New York City’s ‘Enron’ Peril
Add another headache to Mayor de Blasio's New Year's hangover. The stock markets took a big hit Monday — and if they keep heading down, the mayor will have a big budget hole to fill.
That's always bad news. But it's really bad for this mayor. He needs a permanent bubble to cover up his crazy-quilt accounting for last year's deal with the United Federation of Teachers.
Don't take my word that the accounting is . . . different. The mayor's top aide and other key advisers said so, too.
In the agreement last May, de Blasio said he'd pay the teachers billions of dollars in back pay dating to 2009 after old, rich, evil Bloomberg had lied and said we couldn't afford it.
Problem is, we can't afford it, not under any traditional accounting system. So City Hall scrambled last spring to invent new accounting rules.
“There is a professional and credible alternative approach to the accounting treatment,” wrote First Deputy Mayor Tony Shorris in an e-mail last May to the city's budget director, labor director and top mayoral aides.
Shorris wrote that e-mail after a week of questions from the press and the city's elected budget watchdog, Comptroller Scott Stringer.
You'd think the city would've figured this minor detail and shared it with Stringer before de Blasio announced the agreement.
But City Hall had been “attempting to get permission from the UFT to share the UFT [agreement] with the Comptroller's Office,” de Blasio's deputy budget director explained.
That's right: The union being paid billions of taxpayer dollars got to decide when to share details of that payment with the elected official who signs off on the payment for taxpayers.
Anyhow . . . what “alternative approach” to normal accounting did City Hall come up with?
The city knew that if you say you're going to pay people billions of dollars for work they already did, you have to pay them right away.
Indeed, the accountant whom the city asked for an opinion — a guy in California, William Holder — told City Hall that “a salary increase,” if it is “compensation for work already performed,” but “will not be paid currently,” would be a debt — “an obligation of the city.”
But the city isn't allowed to borrow for operating expenses — let alone past operating expenses.
So what to do?
City Hall asked Holder to consider a “hypothetical”: that the retro teacher raises would still be made in the future, “based on services rendered in the past,” but (in the city's new instruction), “the eligibility to receive the payments is conditioned on . . . certain future events” — namely, that the teachers continue to work for the city.
Holder said OK — even though there is no chance teachers will quit en masse, relieving the city of this obligaton.
But he covered his butt. Holder told City Hall that, since the accounting was “new, complex and significant,” the city's budget guys should discuss it with the Securities and Exchange Commission, the nation's financial-markets enforcer.
He also said the city should “disclos[e] the pertinent terms of the agreement and the accounting policy developed” in its next annual report.
It's not clear if the city asked (or told) the SEC. We do know that the city didn't flag this huge change in its annual report, which came out months later.
If the past 15 years have taught us anything about financial disasters, it's this: Beware of “alternative” accounting. Remember Enron — the energy giant bankrupted by creative accounting in 2001?
Remember Detroit — a city that won an award for creative debt in 2005 before it defaulted on that debt in 2013? Remember the 2008 meltdown?
When a new mayor — who admits he spent most of his life “try[ing] to stay away from accounting” — embarks on a “new, complex and significant” approach to cooking . . . er, balancing the books, you should be worried.
The mayor had better hope that Wall Street thinks up ever-newer ways to conjure up profits out of thin air — so that one day City Hall has the cold, hard cash to pay a multibillion-dollar debt that it claims, in its “alternative” reality, is not a debt.
This piece originally appeared in New York Post
This piece originally appeared in New York Post