PRESS RELEASE
PARTNERSHIP FOR NEW YORK CITY
New York, New York
March 1, 2009
speech (PDF 68K)Speech to New York State School Boards Association
Introduction
The Partnership for New York City was established in the wake of the city’s near bankruptcy in the 1970’s, during a period of economic crisis that threatened all of urban America. David Rockefeller organized the city’s business executives to partner with government and labor leaders to help rescue the city and insure its status as a world center of commerce, culture and finance.
From inception, the Partnership identified education as its highest priority. It encouraged corporate philanthropy and public investment in education, filed amicus briefs in support of the Campaign for Fiscal Equity, and led governance reform in NYC as it became clear that no amount of money could improve the schools without accountability and strong leadership.
Today, New York City and State are at the center of a world financial crisis that will have a permanent impact on both our private sector economy and our public sector budgets. The education community has reason to take a prominent role in helping New York respond to this crisis. On the one hand, school funding is vulnerable to the dramatic fall off in tax revenues, which is bound to leave local districts scrambling for resources. On the other hand, the quality of our education system will be a major determinant of the pace of recovery and New York’s future economic growth.
Experts agree that educational demographics are the single most important indicator as to which communities will emerge as leaders in the post-recession economy. New York’s competitive edge in the 21st century economy depends on a diverse, well-prepared pipeline of highly skilled workers who will create the next generation of business products and services. In this context, funding for education is certain to remain a priority even through a prolonged budget crisis.
I was asked to speak today about economic conditions and their impact on the budget issues facing the state and its communities. This is a glum subject, but I will reiterate the overused “crisis brings opportunities” phrase and try to sound a positive note before I conclude.
The State of the Economy
We are experiencing the first recession that is both worldwide and consumer-driven. Because this recession has no precedent, no one really knows how to deal with it – something you have probably noticed. The economic downturn started in the U.S. housing market a few years ago, moved on to Wall Street and the financial markets about a year ago, and during the past six months has infected virtually every sector of the world economy.
In less than a year, 40% of the world’s wealth has disappeared – which we all know by looking at our retirement accounts. The value of US real estate, stocks and bonds has fallen by more than $15 trillion—more than any period since the Great Depression – and no one thinks we have hit bottom. Recovery, when it comes, is not expected to follow the historic pattern of a sharp upward turn of fortune. Instead, the American economy is likely to bump along on the bottom for some time.
California, Florida, Nevada, Arizona were hit early by the housing market collapse. New York was not really affected until the second wave of the crisis, as financial institutions on Wall Street and around the world were caught with huge portfolios of mortgage-backed securities that suddenly could not be sold. Trading stopped, markets froze, and only the federal government – with its power to print money – could save the financial system from total collapse. Investment banking institutions that had leveraged their capital reserves at ratios of more than 30 to 1 did not have sufficient capital to honor all their potential liabilities and had to undertake the difficult process of de-leveraging. The result is an on-going credit crunch, as institutions are forced to hold onto every penny of capital – including federal rescue money – to backstop the falling value of their assets. We are caught in a classic Catch 22: the economy will not move until credit flows and credit will not flow until consumers and investors regain confidence and restart the economic engine.
Although New York has a pretty diverse economy, over the past twenty years we have become very dependent on the financial services industry. The securities component of the industry, with only about 200,000 jobs, has been responsible for 20 percent of our state tax revenues in recent years. Financial services were responsible for a quarter of the $1 trillion economic output in the New York City Metro Region in 2007. In New York State, the industry was responsible for more than 10% of economic output and accounted for 526,000 jobs. One in every 14 privately employed New Yorkers worked in this industry last year. Moreover, a Wall Street job paid four times the average salary in other industries and each job was responsible for creating three additional jobs in other sectors.
Over the years, Wall Street has experienced many boom and bust cycles. What is happening now is different. Wall Street describes this as their 100-year storm. A permanent downsizing of the industry and the services that support it is underway, in which New York City alone will likely lose 300,000 jobs in all sectors, with only a quarter of the lost Wall Street positions projected to return.
