DeBlasio’s FY 2018 NYC Budget, Detroit’s Bankruptcy, and NYC’s Recovery from the 1970s

I was upset that a summary table that showed how much NYC spends on the largest government functions, including debt service and pensions, and how much of this is funded by locally-raised money, was removed from NYC’s “Budget Summary” documents.

https://larrylittlefield.wordpress.com/2017/01/25/the-deblasio-budget-hiding-the-facts/

But there is good news. The table, albeit without a column for spending by agency on judgments and claims and without a comparison with prior years, is back in a more detailed document that came out later, the latest “Message of the Mayor,” page 81.

http://www1.nyc.gov/assets/omb/downloads/pdf/mm4-17.pdf

And that allowed me to easily update the tables and charts I produced last year comparing FY2014, Mayor Bloomberg’s last budget year, with FY 2017, as proposed. A spreadsheet with the tables and charts for FY 2007, FY 2014 and FY 2018 as proposed is attached below.

But in the rest of this post, I’d like to review the “Unsaid” about Detroit’s bankruptcy and New York City’s recovery from the 1970s, and their relevance to NYC today.   Because in my view, despite all that was written and said about those two past events, few have identified the most important reasons why they actually happened.

The spreadsheet is here.

Analysis of NYC Budget FY2018

All I did was replace the numbers for FY 2017 in last year’s spreadsheet with FY 2018 in the new table, and update the inflation adjustment for FY 2007 and FY 2014. The inflation rate for this year, and the expected increase in city residents’ personal income, are taken from the city’s estimates in the same document.

It should be noted that everything about FY 2018 is not real, it is a projection produced by the Mayor’s office, and a proposal. Reality often turns out to be very, very different, particularly when there is a shift in the economy. But the proposal for FY 2018 isn’t very different from is the FY 2017 budget proposal, which I wrote about last year.

https://larrylittlefield.wordpress.com/2016/05/12/new-york-citys-fy-2017-budget-proposal-more-for-those-who-have-more-leaves-less-for-those-who-have-less/

So for a detailed discussion you can follow the link and read that post. This year’s charts look about the same as last year’s charts, but I’ll summarize them again.

Chart1

From FY 2007 to FY 2018 (as proposed) the City of New York’s total spending increased faster than the income of city residents, despite cutbacks in city workers relative to population and, in some cases, services. The main reason is increases in spending on retired workers, notably pensions. The total wage income of city workers increased more slowly than the total personal income of all city residents, due mostly to flat city employment and soaring private employment. Though the average public employee became better off relative to the average private sector worker.

Chart2

Most of this difference occurred from FY 2007 to FY 2014, before Mayor DeBlasio took office, the period that includes the recession. The relationship of city spending to NYC residents’ personal income during the DeBlasio Administration looks much better for the general public, and also looks much better than it did last year. But only because the Mayor is expecting that the wages of private sector workers living in NYC will start rising much faster than inflation, starting this year, allowing the general public to catch up to city workers a little bit.

The work earnings of private sector workers rising far more than inflation after adjustment for the business cycle, however, would reverse a decades-long trend of private sector workers getting paid less and less relative to inflation (aside from the top 20 percent, and then the one percent, and then the .01 percent).   But big part of the projected increase in total personal income that the Mayor assumes will float the city’s budget, according to the budget document, is rising Wall Street bonuses, something I don’t think those who work there have in fact earned.

https://www.bloomberg.com/view/articles/2017-05-30/markets-don-t-trust-bank-balance-sheets-and-they-re-right

And more money for top executives in general, which hasn’t been earned either, just taken politically, like the retroactive increases in public employee pensions from 1995 to 2008 and beyond.

http://www.marketwatch.com/story/this-former-ceo-wants-a-luxury-tax-on-ceo-pay-2017-05-06

So the Mayor is hoping the rich will rip off the general public even more, to pay for the fact that the politically powerful have ripped off the general public as well, and limit the damage. If the rich and/or general public doesn’t suddenly start getting richer relative to public employees, instead of having them get poorer as the city’s public employee unions usually demand, the city budget will be in trouble.

