Bloomberg’s Blunder

Those rosy dreams now lie beneath the ashes of the World Trade Center. More than 70,000 jobs have fled Lower Manhattan. Jersey City has become a twin skyline across the Hudson, loaded with Wall Street refugees. Electronic trading is greasing the skids. New York-based Quick and Reilly set up its e-trading operation in 1998. The company moved the division to Rhode Island in less than a year. “We always planned it for a lower-cost environment,” says a company official.

Now another blow to the city. The Securities Exchange Commission is requiring financial firms to move large portions of their clearing operations out of Manhattan for security purposes. Bank of New York is shifting jobs to Florida. Morgan Stanley, once the largest tenant in the World Trade Center, is opening offices in Baltimore. Bear Stearns wants to leave just because of outlandish taxes. “Even before September 11, the high costs of doing business had been driving securities industry jobs out of New York,” admitted Crain’s New York Business last week.

In 1980, 40 percent of the securities industry was located in Manhattan. Today the figure is 25 percent–the lowest in history. New York’s run as the undisputed financial capital of the world may be coming to an end.

Michael Bloomberg, the “conservative Republican” elected to revive the city economy, is proving more than inadequate to the job. Faced with a $1.5 billion budget gap this year and a $6 billion deficit in 2003, the mayor has quickly reverted to the tried-and-true stopgaps of the 1970s–raising taxes and borrowing money.

The stripping of New York’s brief economic revival has exposed archeological layers of paleo-liberalism underneath the city’s political culture. At bottom, New York hasn’t changed since the 1960s, when John Lindsay created a social spending machine that almost bankrupted the city and burdened generations of taxpayers to come.

New Yorkers remain the most highly taxed people in the nation, paying 160 percent of the national average. The city has the country’s highest municipal income tax, a 4.25 percent sales tax (on top of the state’s 4 percent), one of the nation’s highest property taxes, plus an aggravating battery of levies such as the Municipal Assistance Corporation parking tax and a “commercial property tax,” which surcharges rents in Midtown and Lower Manhattan.

On top of this, New York City is also the most heavily indebted political entity in the nation, owing $43 billion–more than any state. Massachusetts residents owe $3,300 per capita. New York state (in fifth place) owes $2,000 per head. New York City owes $5,300 for every man, woman, and child in the five boroughs. By 2005, debt service will consume 20 percent of the city budget–exactly the point the federal government was at when Ross Perot began his campaign in 1991.

Because of its familiarity with the bond market, New York City has always found it easy to borrow for day-to-day expenses. In the worst days of 1974, the city government was rolling over debt from week to week, issuing “revenue anticipation notes” and “tax anticipation notes”–the equivalent of borrowing on next month’s paycheck. The creation of the Municipal Assistance Corporation (Big MAC) eventually cleaned up this act, and New York now has the most sophisticated accounting system in the country.

But all this means nothing if politicians don’t exercise fiscal discipline. In 1997, bumping up against the state constitution’s debt limits, the Giuliani administration created the Transitional Financing Agency (TFA), yet another off-budget authority designed to circumvent the restrictions. Five years later, TFA has more debt ($8.1 billion) than all but 12 states. Last July, Mayor Bloomberg quietly employed TFA to borrow $1.5 billion to cover this year’s budget gap. Moody’s put a negative outlook on the state’s bond rating, already below the ratings of all 50 states. If the mayor borrows again to cover next year’s projected $6 billion deficit, watch for the roof to fall in.

Meanwhile, Governor George Pataki, facing his own $6 billion deficit, announced last week the state would borrow $4 billion on tobacco-settlement revenues that will be coming in over the next twenty years. In Albany they burn furniture for firewood.

Mayor Bloomberg’s only other initiative has been to raise property taxes 18 percent–a request that the normally flaccid City Council processed within two days. Last time the city raised taxes, during the Dinkins administration, New York lost 300,000 jobs. This time it could be worse.

Despite this prodigious taxing and borrowing, municipal services remain atrocious. Major highways look as if they’ve been used for bombing practice. Helpful neighbors put garbage cans in potholes to warn passing motorists. Education, of course, is a disaster. All this often leaves thoughtful New Yorkers asking, “Where does all that money go?”

Ten years ago, Steven Craig, an economist at Hunter College, addressed this question in a landmark 1991 City Journal article, “Where the Money Goes.” Craig compared New York spending with that of six “traditional” cities (Chicago, Boston, etc.) and four “modern” cities (Los Angeles, Dallas, and so on). Astonishingly, he found that New York spends no more–and often less–than other cities on basic services such as police, fire, roads, parks, and education. “New York’s excessive spending,” Craig concluded, “is due almost entirely to the simple fact that, alone among the cities studied, it has undertaken to run its own welfare state.”

