PRAGMATIC IDEAS FOR NEW YORK CITY’S CRISIS
A widely distributed Covid-19 vaccine may be just weeks away, but the economic impact of the pandemic will continue to wreak havoc in New York City for years to come. With more suggestions of shutdowns, and little prospect for a federal bailout, the situation grows more dire each day.
The New York City mayoral election is less than a year from now. The next mayor will have to deal with this crisis. Thus far, I have not seen any ideas or programs that I believe will work, so allow me to try to be helpful and offer a few suggestions.
The City budget is funded by the private sector tax base. Due to the pandemic, that private sector tax base has been seriously impaired. Thousands of companies and small businesses have folded, and thousands of private sector employees have been laid off. The private sector has taken an enormous financial hit. However, for the most part, City government has not taken a serious hit. Because the tax revenues produced by the private sector are diminished, the need for a downsizing of City government is no longer an option. It is a requirement. If conditions do not change, there may be no other choice – except for a possible bankruptcy.
I know that some of the ideas I am proposing will work. Why, you ask? Because they worked before. In the mid-90s I worked for the City as both Deputy Mayor for Economic Development, Planning and Administration and also as the City’s Labor Commissioner. In the mid-90s, as well as during the fiscal crisis in the 70s, the City faced tough economic times. There were record deficits and the City was considered in decline. However, using many of the following strategies, the City emerged stronger, better and healthier. City officials bit the bullet and cut the size of government on a long-term structural basis.
New York City’s budget is controlled by personnel costs. The only way to make real and lasting progress is to make structural change. That means savings that last, not savings that exist for merely one year. The way to structural change is by reducing the size of city government, or in other words, reducing the number of city employees. Below, I will explain how we can accomplish that goal. But, there are also other actions separate from the number of employees in city government that need to be made first. I would start by requiring every City Department and Agency to cut 25% of their non-employee spending. I would freeze this cut for four years. I believe this would easily be accomplished by eliminating travel, conferences, per diems, and slowing the purchase of equipment, furniture and other discretionary spending. In fact, as one digs deeper, I am confident there are some agencies and departments that can cut more than 25%.
Second, is the need to refinance City debt. Because interest rates are at record lows and will remain there for the foreseeable future, this will generate real savings.
Third, the City should put up for sale properties it owns or leases that are no longer needed. The expense of maintaining these properties is costly. Similarly, City facilities should be consolidated to save money, and excess properties transferred to developers to use for affordable housing, or to stakeholders of not-for-profits for uses such as recreational and community centers. In addition to these measures, many of these properties can be sold to the private sector and turned into taxpaying real estate. I believe this can be done, even in a depressed real estate market. As an incentive for a sale, the City should include fast track zoning, which means a streamlined ULURP process. In other words, these are land use and zoning approvals that take months, not years.
Fourth, the City maintains consultant contracts in the hundreds of millions of dollars. In these difficult times, unless these contracts involve essential services, they need to be suspended or terminated and not reinstituted until the fiscal crisis has passed. The need now is to focus on core services.
After the non-employee savings described above, I would implement attrition savings with a hiring freeze. I would not replace employees who leave or retire, with exceptions made for public safety and essential positions. I would leave this freeze in place for four years.
Attrition, in itself, will not create enough structural savings. There needs to be a mechanism to accelerate a reduction in the workforce in a meaningful way without layoffs. When I was Labor Commissioner, we constructed a severance and redeployment program to reduce the workforce. The program was agreed to with the unions, and was a success. We allocated a piece of the savings from the reduction in personnel and allocated one-time cash payouts to employees if they voluntarily left City employment. Thousands of City employees took that severance package and used it to pay for their education, for training, and/or for entry into a private sector job.
The vacancies left by those taking severance payments were filled by those employees remaining in the government, not from new hires. Those who got redeployed came from City departments and agencies with excess employees. Thus, there were not any new hires. This led to thousands of fewer employees and resulted in a structural reduction in City government. To do this, we changed archaic civil service rules, which in the past prohibited this common sense practice. There is no reason this approach cannot be utilized now.