Chart3

On a percentage basis by agency, under the proposal, the big increases in city spending from FY 2007 to FY 2018 would be in the Department of Education, the City University, and the Department of Homeless Services. The DOE increase is due to the cost of retroactive pension increases, and then universal pre-K. The latter turns out to be Mayor DeBlasio’s big initiative with regard to the public actually receiving an increase in public services. The increase in spending on the Department of Homeless Services is due to the city’s rising homeless population.

chart3a

In absolute dollars, since the total spending on the Department of Education is so large, it accounts for most of the increase in total city spending from FY 2007 to FY 2018, following another big increase from FY 2002 to FY 2007. New York City’s school spending per student was once relatively low, but it is now sky high compared with virtually anywhere else other than the rest of New York State, where it is also sky high.

Chart4

Looking at the DeBlasio Administation alone, the largest percentage increase under the proposed budget would be the subsidy for the Health and Hospitals Corporation, but that would merely reverse prior cutbacks. The city’s contribution to another independent agency, the New York City Housing Authority, may have also increased, while the city’s contribution to New York City Transit, part of the MTA, remains low. Money sent to these independent agencies is classified in “All Other.”

Notably, the city assumes that it will not have to pay more for public assistance and required aid payments to New York State’s Medicaid program, resulting in a decrease in city spending on these benefits after adjustment for inflation. That is one hell of an optimistic assumption. Particularly with the Republican controlled Congress looking to cut its funding for Medicaid, and the rest of the state seeking to force NYC not only to pay for Medicaid expenditures here, but also for Medicaid expenditures in the rest of NY State.

https://larrylittlefield.wordpress.com/2017/05/20/medicaid-the-rest-of-new-york-state-re-declares-war-on-new-york-city/

Chart4a

In absolutely dollars, most of the expected increase in spending during the DeBlasio Administration is on the Department of Education. Relatively little has gone to aid to the needy, aside a reversal of prior subsidy cuts for the Health and Hospital Corporation and an increase for the Department of Homeless Services.   Adjusted for inflation spending on the Administration for Children’s Services, always the first to be cut in a downturn, is proposed to be 9.7% lower in FY 2018 than it had been in FY 2007. But this isn’t a downturn. Perhaps the number of children in need, like the number of children in general, is going down.

Chart5

The DeBlasio Administration has stopped increasing the city’s pension contributions relative to the wages of city workers, even though the city’s pension funds are among the most underfunded large pension funds in the country. That is a policy that will shift costs to the future, based on repeating once again the assumption that the city will get a historically average investment return from the peak of a stock market and bond market bubble. The same like used to justify retroactive pension increases and reductions in taxpayer funding in the past.

https://larrylittlefield.wordpress.com/2013/11/29/pensions-the-nature-of-the-lie/

Part of that expected return is inflation, and the DeBlasio budget assumes inflation will increase to close to 3.0% per year by 2020, not high historically but above the Federal Reserve’s target and high compared with other countries with aging, deeply-indebted populations, such as Japan.

The budget also assumes a big increase in interest rates, but the only reason stock prices are as high as they are is that interest rates have been close to zero. If such a rate increase did occur, the city’s pension funds might earn more money as a percent of assets going forward, but only because the value of those assets would have first crashed to account for the higher interest rates.

Moreover, the budget does not take into account future retroactive pension increases. The head of the TWU was recently quoting that the unions are actively working to reverse Tier VI, which provided a later retirement year for newly hired workers. The city is not putting enough money in the pension funds to provide those hired since Tier VI was enacted to receive far greater pensions than they have been promised, but with the unions controlling the state legislature it is a virtual certainty that such increases will occur before the first Tier VI workers retire.

Note that taxpayer pension costs are much higher as a percent of wages for categories of workers that have been allowed to retire at age 55 after just 25 years of work, with one or more years in retirement for each year worked by a full-career employee. These include sanitation workers, corrections officers – and teachers. The pensions of police officers and firefighters, with a 20 and out pension and high disability rates, are even more expensive, while the pensions of most city workers are much cheaper. I am concerned that to support the high costs of the vastly richer of more politically powerful police officers, firefighters and teachers, the general pension plan for most city workers – which had been far better funded – is getting short changed.

Chart6

It is worth remembering that in the 1970s rising debts and the pension increases scored by NYC’s public unions (both of which were repeated from 1995 to 2008) caused New York City services to collapse, even as taxes soared. As a consequence the work of many agencies was largely privatized, notably in the Health and Social Services and infrastructure categories. City workers remained on the payroll, but the actual work was done by others.

