Steven Malanga joins Brian Anderson to discuss New York City’s massive expansion in government spending and hiring under Bill de Blasio, the potential long-term impact of Covid-19 on the city budget, and why the next mayor will face a fiscal nightmare.
City Journal’s special issue, New York City: Reborn, is now available.
Brian Anderson: Welcome back to the 10 Blocks Podcast. This is Brian Anderson, the editor of City Journal. Joining me on the show today is my colleague and friend Steve Malanga. Steve is our senior editor at City Journal and a senior fellow at the Manhattan Institute. We've invited him to come on the show today to discuss his new essay, "The Bill Comes Due," which details New York City's budget dilemmas and the fiscal challenges facing its next mayor. Steve's essay is featured in our new special issue, called New York City Reborn, which we've just released. The issue includes essays by long-time City Journal writers and others, on how New York City can regain order and prosperity as it rebuilds, following the COVID-19 pandemic. You can find the issue and request print copy on our website. Thanks very much for joining us as always, Steve.
Steven Malanga: My pleasure.
Brian Anderson: You write, in this essay, that Mayor de Blasio, from the time he took office in 2013, through the formation of his actual 2020 budget, boosted city spending by $25 billion. This is a very significant 34% growth rate. He added something on the order of 30,000 full-time positions to the city staff. This was the largest increase in municipal workers in 40 years. New York City provides its employees, of course, generous pensions and fringe benefits. And the mayor's concessions to unions, as you note, including retroactive pay increases, have boosted the city's personnel costs by billions. So, could you describe some of the policies that have contributed to the city's bloated payroll, and offer your take on how these personnel costs could start being pared back?
Steven Malanga: Yeah, so, I mean, it basically falls into two categories, giving those who work for the city more, and making more of them, hiring more of them. There was an unprecedented, really, expansion of the city workforce by about the 30,000 full-time workers, that was about an 11% increase. We haven't seen anything like that since back in the days, in the aftermath of the fiscal crisis of the 1970s, when the city had been forced to cut its workforce, really cut to the bone. We had gone down to only 200,000 workers in the city at that time, and afterwards, when the city recovered, it was allowed, of course, to finally build back up, especially its police force and its... The fire department too, both of which had been cut back dramatically. But de Blasio came in, and at a time when the city's force was already at a significant high, he added 30,000 workers.
If you consider that the cost, the average cost of employing a city worker... Now, not high-end city workers, but the average city worker, it costs about $151,000, counting salaries and benefits. That's what the average worker costs. Those are enormous costs, just expanding the size of the workforce that much. Now, some of that came because of individual programs. He had a lot of programs that were somewhat controversial and remain controversial. Certainly, his mental health initiative is one of those, it's been highly criticized by people within the city council, for instance, because spent an awful lot of money. But in addition to that, there seems to be very little payback, and anyone who wants to understand, in great detail, why that's the case, should read the City Journal law articles that we've published on the program. But there were thousands of workers added to some departments there.
The other big area, of course, was the board of education, and especially pre-K. The mayor started off with the idea that we wanted to have free pre-K for kids, lower income kids who were four years old, and he started with that. It's somewhat controversial. [Kehan 00:04:12] Woods has written extensively about how there have been studies of pre-K, going back all the way to the 1970s, showing that the payoff, in terms of educational achievement, is very, very small, if anything at all. But beyond that, he started that modestly, but then expanded it to, kind of, universal pre-K, and then down into three-year-olds. And he even argued that, for the sake of equity, a word that's thrown around a lot these days, we had to expand the program, not just to lower income kids, but to middle-class kids, because it was a matter of equity now. I mean, this is a kind of perversion of the word equity. Just imagine if every program we have for the poor and now every social program has to be expended to the middle class [crosstalk 00:04:58].
Brian Anderson: It becomes the universal entitlement.
Steven Malanga: Exactly. So, but what that did was, it created this huge jump in the workforce. At the same time, we talk about giving those workers that were already working, more. He did something else that was unprecedented, in Bloomberg's final term, he had tried to negotiate significant givebacks from the city unions, particularly on healthcare, because they have... Their healthcare is not only premium, compared to those in the private sector, including those working at Fortune 500 companies in the private sector, but it's even at a premium to those working at other cities and its State government in New York, they pay... Senior employees pay virtually nothing. And we also offer almost that same exact deal to retirees. So it's if we're paying for two workforces in the most expensive way possible, for healthcare. Bloomberg had tried to get that back. The employees... The unions had balked at at, and therefore did not even sign the contract.