Take Medicaid for starters. Although a budget-buster that is already ravaging the finances of other states, Medicaid, as run by New York state, is on a different planet. With 9 percent of the nation’s Medicaid patients, New York spends 15 percent of all Medicaid dollars. The Empire State spends more than California and Texas combined, even though they have three times New York’s population. The Public Policy Institute in Albany notes that if New York state spent only twice the national average on Medicaid, it would save $3 billion a year.

Unlike every other state, New York also requires cities and counties to split the Medicaid burden. Every dollar spent in Albany must be matched by another dollar from City Hall. Unfortunately, politicians at both ends of the Hudson have taken this as an invitation to a spending contest. Since Washington pays half the bill, every dollar spent by Albany or City Hall “leverages” three dollars from other jurisdictions. Both city and state have become especially adept at providing Medicaid coverage for the middle class. In the 1994 gubernatorial election, both George Pataki and Mario Cuomo had an elderly parent or in-law on Medicaid.

Still, Medicaid is only a small part of the picture. Welfare rolls under Mayor Giuliani were cut 50 percent, but that hasn’t shrunk the welfare department. Instead, costs have simply reemerged in the Administration for Children’s Services, which didn’t even exist in 1995 and now absorbs $2.3 billion. The Health and Hospitals Corporation (which Giuliani tried to sell off before being blocked in the courts) costs New York City $1 billion on top of Medicaid allotments.

Then there’s housing. Since 1943, New York has had “temporary” rent control. (The 18 percent property tax hike, by the way, was also temporary.) Builders have fled, and vacancy rates never rise above 3 percent (national vacancies are now 10 percent). Of course, such a perpetual housing shortage can only be remedied by one thing–more government spending.

Since the 1970s, New York City has spent $10 billion building and renovating housing, much of it for the middle class. This is on top of the city’s 180,000 units of federal public housing–more than the next ten cities on the list combined. Only last week, in the midst of a budget crisis and a potentially devastating transit strike, Mayor Bloomberg announced yet another plan to borrow another $5 billion to subsidize 65,000 new housing units, many of them for the middle class.

In addition to the nation’s largest public housing effort, New York also has a $483 million Department of Housing Preservation and Development designed to offset the decay and maintenance problems caused by rent control policy. HPD’s strategy has been to help tenants wrestle their building away from “bad” landlords and redistribute them to “good” landlords–community action groups or even HPD employees themselves. At one point HPD owned 500,000 units, including 70 percent of Harlem. Although the redistribution is now almost complete, HPD’s Office of Housing Management and Sales still absorbs $150 million–more than the city’s appropriations for the Manhattan, Brooklyn, and Queens libraries. More than $2 billion of the mayor’s new borrowing will go directly to HPD.

With private developers discouraged by rent control, the government must constantly offer tax abatements and exemptions for new construction. These now cost $330 million in forgone property taxes. The so-called Mitchell-Lama system–subsidized middle-class housing–costs another $200 million in tax abatements.

Then there’s the Department of Homeless Services. New York has essentially opened its doors to homeless people across the globe. Anyone can show up at an evaluation center and be given lodging for the night. If intake workers fail to provide shelter, the applicant gets $150 in cash. “We get people coming right into the system from the Dominican Republic, Yemen, and Scotland,” says one disgruntled DHS staffer. The department’s 2002 budget was $548 million–more than the federal government spends on homelessness.

Since a 1986 consent decree, the shelter system has been administered by a single state court judge, Helen Freedman, who has tried to create a liberal utopia. “Homeless families” (i.e., welfare mothers and their children) are attracted to the shelters by the promise of being jumped to the top of the waiting lists for public housing or being granted coveted Section 8 housing vouchers. When the DHS tried to write rules ejecting shelter residents for violent behavior, Judge Freedman dismissed them as “cuckoo.” Dancing to Freedman’s tune, the DHS pays as much as $3,000 a month to rent out apartments where they put up homeless people–though the homeless can hold out for lodgings in neighborhoods more to their liking. Freedman has threatened to make officials sleep in the shelters themselves if they do not comply with her orders. The city is now looking for cruise ships to house the growing hordes. (Freedman herself lives in publicly subsidized middle-class housing.)

So it goes. Even as Wall Street marches out the door, the city continues to squander billions on counterproductive social programs.

As Fred Siegel illustrated in “The Future Once Happened Here,” New York’s contemporary psyche was born in the glorious days of the 1930s. Back then Mayor Fiorello LaGuardia was working hand in hand with President Franklin Roosevelt to create a shining “city of the future”–by design, a free-spending welfare behemoth fueled by neverending deficit spending in Washington. Those habits have not died. Even as the city’s finances spun out of control, Senators Chuck Schumer and Hillary Clinton were promising to make it all better by securing more funding from Washington.

Long before the Daily News writes, “Bush to NY: Drop Dead,” the obituary notices will be on file.

William Tucker is a columnist for the New York Post.