City Journal

Roger Starr
The Historical Roots of the Budget Crisis
How New York’s Government Grew
Spring 1993

Edwin S. Rubenstein’s “A Citizen’s Guide to City Government” and Charles R. Morris’s “Navigating the Nineties” present a picture of a city government living beyond its means and facing the strong possibility of a fiscal crisis in the next few years if it does not undertake serious changes in its basic approach to public policy. How did the city arrive at such a point?

New York has been, and remains, one of the world’s richest cities. In the past, its economy was soundly based on the three legs of an economic tripod: a magnificent harbor, the nation’s largest manufacturing base, and the headquarters of many large American corporations. New York has experienced a falling-off in all three of these categories, but the strength of its financial services sector sustained it through the 1980s. Even with its current economic problems, the city has enough resources at its disposal to project a 1993 budget of more than $30 billion, a sum larger than all but three states spend in a year.

Several distinctive strands in the city’s geography, political history, and demography have combined to produce extremely high government expenditures while limiting the city’s ability to raise revenues from real property taxes. To understand why New York’s government has grown so large, we must begin with the evolution of the city’s political structure. Manhattan, which for the last 95 years has been merely one of the five boroughs, developed into a mighty city long before the other four boroughs were substantially developed. Prior to unification in 1898, the outer boroughs were little more than farmland; the only exception was the small—and, to nineteenth-century Manhattanites, somnolent—city of Brooklyn.

After unification, Manhattan was by far the richest and most densely developed borough. It was also the site of city hall and the command post of the expanded city’s mayor. The rustics who became New Yorkers by the stroke of a pen had done so because they surmised that unification would encourage the city to build new bridges (and, later, tunnels) to connect Brooklyn, the Bronx, and Queens with Manhattan, where the jobs were. But the boroughs wanted to protect their interests within the new city: They desired a variety of improvements that wealthy Manhattan would have to subsidize, and they also feared getting stuck with such nuisances as jails, garbage dumps, poorhouses, and noxious factories.

To resist Manhattan’s anticipated aggression and self-service, the leaders of the boroughs pressed for a governmental structure that would give them a strong voice. What emerged was the Board of Estimate, which consisted of the five borough presidents and three citywide officials: the mayor, the president of the City Council, and the comptroller. The citywide officials had two votes each; the borough presidents, one. Thus, the citywide officials could, if they agreed, always outvote the representatives of the boroughs. There was, however, no cogent reason for expecting that the comptroller and the City Council president would agree with the mayor on controversial issues. But the boroughs stuck together: By custom, when the mayor presented a proposal that affected one of the boroughs, its president could count on the votes of the other four borough presidents.

The arrangement, therefore, did not give the mayor ample authority to push unpopular but necessary policies. As a result, it became common practice for the mayor to offer benefits to the affected borough president in exchange for his acquiescence in an undesired project. The job of the mayor’s office in planning a garbage transfer station, to take an imaginary but typical example, was to impress on the relevant borough president that his borough needed such a station. The borough president might feel that the site was well-chosen but that his acceptance of the station would be politically undesirable without a balancing bonus. The mayor would then suggest that the immediate remodeling of two obsolescent schools in the vicinity would benefit more people than the transfer station would harm. The borough president would tell the mayor that, although he would continue to dispute the placement of the transfer station, he would release the other borough presidents from their implicit promise to vote with him-provided that the Board also approved the school rehabilitation.

Such a process meant that necessary projects took longer to approve and were ultimately more costly because the city had to accompany them with concessions to regional interests. Though the Board of Estimate was dissolved in 1989, this dynamic is still played out, with the City Council and community boards serving as the forums for local resistance to citywide projects.

The unusual relationship between the city and the boroughs also constrained the city’s ability to collect revenues from the real property tax. When New York was unified, it was obvious that Manhattan would produce many times the tax revenues that would flow into the city from the outer boroughs. While the boroughs levied taxes on houses and small apartment buildings, Manhattan’s tax base consisted of multimillion-dollar office buildings, high-rise apartment houses, department stores, and factories (especially in the garment district). In a brief sentence one can describe what happened: Manhattan collected taxes, while the other boroughs pleaded for improvements.

The outer boroughs flexed their political muscle in Albany, leaving the city unable to raise taxes proportionately on residential property outside Manhattan. The State Legislature passed a law that prevented the city from taxing one-, two-, and three-family homes at anything like the rates paid by the owners of apartment houses and commercial and industrial property. As of the late 1980s, property taxes on small homes were only slightly more than one-fifth as high, as a percentage of market value, as those on apartment buildings. This differential prevented the city’s property tax revenues from rising as quickly as the value of the homes in the outer boroughs. The city had to rely more on other sources of revenue: a municipal income tax, sales tax, hotel tax, commercial rent tax, and so on. Revenues from these sources are more likely to decline during bad economic times, as are commercial real estate tax collections: When the assessed valuations of Manhattan office buildings fall, as they are beginning to do because of the current real estate slump, the city government is squeezed.