They decided that they would outlast Bloomberg, hoping that they could get somebody better in the next election, and they hit the jackpot. What de Blasio did was, he not only didn't ask for these givebacks, but instead, he gave them a retroactive pay increases for the Bloomberg years. So, for much of de Blasio's eight years in office, we actually been paying workers bonuses and raises for work they did during the Bloomberg years. That's, kind of, the definition, of course, of inefficient government, and it's not something that anyone does regularly. And in fact, it's so expensive that, even in the pandemic year, we were scheduled to make... The city was scheduled to make a $900 million payment to teachers.
Again, because of this retroactive pay, which these payments have been stripped out over eight years, the union was kind to the city, they said, "Well, we'll only take half this year, and you'll have to pay the half the next year." But this is how long this has gone on for. So, these areas, in particular, vastly increase the spending, and more so than increase the spending, what they did was they increased what we call the baseline of the budget. Meaning the next mayor who comes in has to deal with all of this. It's not like these were one-time expenditures that disappear. These are people who work for the city now. These are benefits and pay levels that are in contract right now. So, the next mayor will face this. And that's part of the challenge that I say in my piece, which is really about the fiscal challenge that the next mayor is going to face. That's part of the challenge.
Brian Anderson: Now, there's a considerable amount of money in the stimulus, the new federal stimulus bill that will be sent to States and cities across the country, including New York City, in effect to, kind of, a bail out of the city's current situation. I think New York City is facing a $5 billion or $5.25 billion budget deficit this year. How is that going to be affected by the stimulus?
Steven Malanga: Yes. So, first of all, I would call a generous amount of money an understatement. People have called this a bailout for dysfunctional governments in States and cities around America because everybody is getting a nice little piece, but it's particularly helpful to places that were in trouble, not principally because of the pandemic. There's no denying that the pandemic has created extraordinary expenses, but we've seen, around the country, that the economy has bounced back so fast that in many places, California, for instance, they're actually running budget surpluses now, even without the Biden money. The larger issue is that there are places like New York, that had spent so much that they were just incapable of absorbing even a short time hit to their revenues. So, what the Biden money does is, it basically says that it allows de Blasio to not have to cut much his final year in office.
What happens is, he, right now, is crafting a budget which goes into effect on July 1st. And it's... The new mayor takes all over next January, and a half of the year, this first half of year is actually de Blasio's budget. But de Blasio was allowed. He doesn't have to really cut any more in the middle of this fiscal year. And he can create a budget next year, that isn't under a lot of pressure. But if you look at the accumulated deficits that are projected by the city itself, and by some of the fiscal monitors of the city, there we're talking about as much as 13 to $14 billion in deficits in the next three to four years. Now, again, the Biden stimulus money is not continuing money, although I would imagine that Biden would try to continue it in the Democratic Congress, might look for ways to continue it, but they'll probably, at some point, run out of good excuses for why they should be sending this much money to the States and cities.
So, because it's not continuous money, because it's one time money, the accumulated deficits that people are projecting in the next couple of years, far outstrip the money that the city is actually going to get. So, at some point, in the next mayor's term, he's going to face, I think, perhaps a significant budget challenge. A lot of what he faces will depend on to what extent the city's economy rebounds. Even with an economy getting back to where it was heading before the pandemic, people were already projecting, and even de Blasio was saying, "Well, we're going to have a problem here in 2020, and we have to deal with that." Then the pandemic came along and the problems became much worse.
If the city's economy, and there's a lot of uncertainty here, doesn't bounce back even to the pre pandemic levels, and there are reasons to think that might be the case, including remote work and these lawsuits that are going on from other States, saying, "You have to stop taxing our workers like in New Jersey and Connecticut because they're no longer working in your city, they're working remotely anymore." Because of things like that, the next mayor could face significant budget problems, which were exacerbated by the fact that de Blasio increased the budget so much.
Brian Anderson: Now, de Blasio and some of his allies have proposed hiking taxes on wealthier residents in the cities, the city, to bring in revenue. But as you know, New York already is one of the most heavily taxed big cities in the U.S., if not the most heavily taxed, I'm wondering, what's your view on the likelihood of a tax rate increase, and how that would affect the city's budget, the city's population? Would it indeed bring in more revenue?
Steven Malanga: Well, first of all, perversely, one of the good outcomes of the Biden stimulus is, I think that it mutes some of that discussion, even though there are a lot of far left progressives, both in the New York State legislature and in New York City Council, who would like to tax anyway, just because it's fun. I don't think they... I think that the Biden stimulus has somewhat muted that discussion. The Manhattan Institute did a survey of New York City residents, back in August and September, asking them about the condition of the city, asking them about what they thought were some of the best ways to get the city back on track. And Manhattan residents, who are hardly the most conservative voters in the world by any means, said, by an overwhelming amount, that they already pay much more in taxes than they get in services.