It would be easier to deal with the current crisis if we could expect things to come back to “normal” in a year or two. But that is not the case for several reasons:
First, there is the sheer scale of the wreckage of institutions that made New York the world financial capital. In the past year, every major investment bank has disappeared, been acquired or converted to a regulated bank holding company. Bear Stearns, heavily invested in mortgage securities, was the first to go. It was followed by Lehman Brothers, which had survived 100 years of market ups and downs, but ended being picked up for nothing by Britain’s Barclays and Japan’s Nomura Securities. Wachovia – which had established a strong New York presence when it acquired Fleet Bank and Prudential Securities – was dissolved into California-based Wells Fargo. The nation’s largest savings bank, WaMu, which earlier had acquired Dime and other New York banks, folded. Merrill Lynch became the property of Charlotte-based Bank of America, which is now itself struggling as a result of that acquisition. Citibank – long New York City’s largest private sector employer -- has laid off almost 100,000 people worldwide and, as of last week, the federal government is its largest shareholder with 36% ownership. AIG, the Goliath of the insurance industry with more than 8000 employees in Manhattan, is bankrupt. Morgan Stanley and Goldman Sachs, our last big investment banks, were forced to convert to federally regulated bank holding companies in order to survive. Hundreds of hedge funds, asset managers and bond insurers are endangered or have closed shop — and the crisis is still running with credit card exposure the likely next shoe to drop.
In addition to the dimensions of these losses, the second reason this cannot be considered a cyclical situation is that the financial industry has, to a significant extent, been brought under government management. Virtually all New York’s major banking institutions are recipients of federal rescue funds, subject to unprecedented federal controls. Washington DC, not New York, is our new center of finance, just as Brussels has displaced London in Europe. As part of the government’s investment agreement with institutions receiving taxpayer money, Washington has mandated restrictions on investment activity, executive compensation and even hiring of foreign talent. During the coming months, the government intends to put in place new regulations on the entire finance industry. The result will be lower profits, lower compensation and a less aggressive, less innovative posture for US firms in the global marketplace. It will also mean significantly lower tax revenues for New York in the foreseeable future.
In short, the highly leveraged investment-banking business model is gone, and the huge profits and inflated payrolls of Wall Street that buoyed our economy and our tax rolls for the past decade, have gone with it.
Impact on the State Budget
Last week, the Governor and legislative leaders revised estimates of projected state tax revenues for the fiscal year that begins April 1, marking them down another $1 billion since December. The projected deficit has grown to $14 billion, or 17.5% of the $80 billion state funded portion of the budget, more than half of which goes to health care and education.
Falling revenues are a reflection not just of losses on Wall Street, but of deteriorating conditions that have spread to other sectors. The state unemployment rate has reached 7%, amounting to 670,000 people out of work – the highest number since October, 1993. Last year, the state lost 120,600 private sector jobs — 49,300 in December alone.
Many of the most robust sources of job growth and tax revenues over the past decade — media, professional services, retail and tourism, advanced manufacturing and information technology — are also suffering. New York’s real estate industry is most profoundly effected, both high end residential and commercial office leasing and new development. Property values have fallen 20% and could decline another 20% before the crisis is over. The impact on local, as well as state revenues, will be profound.
Recovery from this level of economic damage will take four or five years, by most estimates, during which period government deficits will continue to grow. New York’s spending has increased by at least 4 percent annually during a period when revenues have grown only 3 percent at best. The projection for the next 3 years is a $50 billion state deficit.
Compounding the budget problem is that New York State and local taxes are already the highest in the nation, and there are few constructive alternatives for raising money from the current tax base. Governor Paterson has creatively come up with $3.5 billion in suggested nuisance fees, savings and tax loophole closers — ranging from an 18% obesity tax on sugared soda drinks to cancellation of homeowner property tax rebates. These proposals have created a field day for Albany lobbyists but otherwise not generated much enthusiasm. In short, there is no easy or obvious solution to what promises to be a long-term reduction in tax revenues from all sources.
The Search for Solutions
Despite the uncertainty of present conditions, among New York’s business leaders there is confidence in the long-term future of New York, so long as government and influential interest groups take the right actions in response to the current crisis. From the business perspective, here are some of our ideas about what actions would help get the economy and budget on the right track.
First, we need to retain our position as the world financial capital. There is no industry that can replace international finance as a source of good jobs and tax revenues in this state. Healthy banks are necessary partners in solving all the problems that confront the national and state economy. Right now, banking institutions are struggling to re-invent themselves in accordance with requirements associated with having taxpayers as shareholders. As New Yorkers, we need to be aggressive about challenging Members of Congress, media pundits and others who are still playing the blame game. Yes, Wall Street is culpable for taking too much risk and grabbing unjustified rewards. But not all financial institutions are at fault and many others — lax regulators, real estate speculators, and irresponsible consumers — all have contributed to the global crisis. The U.S. and New York will not begin to recover until we get beyond recriminations and allow the bankers to get back to business.
