New York City mayor Michael Bloomberg is beginning his second term after a landslide reelection even more stunning than his surprise victory four years ago. Like the mayor, the city has come a long way since he took office in 2002, when New York was still reeling from the devastating attacks of 9/11 and Bloomberg was only a novice at governing. Today, tourists are flocking to the city in near-record numbers, and construction scaffolding pervades the midtown Manhattan streetscape, evidence of a city renewing itself. After a precipitous tumble, Wall Streets business is nearly back to where it was in the go-go late 1990s, and that prosperity has helped fill the citys tax coffers, producing a surplus and sparking tax rebates. Crime remains low, and New York is still one of the safest big cities anywhere, a tribute to the mayors good judgment in naming Ray Kelly police commissioner.
What could be wrong, then?
Plenty, it turns out. Most worryingly, New Yorks prosperity and financial security are barely skin-deep. The citys post-9/11 fiscal recovery has mostly resulted from two outside forces: investment tax cuts in Washington that spurred Wall Street, and a nationwide housing and mortgage-refinancing boom, prompted by remarkably low interest rates and yielding record collections in the citys mortgage and property transfer taxes. But these unusual and unsustainable revenue jolts have barely kept pace with Gothams record spending. The result is a fiscal house of cards that could collapse at the slightest tremor.
Weighed down by a huge workforce, opulent public-employee benefits, and contributions to the nations most expensive Medicaid program, New Yorks budget during Bloombergs first term swelled by some 28 percent, about three times the rate of inflation, and projections suggest that spending will keep rising at least this quickly, unless drastically curbed. Though the mayors reelection campaign touted his fiscal stewardship, some of his first-term actions, especially the big wage increases that he has given to city workers, and his preference for solving budget problems by raising taxes rather than by slowing spending, have fashioned an unsustainable business model for Gotham.
As a result, despite the good times, the city faces a $2.3 billion budget deficit next year and $4 billionplus gaps in subsequent years, already prompting new mayoral calls for more tax hikes. Should Wall Street or the national economy merely pause to catch its breath rather than continue at the torrid pace of the last two years, New Yorkers will quickly discover how fragile was their economic security under Mayor Bloomberg.
Bloomberg, whose budgetary pronouncements in his more candid moments make clear that he understands the problem that the city faces, now confronts a stark choice about what kind of second term he wants. He can hope that Wall Street stays solid enough that the fiscal thin ice hes skating on doesnt crack while hes in office, leaving the problem to the next mayor. Already his unrealistic calls for reinstituting the commuter tax, as well as his willingness to postpone city contributions to employee pension plans, suggest that this is the course that he will take. He will then go down in history as the mayor who set the stage for the citys latest fiscal breakdown, rather than the mayor who helped New York recover after 9/11.
But even now Bloomberg could use his second term to become a genuine reformer in the mold of his predecessor, Rudy Giuliani, an urban trailblazer who overturned the conventional wisdom and battled the citys entrenched interests to achieve his aims. Elected twice without the help of the citys special interests, Bloomberg has no reason not to become that kind of reformer in his second term. In addition to maintaining a low crime rate and ensuring that other Giuliani-era reforms remain in place, the mayor can start to put the citys fiscal house in order. That would mean changes in the citys pension and benefits systems, outsourcing and competitive bidding for some services, deregulation of the bureaucratic codes and rules that hamstring local businessesand passing the resultant savings to taxpayers through broad-based tax cuts that make the city more economically competitive, by contrast with the narrow and politically motivated tax rebates of the past few years.
Achieving such changes will require a tough-mindedness absent from Bloombergs first term. But Giuliani demonstrated that they are eminently doable. True, Giuliani ruled in a more confrontational way than Bloomberg, never accepting that parts of the budget, or existing ways of doing things, were beyond his control because they were ordained by contracts or mandated by Albany. Early in his tenure, for instance, when Giuliani sought to merge the citys housing and transit cops into the main police force to save hundreds of millions a year and make the force more effective, the state legislature, at the police unions behest, balked, until Giuliani simply threatened to fire the entire housing and transit force and rehire them as city cops if the legislature didnt go along. Similarly, when sanitation workers, who had worked for several years without a contract under Giulianis predecessor, David Dinkins, resisted signing a contract that included productivity and staffing changes that would save hundreds of millions of dollars, Giuliani threatened to contract out city routes to private carriers, prompting a quick deal. Such bold and decisive moves helped Giuliani close big budget gaps early in his mayoralty without raising taxes.