Of course, with a smaller workforce, services must be kept up, or hopefully, improved. The way to do this is through bargaining with the municipal unions for work rule changes. The unions are tough, they are smart, and they know how to protect their members. But they are City employees with a responsibility to put the City first. They are also realists, and like their predecessors in the previous fiscal crises, they will step up up to the plate. However, to convince them to do big structural deals takes leadership. It takes a negotiator with a thick skin, intestinal fortitude and a lot of patience. The challenge is more daunting today, because in the past decade, the number of City employees has substantially increased.
We accomplished work rule reform then, and the City can accomplish it now. During my tenure, firetruck minimums went from five firefighters to four. Sanitation workers were penalized for not performing their routes on time, but were rewarded with extra pay for performing them faster. Transportation workers were given similar incentives and teachers were required to spend forty-five minutes longer in school while school custodians were required to maintain standards or forfeit pay. Unfortunately, in later contact negotiations, subsequent administrations gave back most of these reforms. Now is the time to bargain to retrieve them as well as others. But the unions and workforce have to be incentivized and rewarded for their sacrifice. Thus, part of the savings generated by these changes must be given to the employees as wage increases.
Recently, the City said it would secure $1 billion in health savings from City unions and employees. To date, this has not materialized. But there is a way to accomplish it. We negotiated hundreds of millions in savings with the unions and their healthcare providers. There are also other ways to save money. We negotiated two-year wage freezes and passed early retirement programs. These programs like the wage deferrals Mayor DeBlasio recently negotiated, help in the short-term as a transition to a lower deficit, but do not lead to structural savings. Separately, it is my suggestion that we freeze all City manager salaries for at least two years.
As for the revenue side of this equation, I personally believe that any new taxes will be detrimental to the City’s comeback. It will force productive individuals and businesses to leave, further diminishing an ever-shrinking tax base.
The imposition of taxes is under the jurisdiction of the State Legislature and Governor. If there are to be new taxes, I believe that there is a particular group that has not paid their fair share and are a source of new revenue. Any new taxes cannot be on the backs of wage earners, even high wage earners. Wage earners (i.e. those who receive W-2’s for the vast majority of their income) have paid and are currently paying extremely high tax rates. For example, a wage earner in New York City who makes $500,000 per year, pays about half of their income in federal, state and city taxes. A wage earner in New York City who makes approximately $1 million per year pays more than half their wages in income taxes. Any higher taxes will discourage wage earners from working in the City and will lead to a flight of talented people to other states. The inability of companies to secure great talent, will lead to a further flight of companies from New York.
That group that has not paid their full share are those who do not receive their compensation in wages or through a W-2, but are those who derive their income as they declare it through “investment income.” Although it is often their main source of income and is, indeed, their wages, the tax law does not characterize it as wages. These individuals include private equity members who have used the “carried interest rule” to pay lower rates; real estate investors who use items such as depreciation and other vehicles to pay lower rates; and corporate and hedge fund investors who also describe their income as “investment income” not wages. Today, some billionaires in this category are calling for higher income tax rates. They do so because they know the higher income tax rates do not and will not apply to them. Generally, this group pays at a tax rate of 10%, or under, which is less than almost all other wage earners. That is why Warren Buffet has been known to say that he pays a lower tax rate than does his secretary.
It is my idea that we should allow these individuals to be taxed as they are until they reach a total income per year of, for example, $15 million or another appropriate amount. This recognizes their risk of capital which, at times, creates and saves jobs. For any amount over $15 million per year, that amount should be taxed at the highest individual wage earner rates. This is fair as it provides a $15 million per year cushion that will not derail the motivation to invest, and will raise hundreds of millions of dollars in new tax revenues. At $15 million per year, they will also have plenty of money available for charitable donations.
