You may have heard that New York is facing a little budgetary spell, having been slammed by the slumping economy and the devastating hollowing out of the financial industry. Of course, every time there’s a recession, state budgets face a major strain. This time it might be different, especially for the two most largest states in the union, California and New York:
Daily Beast: Here’s the really bad news: the full impact of the financial crisis in New York has yet to be felt.
The dirty secret of Empire State budgeting is that New York City depends disproportionately on Wall Street for its budget and New York State depends on New York City.
In the last four months, the financial landscape has changed dramatically. Investment banks that have been the engine of the city’s tax revenue for decades have disappeared entirely or morphed into restricted new entities. According to E.J. McMahon, my colleague at the Manhattan Institute, between 1980 and 2007 the securities industry’s share of wages in the state rocketed from 3 per cent to 18 per cent, with the average Wall Street salary and bonus rising to $379,000. Wall Street revenues made up 20 per cent of the state’s budget. So the 40,000 local jobs lost in the financial sector are only the beginning. We’re not facing a cyclical downturn; we’re facing a fundamental alteration of the facts of financial life in New York. And the 20 per cent unemployment in some upstate counties will not help ease the squeeze.
Here’s a glimpse of what’s going on in California:
The city of Vallejo—population 120,000—declared bankruptcy earlier this year because it was locked into spending 74 per cent of its $80 million general fund budget on public-safety salaries. Police captains were entitled to receive $306,000 annually in pay and benefits, while 21 firefighters earned more than $200,000 a year, including overtime. After five years on the job, all were entitled to lifetime health benefits. Now two smaller towns north of San Francisco, Isleton and Rio Vista, also appear on the brink of bankruptcy.
In a preview of political fights to come, both New York State and California budgets are being crippled by outsized public sector union pension obligations that are now coming due in a perfect storm—a combination of an ageing population, a declining tax base, and a fiscal crisis.
As we work our way out of this mess, one solution might be to start breaking promises. Our politicians say we’ve made a lot of promises to all kinds of groups: Seniors, veterans, our brave men in uniforn, state employees, teachers, etc. Oh, and we also have all kinds of obligations to our children, or so we’re told over and over again. Well it might be time to start talking about what kinds of promises we break. In some cases, we won’t have to break any promises, just honour them to only 75%.
Without some adjustment in government obligations we’re creating two classes of citizens. Ordinary taxpayers and the people who live off the backs of ordinary taxpayers. So in California, you have state employee retirees whose pensions are guaranteed by everyone else. If a Silicon Valley tech worker loses his retirement savings, does a state worker have to contribute more of their taxes to ensure that person’s retirement? Doubtful.
And we should be disturbed that New York and California, arguably the two most dynamic and vital economies in the country are having these problems. We’ll leave that for another post.