Bloomberg doesnt play political hardball like this; indeed, he seems to relish the favorable press comparisons of his conciliatory governing style to Giulianis tough approach. But without taking responsibility for wielding the consider- able powers of his office energetically, Bloomberg will ultimately take the blame for a Gotham financial meltdown, even it if occurs on the next mayors watch, as former mayor Lindsay is now almost universally condemned for the fiscal crisis that ensued after he left office.
Even with the mandate that his landslide victory has given him, its not likely that Bloomberg will completely change stripes in his second term and use his political capital to pursue dramatic reform. But he can still send the city on the road to fiscal recovery with changes that dont require a heroic or pugnacious governing style.
Employee costs. New York City desperately needs to get control of its compensation costs, especially its pension and benefit outlays, which have soared by over 70 percent since 2002 and now cost the city a staggering $9 billion a year, nearly 25 percent of Gothams budget. Mayor Bloomberg inherited many of the benefits and entitlements that have created this fiscal mess, and the state legislature (in its usual fashion) has lavished on more without his consent, but Bloomberg has added to the problem by approving union contracts with big wage increases, which translate into higher pensions. His new teachers contract, for instance, provides the biggest pay boost to senior teachers nearing retirement, ensuring even heftier pensions for workers whose benefit packages already far outweigh the private sectors.
A big impediment to savings in this area is that benefits are locked in by contracts, and the mayor, during his campaign, signed some new long-term deals with unions. In addition, many benefitssuch as retirement at age 55 and health-care coverage that requires no employee contributionsare state-legislated and can only be changed in Albany, where unions have enormous sway. Even so, a determined mayor can effect change. One place to start is with benefits directly under city control. For instance, Gotham pays the full cost of its retirees health coverage, including premiums for Medicare coverage of doctors services and outpatient treatments, which 90 percent of private-sector retirees pay for themselves. The city itself could unilaterally stop paying for this coverage, which costs about $800 per retiree annually, without going to the state legislature. That would save about $150 million annually now, and much more later.
Another relatively nonconfrontational strategy is to roll back benefits that dont affect current workers, thereby limiting political opposition. For instance, New York can bargain to rationalize the administration of city-funded employee benefits, such as dental and vision plans, now handled by 83 separate local union benefit funds. A city comptrollers audit two years ago found that the extremely inefficient plans soak up as much as 10 percent of nearly $1 billion in taxpayer contributions for administrative costs. The city could demand that unions consolidate administration of the plans and cap costs, and it could then reduce its contribution for these benefits accordingly, saving close to $100 million a year. Such an efficiency move would do nothing to deprive members of benefits, though it would shrink the patronage empires of union officials.
Similarly, the mayor could push to switch future public employees to a defined-contribution retirement program, in which the city has no open-ended commitment beyond the annual contributions that it makes during a workers career. Such plans, standard in the private sector, are increasingly common in the public sector. Since a switch would only cover new hires, the mayor can advocate for it without taking anything from current employees, and indeed by making the case to current workers that the citys future solvency, as well as their job and pension security, depends on such savings. A defined-contribution plan with an annual city contribution of 7 percent of a workers salary would save $45 million next year, $85 million in 2007, and so on, the Independent Budget Office calculates.
Medicaid. New York State has by far the countrys largest Medicaid systemmuch bigger even than more populous Californiasbut not because the Empire State has more poor to serve. Rather, New Yorks Medicaid system has broader eligibility, offers more services, and pays higher reimbursement rates than other states. Unlike other cities, which pay nothing for Medicaid, Gotham must pay a quarter of the cost of this huge programover $4 billion a year. And because Medicaid is a state-controlled program, the city can do little on its own to cut it. But the mayor can loudly and persistently pressure the state to cut costs. In the meantime, city administrators who enroll applicants into this means-tested program can tighten their procedures for checking eligibility, which is based on income levels. When the Giuliani administration instituted tougher screening of welfare applicants and recipients, it discovered that tens of thousands were ineligibleas is typical with means-tested programs. The city is likely to find something similar under Medicaid.
The Medicaid crisis, also weighing down the state budget, is sure to become an issue in this years gubernatorial race, so the mayor can use the power of his endorsement to extract promises of reform from a new governor. One sane change that Bloomberg should push would be to eliminate premium services like dental care and transportation to and from doctors offices and clinics, something that few other states offer. A recent New York Times exposé illustrated how patients who dont need the ambulette services often abuse them, with the connivance of the providers. Ending these two premium services alone would save the city some $70 million annually.
Another service whose growth needs reining in is home health care, originally designed to save money by allowing seniors to live in their own homes rather than in nursing homes. Now that the program pays personal-care workers not only for medical services but for shopping and cleaning, too, it gets billed for an average of 30 hours per week, compared with a national average of 11 hours weekly. Eliminating reimbursement for such nonmedical services might save the city as much as a quarter of a billion dollars annually.