The heart of the City is small businesses. Over half of New Yorkers earn their living through small business, but small business is struggling and needs a hand. Their tax rate cannot be increased. We need to find ways to help them forge ahead through this crisis. Cutting the Commercial Rent Tax is one good idea. In the past, this has led to small businesses growing and putting more revenue into the City.
The City must do all it can to give entrepreneurs and small businesses the opportunity to maintain and create new businesses. The more ongoing businesses, the larger the revenue base. Many businesses have been devastated by COVID-19, thus the City needs to be creative and use all of its economic development tools at its disposal. The City needs to use and expand its use of taxes and financing to get deals done. Tax exempt financing is a great tool that has been mischaracterized by politicians, advocates, and media figures who have no idea what it is, or how it works. It is not corporate welfare. It is a good way of getting working capital to needy businesses at low interest rates. It is the use of the federal interest rate, which is often lower than standard bank rates. No New York money is spent. It is a federal expenditure and one used by citizens in Texas, Arizona, Oklahoma and every other state in the union. Yet, here in New York, some misinformed critics call it an “unfair subsidy” even though New York pays more into the federal government than it receives. We have already been injured by the repeal of SALT (the provision under the recent tax law which limited New Yorkers from deducting their state and local taxes, and limited their mortgage deduction) but these critics think New York should take yet another one on the chin and take a pass on these programs even though they are currently being used and are benefiting other states. We need to accelerate these IDA programs and to pump capital into needy businesses, as well as direct it to individuals and entrepreneurs who want to open new businesses. Mayor DeBlasio has used these programs to provide a living wage. This is great for those employees who work for businesses who can utilize these programs and afford to pay the living wage.
There has been talk of the City borrowing money to fund ongoing operations. This is not allowed under New York’s Balance Budget Act. But I recommend a special, one-time “Bring New York City Back” bond that is used to 1) partially finance the City as it transitions to a structural budget reduction, and 2) to provide subsidies for businesses, such as restaurants, small retail stores and others that have been crushed by this pandemic. This bond would be a twenty-five year bond sold by an entity created by the State, not by the City. That entity would issue tax-free bonds funded by a small percentage of the programs I will describe below. Small business recipients would have ten years to pay back their subsidy, which eventually would become part of the amount used to fund the bonds. Individuals buying the bonds might do so for patriotic reasons, much like war bonds of the past or Big Mac bonds in the seventies. Bondholders would cash out after twenty-five years tax free, but not expect any distributions in the interim. The independent bonding authority would oversee the funds distribution to ensure it is secure and being used for the appropriate purposes.
Finally, the City needs the State’s help to push for and pass laws that other states are already using to pay for budget shortfalls. These include Mobile Sports Betting and, possibly, Marijuana use laws. Since New Jersey has already passed both, the spillover has already impacted New York. Passage of these laws can provide huge revenues to be used to fund long-term borrowing such as the bonds described above, as well as to fill budget deficits. Mobile Sports Betting can also help the restaurant and hospitality industry generate revenues.
There exist other revenue-producing initiatives, such as adding additional casinos in New York, as well as other innovative programs which would create jobs, produce revenue, support the bonds and lower the deficit.
For any city to thrive, its citizens must feel safe. They must feel as if they are afforded equal opportunities, equal justice and a good quality of life. There are many other important issues to be discussed, including improving education and determining how residents who cannot pay their rent and mortgages due to the pandemic will be able to survive this economic downturn. But those are topics best left for another day and another OpEd.
The ideas put forth in my OpEd are intended to provoke and generate further serious discussion about the financial fate of New York.
Let those discussions begin now.
As an aside, I am not running for mayor.
Randy Levine is President of the New York Yankees. He formerly served as Deputy Mayor of Economic Development, Planning and Administration and New York City’s Labor Commissioner. These views are his and his alone, and do not reflect those of the New York Yankees nor any other entity.