And a significant percentage of those we surveyed said they were thinking of leaving New York for a whole host of reasons, many of them actually having to do with the pandemic. But regardless of what reason people are saying, they are thinking of leaving the city. Even if it's not specifically for taxes, when you have a large part of the population saying that they're overtaxed, relative to the benefits they think they're getting already, then taxing them only exacerbates potential of exodus of people from New York, that we're very much watching closely because we just don't know how this is going to play out. And we do know that during the pandemic, many, many people left the city, people with aware of all left the city, and some of them are not coming back.
Brian Anderson: We've gone through two previous recent crises in the city, 9/11 and then the financial crisis. How does the current situation, post pandemic, compare with those two earlier catastrophes that struck New York?
Steven Malanga: Well, one of the things I would say is that the pandemic is unprecedented because it does create something that people were talking about months ago, and they stopped talking to you about it now, but it's still out there, and that's the, kind of, the V-shaped recovery. The thing is that the recovery from 2008, which was a very deep financial driven recession, financial services driven recession, and even the recovery from 2002, which there were two things going on. Of course, you had 9/11, but you also had this nationwide economic decline and stock market decline that was driven by different factors, including the meltdown of NASDAQ and technology stocks in 2000 and 2001. In retrospect, of course, the city actually recovered from 9/11, far quicker than people thought it was going to, considering all of these uncertainties about New York City as a target city.
The recovery from 2008 was aided by the fact that the federal government, though they didn't send a lot of money in stimulus money to cities and States after that, they did send $800 billion to financial services firms, many of which were located in New York City. So, that... You know what? Essentially, what happened is, while a place like Detroit saw its General Motors just collapse in the wake of 2008, we had a couple of Wall Street firms, like, obviously, Lehman Brothers collapse, but the rest of the firms actually picked up the slack, if you will. And also, the city, under Bloomberg, really tightened spending at that particular point and focused on making the city more efficient. So, this is so different. It's just so hard to predict.
The economy around the country is already rapidly recovering, and more importantly, tax revenues are recovering. Now, this is crucial. After 2008, we had a very slow recovery of State and local tax revenues, so that it actually took States and cities to about 2016, on a inflation adjusted scale, to get back to where they were in 2007 and 2008 before the crash. Right now, we're seeing States around the country already reporting, not just far beyond what their expectations were, but getting back to where they were before the pandemic. But for New York City, the comparison is just completely different, because it was the center of the pandemic, the real issue is whether all of those office jobs will come back. And the city officially has a 15% vacancy rate right now, but that means 85%... it's 85% occupied rate, and yet, everybody knows that there aren't 85% of the people who are supposed to be working in office towers in New York, actually in those office towers, they're still working remotely.
So, the city is, I think, uniquely vulnerable because of the kind of office market it is, the kind of density it has, its reliance on its mass transit system. And so, it's hard to compare at this point. Needless to say, caution and pro growth strategies, caution and spending, and pro growth, pro development strategies, pro economic development strategies are the things that are in order right now, but this is New York City we're talking about, and the leadership there doesn't always act as if New York is one of the financial capitals of the world, which of course it is.
Brian Anderson: All right. So, that leads to a final question. We've got a mayoral race coming up, and any number of candidates have thrown their hat into the ring. What advice would you give the next mayor of New York City to confront this situation? And what might be the single best measure that, that next mayor could take to bring the city's economy back to where it was?
Steven Malanga: So, first of all, the mayor has far more control over the budget itself even than he has over the economy, not that mayors can't do damage to the economy, they certainly can by their long range policies. But the real issue perhaps is keeping the city government effective and efficient, while at the same time, being able to deal with any shortfalls in revenues that might cause a budget crunch or a budget crash. This is not something that's being discussed during the election. As you can imagine, the election is largely about the pandemic and how the city reacted. This is what the campaign debates are about. But inevitably, people always forget, in New York City elections in particular, they always forget that the number one task of a mayor is the budget. The budget controls everything.
That's what the mayor is does in New York City. And so, there are... I guess the good news is that de Blasio expanded spending so much and so cavalierly that there's a lot of rooms for cuts. There are a couple of things. Number one, you have to begin through attrition, meaning not hiring people, to get the city workforce down to a more manageable level. You do that partially through attrition. You also do that by looking at the programs he expanded, that had been highly criticized and not effective, like the mental health program, like the continued layer after layer expansion of the pre-K program. And you look at which of those can be pared back. So, but you have to cut back the workforce. The workforce is expensive, not just now, but it's expensive in the future because retirement benefits are so expensive that once you get people into this workforce and they become part of the retirement system, they are very expensive to accommodate.