Without Wall Street profits and bonuses, the state has no choice but to restructure its expense and revenue budget. New York State has gotten itself in the same hole as the American consumer – piling up debt, surviving on non-recurring revenues, living beyond its means. We have too many special interests that are hanging on to obsolete 20th Century spending patterns and perquisites. It is time to embrace change.
For example, there is need for a new approach to economic development to encourage private sector economic growth that will build a stronger, broader tax base than the state has today. New York has been too dependent on state subsidy programs designed to keep alive old enterprises rather than incentivize new ones. Government and publicly supported institutions have replaced the private sector as the employer of last resort in many areas of New York State. Hospitals and prisons have become jobs programs and remain open regardless of occupancy rates. To challenge the status quo, the Partnership for New York City joined with the state AFL-CIO, Citizens Budget Commission and Metropolitan Development Association of Central New York to call for an end to Empire Zones, the economic development program that costs the state more than $500 million a year and produces almost no added value. We want to replace them with targeted investment strategies that take advantage of our state’s assets in higher education, research, technology and international business and finance. This is the way we will grow an economy that can support a great education system.
Public pensions and benefits also require attention. The Teachers Retirement system has been traditionally well managed, exceeding target returns even during difficult times. But this downturn will force increases in pension contribution rates in the next few years, making a larger claim on district budgets. The Governor has called for public pension and benefit reform as a necessary component to long-term containment of state expenses. This should not be seen as a punitive attack on public employees, but rather a collaborative process in which the entire community works together to solve a problem in a way that is fair and equitable.
There are countless ways to save money, without cutting essential services. The state, its authorities and localities all have procurement and contracting processes that are inefficient and wasteful. Members of a Blue Ribbon Commission that looked at the MTA capital construction program last year suggested that costs could be reduced by as much as 20% if a streamlined process and a more balanced allocation of risk were put in place. The Governor’s Commission on State Asset Maximization has come up with a series of proposals to reduce state expenditures and generate new revenues through more effective contracting and management arrangements.
A popular solution coming out of the State Legislature is to raise taxes on the rich. This has limited potential as wealth continues to evaporate. Currently, 1% of New Yorkers pay 41% of state personal income taxes. If federal, state and city proposals to increase the income tax on high earners are enacted, business owners in New York City will be taxed at a rate of more than 62% of their income, effectively having to earn $3 to keep $1. Not many millionaires will have to abandon ship to turn anticipated revenues from new taxes into net losses. Texas, which has no state income tax, had 70% of the country’s private sector job growth last year. That sort of says it all.
Thanks to the federal economic stimulus package, we have some breathing room to work out some solutions to New York’s economic and fiscal challenges. It will provide at least $24.6 billion in budget relief to New York over the next two years. The Governor stated last week that the $768B in education spending reductions that in his Executive Budget will be restored thanks to the $2.4 billion in stimulus money targeted for education this year. This is a welcome but temporary reprieve.
Since last June, Governor Paterson has attempted to launch a constructive public conversation about fundamental reforms in government spending that will be required to maintain education and other essential public services within the constraints of state revenues. He has taken some tough budget decisions, and watched his popularity plummet. But the Governor is making the right case. Political ads and demonstrations at the capitol will not change the reality of a diminishing tax base.
I came to speak with you today in hopes that the education community will get involved in pushing for more than an education agenda. We need to break out of our silos and work together — business, labor, government and advocacy groups from across the state. Rather than dispatch our respective lobbyists to fight for a share of a diminishing budget pie, we need to work together on restructuring state and local government, rethinking procurement and contracting policies, getting control of Medicaid and pension costs, evaluating appropriate tax policies and all the other actions that will be required to survive this crisis and to help the state move forward on sound footing. Thanks for your consideration and for your commitment to education and the future of New York.
About the Partnership for New York City
The Partnership for New York City (www.pfnyc.org) is a network of business leaders dedicated to enhancing the economy of the five boroughs of New York City and maintaining the city’s position as the center of world commerce, finance and innovation.