The city would be better off if that policy was extended due to past retroactive pension increases, and the likelihood of future retroactive pension increases, in other categories, wherever possible. Basically the amount of money New York City spent in past years on public employees can be increased retroactively at any time, and then never reduced, and it happens over and over.  What is spent in the contract budget is what is actually spent.

Chart7

While the total wages earned by City of New York workers is predicted to have risen relative to inflation from FY 2007 to FY 2018, as the back-loaded raises under contracts DeBlasio signed kick in, the big percentage increases in spending have been on pensions, fringe benefits, debt service and the contract budget. The problem that for services provided by city workers is it is only the wage spending that generates public services, not spending on the retired, because it determines how many public employees there are, and how much they are paid. And starting pay has the biggest impact on the quality of worker recruited. A huge increase in spending on public employees has therefore brought very little increase in public employee wages over the years, and nothing much in terms of services.

In summary, what you have is an election-year budget, with interest groups served but optimistic assumptions allowing a prediction of no cost to anyone else, and even a few little initiatives in their favor. What we have had in reality is an election-year era, in which the executive/financial class and the political/union class have become better off even as everyone else, the serfs, have become worse off, in part to pay for it. The second such era for New York City.   So let us now turn to The Unsaid” for Detroit’s bankruptcy and New York City’s recovery from the 1970s.

Why did Detroit go bankrupt? Here is what most people have heard.

http://www.freep.com/story/news/local/michigan/detroit/2013/09/15/how-detroit-went-broke-the-answers-may-surprise-you-and/77152028/

An in-depth Free Press analysis of the city’s financial history back to the 1950s shows that its elected officials and others charged with managing its finances repeatedly failed — or refused — to make the tough economic and political decisions that might have saved the city from financial ruin.

Instead, amid a huge exodus of residents, plummeting tax revenues and skyrocketing home abandonment, Detroit’s leaders engaged in a billion-dollar borrowing binge, created new taxes and failed to cut expenses when they needed to. Simultaneously, they gifted workers and retirees with generous bonuses. And under pressure from unions and, sometimes, arbitrators, they failed to cut health care benefits — saddling the city with staggering costs that today threaten the safety and quality of life of people who live here.

Others have pointed to the collapse of the auto industry from 2000 to 2008. All this is true. But it was all true for 35 years leading up to 2000 too. So why didn’t Detroit go bankrupt in the 1970s, 1980s, and 1990s? Because the factories, other businesses, and middle class and affluent residents that fled the city had moved to the suburbs, but were still located within the State of Michigan. And they paid state taxes. So the state had the money to provide aid to fund virtually the entire City of Detroit budget. It wasn’t enough money to make Detroit a decent place to live with decent services, but it was enough to keep it functioning in a state of gradual decay. For decades, Detroit was like Buffalo is today. And then…

The State of Michigan also bears some blame. Lansing politicians reduced Detroit’s state-shared revenue by 48% from 1998 to 2012, withholding $172 million from the city, according to state records.

This is what actually caused Detroit to go bankrupt. The State of Michigan cut the city off, because the entire state was facing a Great Depression that started in 2000 and didn’t end until more than a decade later.

The city’s bankruptcy has focused press attention on its economic and demographic woes, but those woes were decades old. What changed is the decline of Detroit’s suburbs and Michigan’s smaller cities and rural areas, and its economy as a whole, with the entire state becoming much poorer than the U.S. average after having been much richer than average in the past. State aid to localities was cut, but the effect of the cut was far worse in the fiscal basket cases where it accounted for most of the city budget, such as the City of Detroit.

Detroit’s debts, held up to scrutiny, were far less than those of the City of New York and related agencies are today. Detroit’s pension funds were far better funded than New York City’s pension funds are today, and its retroactive pension increases and deals were far less extreme than those imposed on NYC by the New York State Legislature, on behalf of public employees who reside in the suburbs.

The difference is that like the city of Chicago, the city of New York is booming relative to the rest of the state. But whereas the rest of Michigan cut off Detroit when the going got tough, the rest of New York and Illinois are likely to suck New York and Chicago dry rather than face the kind of collapse imposed on New York City in the 1970s. In fact, it is already happening.

New York City in the 1970s was only somewhat better off than Detroit at the same time. So how did NYC recover? The mythology is that New York’s public employee unions engaged in “shared sacrifice,” the federal and state governments came to New York City’s aid, the general public accepted vastly diminished services and higher taxes.

