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Commentary By Nicole Gelinas

NYC's Debt Disaster

NEW York City's acute de pendence on debt may soon become all too clear.

The problem isn't merely the city's dependence on all of that now-failed debt that Wall Street structured, packaged and traded for so much of its profits (and thus the city's tax revenue) over the past two decades. For, even as Wall Street was making New York very rich very fast, the city was borrowing against that wealth—at an even faster clip.

This burden makes it difficult, though certainly not impossible, for New York to replace the tens of thousands of Wall Street jobs that we're all but certain to lose.

In the early '80s, the financial sector started outperforming the rest of the US economy—and Wall Street began funneling vast amounts of money into the city's tax coffers. In 1981, the city's tax take was lower than a decade before (after inflation); by 1991, Gotham was raking in a third more.

By the mid '80s, the city was doing well enough to reverse some of the draconian service cuts of the '70s fiscal crisis—and to start borrowing large amounts again.

As city Comptroller Bill Thompson pointed out recently, the city's debt burden grew by 4.5 percent a year in the '80s, and by 6.4 percent in the '90s—largely to rehabilitate "facilities... neglected during the 1970s fiscal crisis."

From 2000 to today, debt continued to grow at 5.7 percent a year—and is projected to rise another 5.9 percent annually over the next four years.

Yet debt growth has outpaced the city's wealth. Since 1990, per-capita debt is up 185 percent, exceeding inflation by 118 percentage points and the growth in city tax receipts by 27 points.

And these figures may understate how much the city's debt burden has grown relative to tax revenue—for much of that tax revenue was based on Wall Street bonuses and profits that we may never see again, especially not these next few years.

Consider: Last year, Wall Street bonuses, all $33 billion worth, comprised 8 percent of the city's income directly—and indirectly supported up to two other jobs in the city. Bonuses fell by half in the last downturn, from 2000 to 2002—but they quickly rebounded. How likely are they to bounce back now—when, in one way or another, all five independent investment banks have disappeared?

Wall Street is most likely entering a long-term, structural rethinking of its entire business model, not just a short-term downturn. So, barring a miracle, New York will see sharp (and likely sustained) drops in personal income.

And the city's coffers will see even sharper drops, because our progressive tax system makes us acutely dependent on the rich, not the middle class, to pay our bills. When income fell just 1.2 percent from 2001 to 2002, tax revenues dropped nearly 7 percent.

So the city's debt load is still growing—even as the tax base (personal incomes and private assets) that we rely on to pay that debt is likely shrinking.

And our debt load was too high even before Wall Street imploded. The S&P bond-raters use a general rule: Per-capita municipal debt above 6 percent each of a city's property base and personal-income base is high. New York's is already at 9 percent and 15 percent, respectively.

Yes, Mayor Bloomberg used some recent surplus money to pre-pay debt, easing the burden for the next couple of years. But even after that savings, Moody's notes that our debt service is rising 14 percent annually for the next three years.

And New York has 21 percent of its debt in "variable" rate instruments, up from 12 percent five years ago. Such rates save money in normal times, but mean immediate higher interest costs in bad times—like right now.

Of course, all of that debt wasn't for nothing. It helped build and repair the city's parks, roads, schools, bridges, crime labs, etc. over the past two decades.

If we don't raise taxes over the next few years to pay for that debt, that might actually do us some good. The half-decent infrastructure we bought (along with lots of ill-considered, wasteful projects) means that the city, physically, is a great place for non-Wall Streeters from around the country to come make a life for themselves. And, as commercial and residential rents fall, they'll be able to afford it.

But as debt service consumes more and more of shrinking revenues in the next few years, our leaders will be tempted to call it an "uncontrollable" cost—and hike taxes.

In that case, people likely won't come to New York to take advantage of lower private-sector costs, because public-sector costs—taxes—will be so high, relative to cities like Houston and even Boston. The tax base would then further erode, as we wait for the ghost of Wall Street to re-appear. And all of that debt will have done us little good.

We can avoid that conclusion now if we act now to rein in city spending from today's $60 billion-a-year levels to live within our new means.

This piece originally appeared in New York Post

This piece originally appeared in New York Post