The mayor could also press for a cap on rising reimbursements to hospitals, nursing homes, and pharmacists. The states Medicaid program pays these politically powerful players far more than other states do. One study found that the average bill for a Medicaid hospitalization in New York is 75 percent higher than in California and Texas, because New York pays more for a procedure and allows Medicaid to pay for more hospital services than other states. Outsize nursing-home reimbursements average 29 percent more than the national benchmark. The state pays pharmacists two to three times more than other states for many drugs and often allows doctors to write prescriptions for expensive drugs rather than less costly alternatives. Bringing these expenditures in line with national averages (adjusted for New Yorks higher costs) might save the city up to $1 billion annually.
More competition. Though the mayor touts his administration as businesslike in its efficiency, he has neglected the most basic management principles of competitive bidding and outsourcing, measures that other mayors and governors around the country have embraced. What makes this failure even stranger is that outsourcing and competitive bidding are things that Bloomberg can often do on his own authority, without approval from Albany or unions. Former Indianapolis mayor Stephen Goldsmith, an apostle of such competition during his tenure from 1992 to 2000, privatized some 70 functions, saving his much smaller city an estimated $450 million annually. Moreover, Goldsmith won union workers support for certain of these efforts by promising to share savings with them if they won the competitive biddemonstrating that there are creative ways to overcome political opposition to change. Reinventing Government coauthor (and self-described liberal) David Osborne describes managed competition in his latest book, The Price of Government, as the single fastest route to savings without eliminating services.
Instead of pursuing such a strategy, Bloomberg, bizarrely, has become a force for repatriation of assets from the private sector, arguing, for instance, to have the city take over bus lines franchised to private operators on a non-competitive basisa move that flies in the face of what cities around the world are doing. A Manhattan Institute study by E. J. McMahon and E. S. Savas estimated that cities are saving between 25 and 50 percent annually on their bus transportation costs by employing true competitive bidding of routes. If New York genuinely privatized these bus franchises instead of repatriating them, it could save several hundred million dollars a year in subsidies. Greater privatization, moreover, by migrating workers to the private sector, would also help the MTA curb its growing pension and health benefits costs, since politically motivated legislation in Albany would no longer dictate them. Furthermore, the presence of an alternative efficient and low-cost transportation system would serve as a constraint on the transit unions often extravagant demands, and would dissuade it from going on strike.
Bloomberg has also clung to assets that the city has no business owning, at great cost to taxpayers. He canceled a Giuliani-brokered $160 million deal to sell three publicly owned office buildings that house United Nations agencies (and that pay no property taxes), for the absurd reason that the scandal-scarred outfit was not comfortable with private landlords. He similarly scrapped a Giuliani effort to sell Off-Track Betting for $250 million, believing that he could instead hire an executive to turn the bookie operation around, but OTBs annual contributions to city revenues have dropped precipitously from $12 million three years ago to essentially nothing. Now, the city faces the prospect of subsidizing OTB as it goes into the red. Assets that are better managed by private companies should go back on the auction block.
Gothams revenues consistently run short of spending, despite high tax rates, partly because New York provides more services and supports more duplicative governmental departments, commissions, offices, and boards than perhaps any other city. In California, Governor Arnold Schwarzenegger has created the California Performance Review to examine all facets of state government and recommend elimination or consolidation of redundancies. Mayor Bloomberg should follow suit, with an eye toward changes in New Yorks charter that would downsize government. Among the candidates for elimination are the useless borough presidents offices (annual cost: $30 million); the Human Rights Commission, which duplicates federal and state efforts and costs some $10 million a year; and the Board of Correction, replicating state oversight functions for nearly $1 million.
Stimulating the economy. Mayor Bloomberg has frequently complained that repayment of the citys high accumulated debt is squeezing his budget. But the mayor, who lumps these debt payments among the uncontrollables of his budget, has himself been piling on billions in debt and, worse, using it to fund wasteful subsidized housing and giveaways to developers. He would do far better to unleash the private sector to do unsubsidized development, including building affordable housing, instead of spending taxpayers money in ways that studies show rarely work but only add to the citys debt burden. Strangely, though, the mayor seems to have little faith in the free market, as was clear from his dogged pursuit of a subsidized Manhattan stadium project, even to the point of crowding out private developers. Nothing better sums up the administrations antimarket mentality than a comment that Deputy Mayor Dan Doctoroff made during the fall about the citys desire to remove developer Larry Silverstein from the World Trade Center rebuilding: There is an inherent conflict between someone who is market-driven and the citys interests, which should be rationally discussed.