The shared sacrifice by the unions and the aid from the rest of the state and the rest of the country are a myth. A politically convenient myth.

Even as New York City was in a fiscal, social and economic collapse, the actual cash money in taxes city residents and businesses paid to the state government in Albany and the national government in Washington were more than the actual cash assistance the city got in return in federal and state aid. What the city got instead was high interest loans with onerous terms.

That set the tone for deals cut ever since. Other places and powerful interests get cash, in part funded by taxes collected in NYC, and New York City and related agencies get to go deeper into debt, providing tax-free income for the rich and fees for Wall Street.

In 1995 the rest of the state got the STAR program, which directed a much larger share of state school aid away from New York City, while New York City got a bond issue to rebuild its schools. Or would have, except the bond issue didn’t pass. The rest of the state is getting state cash, more than half of which is collected in New York City, to rebuilt its water and sewer systems. The MTA gets permission to borrow money, and now it so deep in debt it can’t maintain the transit system.

As for the unions, they too are credited with loaning the city money at high rates by having the city’s pension funds invest in high-interest bonds. But since their members’ pensions, which had been drastically retroactively increased in the late 1960s and early 1970s, were guaranteed by the state constitution, in reality they risked nothing, and gave back nothing.

The best off city workers – teachers, police officers, firefighters, transit workers – and already cut deals to allow them to move to the suburbs for lower taxes and better services, and most did so – along with many city managers, who got waivers from residency requirements.   They then retired to Florida with everything that they had promised themselves. They were unaffected by the city’s decline.

Workers without seniority were laid off, but in city government it is workers without seniority who are made to work, so the services provided by NYC’s unionized public employees were slashed by far more than their cost, making them an even worse deal for the city’s people. Only future public employees were sacrificed, with pensions promised to them that were far better than most workers get but much worse than those hired earlier. Or they would have sacrificed if they weren’t suddenly granted increased pensions before they retired.

The sacrifices by the city’s people, on the other hand, were real. The poor were left to suffer and die unaided, with the Bag Ladies dying in the street, the schools collapsed, the infrastructure deteriorated, the police allowed city residents to be victimized by crime on a large scale, and the streets and parks filled with garbage. Life expectancy fell. Decades later, some city services still haven’t fully recovered.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1470515/

And the city’s state and local tax burden remains far higher, as a percent of city residents’ personal income, than the tax burden just about anywhere else in the U.S. But those higher taxes and diminished services, that falling life expectancy and higher poverty, didn’t bring about the city’s fiscal recovery.   They were merely enough to allow New York City to limp along for a few more decades in a state of decay, as did Detroit. It was something else that allowed New York City to recover.

Imagine that some future group of politicians were to tell the rich that the New York City residents of today didn’t benefit from all those debts run up previously, and the city of New York isn’t going to pay them. It is only going to pay half. Imagine that some future group of politicians were to tell New York City’s public employee unions that all those retroactive pension increases, for workers who already got the richest pensions to start with, were unjust, and the rest of the workers, who have been made poorer, were only going to pay half of them.

In that case the City of New York’s fiscal situation would be completely different. It would have the money to slow and then reverse the deterioration of the subways, invest more in services for the needy, even reduce its excess tax burden.

Well that is what happened to allow the City of New York to recover from the 1970s. In a “real” sense it only paid half, or less, of its debt and pension obligations. Not by formally going bankrupt the way Detroit did.   By paying a fixed amount in dollars as the value of the dollar fell by half from 1970 to 1980, as a result of inflation. The bondholders and pensioners of 1980 found that the big tax-exempt score they had made in 1970s had been cut in half. It would then fall further. Otherwise, New York City would not have survived.

Thus the importance of the DeBlasio assumption of higher wage inflation, and higher inflation overall. It would reduce the burden of the past on people who will live in New York City in the future. Unfortunately, the powerful and Generation Greed have already taken money off the top that it is only with an unexpected increase in wage growth and inflation that NYC can avoid a vastly diminished future even compared with the present.

Like the federal budget proposed by Donald Trump, it is a heads those who are already better off win and the vast majority break even, tails those who are already better off win and the vast majority lose, fiscal policy. And as with the deterioration of the MTA, the likely response is going to be blaming each other in a circle.

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