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Commentary By Nicole Gelinas

De Blasio Is Spending New York into Trouble

Cities, Cities, Governance Tax & Budget, New York City

Most of America has had a rough time since the 2008 economic crisis. New York City isn’t most of America. The city is doing strikingly well, repeatedly breaking its own records for job creation, tourism and tax revenues.

“If the city’s rich — or, for that matter, the emerging world’s new middle classes, who drive tourism — don’t continue to thrive, de Blasio or a successor will face a record budget crisis.”

But New York also keeps eclipsing another record: spending. When Mayor de Blasio took office in January 2014, New York was halfway through a fiscal year in which it would spend $76.2 billion; in the current fiscal year, which started July 1, 2017, the city will spend about $87.3 billion — an $11.1 billion increase. Thus, de Blasio’s inaugural term has seen a 14.6 percent rise in annual spending. (All numbers are in today’s dollars.)

New York’s seemingly unshakable economy has given de Blasio the luxury of never having to make any real choices, across four annual budgets.

Yet behind the no-fuss, no-drama budgeting lurk serious risks. To make his budgets add up, de Blasio has pushed much of the cost for past spending into the future — making it tougher to cut spending while protecting public services in a future downturn. The mayor has added tens of thousands of employees to the city payroll without tackling the reforms needed to get their future retirement costs under control.

And in a record boom, New York still isn’t putting enough money into critical infrastructure. Finally, Gotham remains dangerously dependent on its top earners to fund its massive budget. If the city’s rich — or, for that matter, the emerging world’s new middle classes, who drive tourism — don’t continue to thrive, de Blasio or a successor will face a record budget crisis.

De Blasio was lucky to take office during an economic boom. Global investment markets have done well over the past near-decade, easing the immediate burden on New York’s public-pension funds. Growth in health costs has slowed, too.

So what is the mayor spending all the extra money on? Expenditures on homeless services have risen from just shy of $1 billion in 2014 to $1.7 billion, a 70 percent increase that hasn’t translated into reduced numbers of homeless people. The city is shelling out a lot more on offices and staff, too — from $781 million to $955 million during de Blasio’s first term, a 22 percent boost. The ranks of government workers also have been swelling under de Blasio, up 6 percent.

De Blasio’s biggest extravagance isn’t in a particular area of the budget, however. It’s his big wage hikes for all city employees, including retroactive raises for the three years before he became mayor. In 2014, New York paid its workforce $22.7 billion in salary and wages. This year, it will pay $27.3 billion — a 20.3 percent increase after inflation that represents nearly half of de Blasio’s increase in spending.

Teachers have been the biggest beneficiaries; salaries in the Department of Education rose 18.6 percent, while the ranks of education employees rose just 5 percent. But the mayor has richly compensated New York’s uniformed workers, as well, pushing up pay for firefighters, police officers, corrections officers and sanitation workers from $7.7 billion to $9 billion during his four years in office.

Assuming that the city workforce falls a bit this year, as de Blasio has promised, Gotham will pay each of its workers an average of $98,604 this year (not including benefits), up from $83,617 in 2014.

And though health-care costs for city workers and retirees are slowing in growth, they’re still growing. Fringe benefits, mostly made up of health-care benefits, will amount to $10.1 billion this year, up from $8.1 billion in 2014.

De Blasio has been able to pay for this largesse for one simple reason: compared with many other parts of the country, New York has enjoyed a powerhouse economy. The city recovered the jobs lost during the 2008 recession nearly a half-decade before the nation as a whole did. Gotham now has 21 percent more jobs than it did in 2006, near the end of the previous economic boom.

Tax revenues have poured in. In 2014, New York City collected $49.9 billion in tax revenues, and this year, it expects to collect $56.5 billion. The city receives the balance of its funding from federal and state sources, but it is this $6.6 billion increase in local revenue that has allowed de Blasio to ramp up its spending. Like most cities, New York relies on a property tax as its primary source of revenue; unlike most cities, Gotham has seen property taxes recover strongly, and then some, since the Great Recession.

In 2014, New York collected $20.6 billion from these taxes, about $5 billion less than the $25.6 it will take in this year, thanks largely to higher commercial real-estate values. Similarly, as the rest of the country has struggled with slowing retail sales, New York has done fine; our record 60.3 million tourists, double the number of little more than a decade ago, have made up for any slump in local working-class or middle-class spending. The city expects to collect $7.4 billion in sales taxes this year, up from $6.7 billion when de Blasio took office.

Yet with America’s private-sector debt reaching disturbingly high levels again, the country has a fair chance of facing another recession, and soon.

In the short term, New York’s risks from a recession are the same as they’ve been for more than half a century. The city would experience a sudden decline in tax revenues as wealthier residents, in particular, see losses on investment income and their annual bonuses dwindle or disappear.

“Though de Blasio points to the city’s $1.7 billion in reserves as evidence of his fiscal responsibility, even a mild recession would swallow that amount within a few months — and reveal the city’s vulnerabilities.”

Though de Blasio points to the city’s $1.7 billion in reserves as evidence of his fiscal responsibility, even a mild recession would swallow that amount within a few months — and reveal the city’s vulnerabilities.

Chief among those vulnerabilities is New York’s failure, over two economic booms and two mayoral administrations of supposedly different ideological bent, to come to grips with its unaffordable promises to its public employees. As of 2016, the city had underfunded its public-pension plans by $64.8 billion. Its pension funds — the money that it needs to pay benefits to more than half a million current or future recipients — are just 65.6 percent funded, on average. That’s a good ratio compared with, say, cratering Chicago, but bad when one considers the extraordinary resources that the city enjoys.

The $9.6 billion that New York now deposits into its pension funds yearly is not enough to make up for this deficit. In 2016, the city’s pension funds paid benefits to retirees and survivors totaling $14.1 billion, more money than it had put in. This persistent imbalance makes it impossible to build up sufficient assets for the future. New York has underfunded its health-care promises to future retirees by $89.4 billion, having put just $4.2 billion aside for this purpose.

New York faces yet another major liability: its infrastructure deficit. Even with record tax revenues, New York isn’t putting aside the money that it needs to keep up with its economic growth and the strain that that growth creates on schools, bridges and parks.

The mayor has proposed $95.8 billion in infrastructure spending over the next decade. But the priorities are skewed: $10.9 billion would go to housing, for example, even though the building of subsidized housing for a comparative lucky few isn’t public infrastructure. Meanwhile, the city’s contribution to the state-run subway system remains paltry: only $2.5 billion over five years, not nearly enough to launch the next phase of the Second Avenue subway or upgrade signal systems to allow for more trains.

Worse, de Blasio depends almost entirely on debt to fund this capital program: $88.9 billion in new bonding. Even with interest rates close to record lows, this borrowing will send annual debt costs skyrocketing, from $6.5 billion today to $8.4 billion three years from now. Consider: This one 10-year capital program would more than double New York’s $83.4 billion in total debt outstanding — debt it took four decades to amass.

There is no doubt that New York, over more than 20 years, has been both smart and lucky: smart in cutting crime and improving the quality of life to attract a record number of residents, tourists and investors; and lucky in that the global economy, for better or worse for the rest of America, has favored the urban elite in finance, tech and other high-paying industries. If these trends ever change, New York may wish that it had spent its boom years building for a sturdier future.

This piece originally appeared in the New York Post


Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow her on Twitter here.

This piece originally appeared in New York Post