So, that's number one. Number two is, you have to look at the benefits. There's a tremendous amount of room, any number of people have studied this, including the Manhattan Institute, there's a tremendous amount of room to save money, nearly by doing what the State is doing with its workers, and what other cities, big cities like Boston, Chicago, Washington, Los Angeles, are doing with their workers. Having them, first of all, contribute more to... Again, they contribute virtually nothing. So, to their own healthcare. Having retirees, we what we even do in New York is, once you qualify for Medicare as a city worker, a retired city worker, everybody in America who gets Medicare, you have to pay premiums. They're very modest, but you have to pay premiums for Medicare B, it's called. It's just a couple of thousand dollars a year. But we even pay the premiums for the Medicare B of retirees, which is just something that you don't see in the private sector or in much of government.
So, just having workers contribute 10% towards their healthcare costs, and making retirees pay for that Medicare premium themselves, or even pay just half of it, right? Would save hundreds of millions of dollars. We're spending $2.5 billion a year on healthcare, just for retirees, just for people who aren't even working in the city anymore, and none of that is typical. So, there's a lot of saving there. There's also savings in the pension system, which remains among the most generous and expensive in the country. And the Manhattan Institute actually produced a paper in the fall, which you can find on our website, about many different ways to save money there. Among other things, we know, because the Manhattan Institute itself has done surveys of city workers, for instance, teachers, in which, as many as 30 to 40% of teachers said, if there were a defined contribution option.
Meaning, of course, not a defined benefit, but a savings account where the city puts in a certain amount of money, and the worker puts in a certain amount of money, about 30 or 40% of teachers said they would choose that option because it's portable and it has certain advantages, most especially just the idea that if you're not committed to working for the city for the rest of your life, you can take that money with you. Whereas if you're in a defined benefit plan, like the one the city uses, you only really benefit if you stay for 30 years, otherwise, it's a lousy deal. So, these are all things which would actually create savings by giving workers choice, and ironically, the unions don't want us to give workers choices because they want the most expensive plan and they want to make sure the most expensive plan is in place.
It's a little bit like the same thing with the battle against school choice. They don't want those choices out there. So, those are some things you could do. The other thing you could and should do is, one of the things de Blasio eliminated was something called the Program to Eliminate the Gap or the budget deficit, it was called PEG. Four different mayors going all the way back to Koch had used this program, and basically what this program does is, it requires city agencies, every year, to put out plans for how they're going to be more efficient and save money. Some of the money savings are really small, like on food items and stuff like that. But when you do it every year, it accumulates, and over the years, it saves billions of billions of dollars.
Really very much in his kind of mode, as a progressive who thinks big government is fine, he eliminated this program for any number of years and just said to city agencies, "Well, if you can find some savings, find them." And the actual savings that were recorded, many of them were not really even savings, they were just, kind of, budget gimmicks, but beyond that, they fell far beyond the, kind of, money that for just the Bloomberg administration and the Giuliani administrations would save through the program to eliminate the deficit. Now, that that program is finally brought back under pressure in the last year or so by Bloomberg... By de Blasio, but it's not really saving much. So, that's something else that the next mayor needs... That tradition has to be put back in office. Finally, I would say, New York State law makes it very hard to enact some kinds of savings, particularly personnel savings, other than firing people, which you can always do but it's a, kind of, brute way of saving money.
New York City's State laws make it difficult to save money because it gives unions the advantage in contract negotiations for a whole bunch of reasons, which is probably the subject of another podcast at some point. Because of that though, there is one way out, and certainly, given the pandemic and the situation that created, it's something the next mayor should consider. There is a financial control board which was instituted in the 1970s in order to essentially oversee New York City's budget because of the crises in the seventies. A mayor does have the option of asking the governor of New York State to institute that board, in other words, bring the board back. It's already exists, but bring it back into active control of New York City, and that board does have the ability to aggregate contracts and to impose settlements.
And so, I would say, if they're really emerges a crisis in the next administration because the city does not bounce back, I think I would advise the next mayor to consider invoking that board and getting some of these changes that the unions have been able to resist, because New York State law basically makes it hard to reform and reduce any kind of benefit once you've given it in a place like New York City. I would suggest the new mayor consider invoking the financial control board.
Brian Anderson: Thanks Steve, very much, for the illuminating discussion and for joining us today on the podcast. Don't forget to check out Steve Malanga's essay, it's called "The Bill Comes Due," it's in our special issue, New York City: Reborn, which you can find on our website, and we'll link to it in the description. You can follow City Journal on Twitter @CityJournal and on Instagram @CityJournal_MI. And as always, if you like what you've heard on the podcast, please give us ratings on iTunes. So, thanks for listening and thanks, Steve, again, for joining us.
Steven Malanga: Thank you.