Instead of trying to micromanage the citys economy, Mayor Bloomberg should attack the true problems that have kept Gotham stuck in a 50-year boom-and-bust cycle, so that today the city has fewer jobs than it had 35 years ago. He should focus his talent on reducing the sky-high tax rates and the bureaucratic regulations that burden companies, make development expensive and difficult, and discourage entrepreneurs from locating here.
A good start would be to speed up the rezoning of the citys abandoned manufacturing space for commercial and residential development, which will create not only temporary construction jobs but also permanent jobs, because the population growth that new housing spurs is a powerful economic engine, as new residents demand more goods and services. After years of manufacturing decline, the city is dotted with unused land awaiting redevelopment. A recent Manhattan Institute study identified five former industrial areas, one in each borough, that are ripe for rezoning and redevelopment and that together would add over $1 billion a year to the citys property-tax rolls.
To speed such redevelopment, Bloomberg should hack away at the regulations, taxes, fees, and other costs that make building in all of New Yorks boroughs more expensive than in any other city. Despite the opposition of the union-friendly City Council, he should keep trying to revise the citys obsolete and costly building code, which discourages outside builders from entering the city. He should also push back against the Councils refusal to lift the zoning barriers to big-box stores. New Yorks outer boroughs, with disposable income comparable with that of the Nassau County suburbs, have thousands fewer retail jobs and collect tens of millions less in sales-tax dollars annually, because the Wal-Marts and wholesale-club stores where New Yorkers want to shop are in the suburbs, not the city.
Of course, what the citys economy needs most are tax cuts. The premium that businesses pay to be in New York has hollowed out the citys economy, as companies have moved mid-level jobs out of town, leaving behind only high-end jobs and the low-wage positions necessary to support them. The combined city and state corporate tax rate, nearly 18 percent, is almost double New Jerseys levy and two and a half times Connecticuts. The citys property tax adds, on average, nearly $13 a square foot to office leases in Manhattan, while the same tax in Los Angeles amounts to just $2.16 a square foot, in downtown San Francisco just $3.15 a square foot, and in New Jersey only $2.75 a square foot. Residents get soaked, too, by high income and sales taxes, especially on the middle class and the wealthy. The combined state and local tax burden in New York City is nearly 60 percent higher than the national average for a family of four earning $75,000 a year, and about 70 percent higher for a family earning $150,000 or more.
Facing a $2.3 billion deficit in his first budget in 1994, Giuliani boldly proposed a plan to make the city more competitive by cutting its hotel tax, gradually ending the commercial rent tax outside Manhattan, and eliminating the sales tax on clothing items under $110. Though editorialists and fiscal watchdogs prophesied doom, Giuliani persevered throughout his eight years as mayorduring which New York added 440,000 new jobs as a result, and employment grew faster than the national rate for several years. Bloomberg has taken the opposite course, imposing a cigarette-tax boost, a record 18 percent property-tax hike, and sales- and income-tax increases, which, all told, have sucked over $6 billion out of the citys economy and into government coffers. Higher fines and fees, as well as aggressive upward reassessment of properties, have netted the city billions more and produced such ire in the business community that the head of a small-business coalition condemns the administrations approach as a scorched earth policy (see Gotham Stalls Out, Spring 2005). Moreover, during his reelection campaign, Bloomberg wouldnt rule out future tax hikesunlike even former mayor David Dinkins, who called a halt to tax increases after he socked New Yorkers in the early 1990s with a round of big raises that didnt solve the citys budget crisis, because Dinkins, like Bloomberg, didnt cut spending.
There is no shortage of crippling taxes that a New York reformer would want to combat, from the commercial occupancy taxthe countrys only tax on rentto the citys personal income tax, which most major cities, including Los Angeles and Chicago, dont even have. The citys levy is a big reason why New York has the highest rate of residents who leave to live somewhere else of any city in the country. Worse, since the citys high income tax falls heavily on unincorporated small businesses, whose owners pay taxes on their profits through the personal income tax, many of them locate just outside the city limits to avoid the tax.
Even with deficits looming, such tax cuts would pay for themselves by generating new economic activity, as Giuliani confidentlyand accuratelypredicted when he proposed his cuts in the midst of deficits. A reduced hotel tax produced more total revenues because tourism increased, while the abolition of the clothing sales tax yielded a 4 percent increase in overall sales-tax collections, because people stayed in the city to shop instead of trekking to Jersey.
In his first term, Mayor Bloomberg made Gothams fundamentals worse, not better, and he displayed an almost finicky distaste for confrontation, a squeamish reluctance to make tough decisions and wield the political power necessary to impose them. Will the endorsement that voters have given him stiffen his resolve? New Yorks future depends upon it.
Research for this article was supported by the Brunie Fund for New York Journalism.