Further, New York’s property tax structure, combined with the preponderance of apartment dwellers in the city (more than 70 percent of New Yorkers are renters), deprives the city of an important means by which municipal spending is kept in check elsewhere in the nation. In most cities, homeowners not only pay taxes on their homes, but they do so with open eyes. Because they get a bill directly from the local government, they have a direct interest in scrutinizing proposed legislation and keeping overall expenditures—and therefore their taxes—down. By contrast, it seldom occurs to a tenant that he is paying part of the owner’s real property tax every time he writes out a rent check. This is even more true of a tenant who is protected by rent regulation. The apartment dweller, never seeing a tax bill, does not know how much of his money the city is spending.

In virtually every other U.S. city (with San Francisco the sole exception), at least half of the residents own their homes. Organizations of homeowners represent the financial interests of their constituents and act as effective advocates for controlling city spending. In New York, however, homeowners are guaranteed low property taxes by state law. Those homeowner groups that do exist, in areas such as the Upper and East Bronx and parts of Queens and Brooklyn, are concerned primarily with securing better city services for their neighborhoods: They want cleaner and better streets and sewers that drain off rainwater; they don’t want to be forgotten when the Sanitation Department starts removing the effects of a major snowfall. Because they know the State Legislature will keep their taxes down, they have no incentive to monitor the city’s overall priorities or keep spending under control. It is telling that, while New York has several organizations that call themselves citywide tenant groups, there are no citywide homeowner organizations.

The size of New York’s government also owes a great deal to the city’s dominant political culture, which has long held to the belief that the rich should not object when their money is taken from them for the benefit of the less fortunate. This belief grew out of two different motivations. Many of the richest people in Manhattan themselves felt a moral obligation to the poor. They established settlement houses, charitable organizations, prison relief societies, and voluntary hospitals in the sections of town where poor people lived.

Political thinkers and activists, on the other hand, argued that the rich should succor the poor not only because the poor need help, but also because the rich deserve to have their money taken away from them in order to remedy what the nineteenth-century political economist Henry George called the “shocking contrast between monstrous wealth and debasing want” in the city. George, author of the 1879 book Progress and Poverty, advocated a “single tax” system, in which property owners would pay taxes only on their land, not on buildings or other improvements. This, he thought, would give landowners an irresistible incentive to build better housing that the poor could afford. George ran for mayor in 1886; though he lost, he offered a strong challenge to the candidate of the Tammany Hall Democratic machine and outpolled another aspiring politician, Theodore Roosevelt.

The arguments made by progressives like George resonated with successive waves of refugees who were arriving in New York: Germans fleeing the political changes of 1848, Italians leaving the Mezzogiorno, Russian Jews fleeing the pogroms, and the Irish, forced from their homes by English landlordism and the potato famine. Most of these immigrants abandoned their revolutionary views as they ascended America’s political ladder. But the belief that the rich owe a debt to society continued to exert great force in New York politics.

As New York City’s Democratic Party had adapted to the immigration of the nineteenth and early twentieth centuries, so also did it adapt itself to the ideas of the New Deal era. New York State voted the second-highest welfare allotments to families with dependent children (after Massachusetts). New York, alone among large U.S. cities, took responsibility for funding half the amount of welfare benefits not covered by the Federal Government.

One could go on endlessly talking about New York’s continued efforts to make life better for the poor. One public hospital, Bellevue, became a chain of 16. Public housing tenants in New York City were more numerous than residents of Buffalo, the state’s second city. The majority of voters perceived this as good, and never asked, “How are we going to pay for all this?” This tradition remains strong in New York today. Many who have worked to sustain the charitable impulse do not understand that charity, improvidently given, hurts the recipient more in the long run than it helps in the short.

New York’s political structure and culture, then, have led the city government to concern itself primarily with parochial and ideological matters, often at the expense of the city as a whole. There are, of course, organizations that scrutinize the budget carefully and manage to find mistakes, discrepancies, and unnecessary or ineffective programs.

Such groups sometimes have an impact, but City Council members know that only a small number of New Yorkers will vote on the basis of such good-government considerations.

New York’s major newspapers tend to uphold the city’s tradition of service to the poor and are generally not as careful in analyzing the economic effects of bills designed to help the poor as they are in the case of bills that are frankly directed at improving the state of the economy. If reporters would follow legislation in Albany and city hall as carefully as they scrutinize what goes on in Washington, it would certainly help correct the excesses in New York’s budgeting process.

New York City’s spending is also facilitated by the fact that it is a one-party city, with the Democrats constituting an overwhelming majority (45 of 51 members) in the City Council. The city does occasionally elect a Republican as mayor, but party distinctions are not as sharp in New York as in national politics, where the GOP is generally regarded as the party of smaller government. It is true that most big-city governments in the United States are dominated by Democrats, but in Los Angeles and Chicago, for example, many responsibilities rest with the county government, which includes suburban Republicans as well as urban Democrats. It would be good for the budget if the Democrats faced tough contests in more districts where fiscally conservative Republicans have a chance of winning.

It seems increasingly clear that New York will not be able to sustain a city government of its current size and scope indefinitely. The city’s current economic problems are a warning of possibly dire fiscal troubles ahead. But this warning also represents an opportunity for the city to reevaluate its priorities now, before it is forced to do so by a fiscal crisis.

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