City Journal Summer 2014

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Summer 2014
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New Book From Steven Malanga:
Shakedown: The Continuing Conspiracy Against the American Taxpayer

The Immigration Solution: A Better Plan Than Today's
by Steven Malanga, Heather Mac Donald, Victor Davis Hanson
The Immigration Solution.

The New New Left: How American Politics Works Today
by Steven Malanga
The New New Left: How American Politics Works Today

Eye on the News

Steven Malanga
Fiscal Dodge City
Mayor de Blasio’s teacher contract continues a New York tradition of paying off unions with imaginary money.
20 May 2014
Photo by Kate Ter Haar

Michael Bloomberg spent the final years of his mayoral tenure telling New York’s teachers’ union that the city had zero money for fat raises. His successor, Mayor Bill de Blasio, has granted teachers a retroactive pay boost anyway, using a transparent financial gimmick: he’ll pay for work done in 2009 and 2010 with tax money that the city won’t start collecting until 2015. Only in the murky world of local government finance, where politicians can borrow their cities into insolvency, is de Blasio’s maneuver considered “balancing the books.”

The mayor’s first big fiscal stunt has provoked some criticism, but he’s likely to get away with it. New York City mayors have a rich tradition of rewarding labor, especially teachers’ unions, with money that the city doesn’t have. These deals wind up costing taxpayers dearly in higher taxes and fewer services, and they have brought the city to the brink of fiscal disaster more than once.

For nearly a decade—from the mid-1960s to the mid-1970s—New York spent more than it took in and borrowed to pay for it. The city negotiated several teachers’ contracts during this period, but none was more damaging than a 1972 deal. Despite the city’s precarious budget situation, Albert Shanker’s United Federation of Teachers came to the table that year asking for a 33 percent boost in starting salaries and a near doubling of wages for the highest-paid teachers—demands that exceeded federal wage guidelines. The Board of Education estimated the cost of the proposed three-year contract would require New York taxpayers to double their $1.6 billion contribution to the city’s education budget. Barely acknowledging fiscal reality, the union settled for a “mere” 33 percent increase in wages for experienced teachers over three years. The agreement still cost taxpayers hundreds of millions of dollars.

The pay hike contributed to the fiscal chaos that ensued. When new mayor Abe Beame took office on January 1, 1974, he faced a Board of Education request for a whopping 30 percent budget increase to help pay for the wage deal and for growing pension-fund shortfalls. Hard-pressed, the city sliced the requested increase by more than half, but the new budget still grew by 12 percent. The city’s fiscal predicament worsened. To make the numbers work, the board let go nearly 1,000 teachers. By the end of 1974, the New York Times declared that Gotham was a “near-bankrupt city.” Beame asked for still more teacher layoffs, but it wasn’t enough to forestall the inevitable. In March 1975, the city’s financial underwriters told the Beame administration they’d stop issuing its bonds. By April, New York was out of money; Albany moved in to bail out Gotham.

New York faced its next big fiscal test in the early 1990s, after the meltdown of financial markets that started in late 1987 led to a gradual deterioration of the city’s economy. Despite the economic thunderclouds, including the loss of 46,000 jobs in 1990, the David Dinkins administration signed a deal granting teachers 5.5 percent annual raises over three years. The administration claimed that the impact on the city’s budget would be equivalent to a mere 1.5 percent pay increase, in part because the city used a trick now familiar to hard-pressed taxpayers: it raised the projected rates of investment returns on the teachers’ pension fund from 8 percent annually to a heady 9 percent, thereby making the pension system look better-funded than it was and justifying a cut in the city’s contribution to the fund. That money instead went to pay for 2.5 percentage points of the teachers’ pay increase. To cover the rest, the city redirected state money meant for education programs.

Years of fiscal chaos followed. Dinkins raised taxes by $800 million in 1990 and by another $600 million in 1991. By 1992, with even newspaper editorial boards calling for no new taxes, the administration tried to save money by underfunding the board of education, slashing the education budget—the one that the labor pact had helped grow—by $150 million and then claiming that the schools were mismanaging their money.

The city’s next budget crisis emerged after the financial and economic slowdown that followed the bursting of the technology stock bubble in 2000 and the 9/11 terrorist attacks in 2001. Despite facing a $5 billion fiscal hole, first-year mayor Bloomberg inked a deal with teachers in June 2002 that raised salaries between 16 percent and 22 percent over 30 months, at a total cost of $1.4 billion. He justified the deal after union officials and schools chancellor Harold Levy argued that city teachers were exiting en masse to teach in the suburbs—even though Sol Stern had demonstrated that the supposed outmigration was largely a myth.

Six months later, the mayor disclosed that the city’s budget was more than $1 billion out of whack, with just half a year left to balance it, and the city faced another $6.4 billion budget hole in the next fiscal cycle. In just 11 days, Bloomberg pushed through the largest tax increase in city history: a $1.7 billion boost in property taxes. The administration also won approval from the state to perform another fiscal gambit, taking money that the city borrowed during the 1970s fiscal crisis, which was scheduled to be paid off in 2008, and refinancing it for another 30 years—meaning that New Yorkers will still be paying for the 1970s fiscal crisis in 2030.

Wall Street’s revival in mid-decade, thanks largely to the country’s housing bubble, temporarily eased the city’s pain, but by the time the financial markets collapsed in 2008, it had become clear even to Bloomberg that New York had overpaid for its generous labor deals. Starting teacher salaries rose from $31,170 in 2002 to $45,530 in 2008—a 46 percent increase—while pay for a fifth-year teacher with a master’s degree increased from $38,598 to $56,808, a 47 percent gain. Facing a rapidly deteriorating city economy in 2008, the mayor subsequently told teachers he would not give them raises without productivity savings on their part. The union balked, refusing to sign a new contract.

That’s a sound strategy, it turns out. Teachers in New York merely had to wait for a new, friendlier mayor to come along and fashion his own sleight of hand to get them their raises. How taxpayers wind up paying for this latest fiscal dodge remains to be seen.

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