Over the summer, Mayor Bill de Blasio made a virtual pilgrimage to testify before an antique government body , the New York State Financial Control Board. Created decades ago, in the depths of the 1970s fiscal crisis, the control board once dominated the city’s government with a tight fist. Today, to the extent it is remembered at all, it is widely presumed to be defunct. But the entity still exists in a dormant state, like Godzilla sleeping at the bottom of the ocean.
The control board now typically convenes just once a year, for a simple review of the city’s finances. It is usually a perfunctory ritual, but this August’s meeting was different. Governor Andrew Cuomo, in a move that caused a ripple of municipal intrigue, had just appointed three new members to the board, including a trusted former top aide, and there were rumblings that the monster was stirring. Cuomo’s budget director, Robert Mujica, opened the Zoom with dire deficit projections.
“Today, as a result of the global pandemic, the city’s financial position and the city itself faces perhaps its most severe crisis since 1975,” he said. “And it may actually be worse than that.”
De Blasio spoke next, departing from his prepared remarks to offer a rebuttal.
“The study of history teaches you what is the same and what is different,” the mayor said. “I think it would just be a mistake to think this is anything like the New York City of the ’60s or ’70s, or even ’80s … even though we’ve been obviously deeply thrown for a loop.”
What the two men were arguing about, besides the usual city-versus-state power struggle, was a question that will continue to hang over the city for months — maybe years — to come: How bad is the damage? Viewed from the mayor’s perspective, the pandemic, as terrible as it has been, is a temporary disaster that should begin to resolve itself with the imminent approval of a vaccine, allowing New York’s economy to return to its previous healthy state. (The city government ran a $4.2 billion surplus as recently as last year.) But to fiscal pessimists, the glass is not just half-empty — it’s shattered. The city is now projected to face a $13.2 billion budget gap over the next four years. And so far, its government has made little tangible effort to address the shortfall.
“What we’ve learned,” Andrew Rein, president of the nonpartisan Citizens Budget Commission, said after the city released revised revenue and spending estimates last week, “is that we’re actually still doing nothing about a fiscal crisis.”
For the moment, discussions of what budgetary pain may come after the pandemic have been muted, overwhelmed by a cascade of more immediate developments, including the election, the transition to the Biden administration, a new wave of COVID cases, and the heartening prospect of mass vaccination. This week, there has been a flurry of activity in Washington, with a potential breakthrough in negotiations over a proposed $900 billion stimulus package. But even if it comes, it would be a stopgap. Eventually, a reckoning will have to come.
The scale of the financial catastrophe currently facing state and local governments is so immense that it boggles the imagination. In July, an analysis of government data by the Center for Budget and Policy Priorities found that state governments faced shortfalls of more than $550 billion over the next two fiscal years. The New York State government faces $60 billion in projected deficits over the next four years. The crisis is particularly dire for the state agency that most directly impacts life in New York, the Metropolitan Transportation Authority.
The MTA currently estimates that it faces a $16 billion shortfall over the next four years. The agency is considering drastic cuts to subway and bus service, and commuter-rail service. “It’s a nightmare scenario, and it’s not hypothetical, it’s what will happen if they are short all this money,” says Carol Kellermann, a commentator and former president of the Citizens Budget Commission. “These are two opposite approaches of how you make the case,” Kellermann said. The city is putting off austerity; the MTA is making doomsday plans. Both entities, though, have come to the same conclusion: Any viable solution has to start with an infusion of many billions more in federal aid from Congress and the Biden administration.
Which, knowing Washington, may not be anything to count on.
Let’s start by looking on the (relatively) bright side. “There will always be a way back for New York City, and certainly for New York State, but it will be gradual,” de Blasio said in his August budget presentation. In fact, since then, his cautious optimism has been vindicated by signals that the pandemic’s effect on the city’s finances has been less painful than initially anticipated. It took in $748 million more in revenues than it had initially projected during the quarter that ran from June to September, a revision partly attributable to a smaller-than-expected decline in personal income tax collections. “The white-collar workforce is still paying taxes,” says Nicole Gelinas, a senior fellow at the Manhattan Institute, a conservative-leaning think tank. “Nobody’s here, but they’re still paying taxes here.” Meanwhile, lower-income households were buoyed by the federal government’s $600-a-month pandemic unemployment benefit, which was taxable.
The Fed also helped by slashing interest rates, allowing the city to save almost $1 billion in refinancing its long-term debt. The city also managed to squeeze $722 million in labor savings out of its workforce, mainly as a result of deferring some payments previously promised to unions, such as a portion of a retroactive pay increase to teachers. As a result, de Blasio has avoided more draconian actions he floated when the numbers looked more dire. He has also set aside, at least for now, his proposal to borrow $5 billion to fund the city’s expenses, which he claimed would be necessary to avoid 22,000 layoffs. Taking on long-term debt to close operating deficits was the course that caused the city’s brush with bankruptcy in the 1970s, and de Blasio’s proposal was what caused the stirring at the Financial Control Board over the summer. Since the talk of borrowing has quieted, so has Godzilla.
Some veterans of previous fiscal crises say that de Blasio is right to reject historical comparisons. For one thing, the city entered the pandemic in good financial shape, in contrast to previous fiscal crises, which were more attributable to poor governance and profligate borrowing. During the Great Depression, for instance, the city had more debt than the 48 states in the union combined, leading bankers to place stringent restrictions on its spending. Stephen Berger, the first executive director of the control board, recounted at a public forum earlier this year that in the 1970s, “the City of New York, on the first day of the fiscal year, had already spent every dollar of tax revenue it was going to collect in that future year. They had spent it. They had borrowed it the year before, and more.” By contrast, the city’s $92 billion budget is currently balanced, and next year’s estimated budget gap — $3.8 billion — is enormous but manageable.
“The difference is the perception then was that New York City was in a big hole because of mismanagement,” says Donna Shalala, an outgoing Democratic member of Congress from Florida who, at the beginning of her career in government, was a top official at an agency created to work out New York’s debt in the 1970s. Today, she says, “the hole is the same but it’s fundamentally different.” The virus is a natural force, aggravated by federal— not municipal — incompetence.
Shalala, who was defeated for reelection this year, says she is still optimistic that Congress will eventually pass a massive package to aid desperate state and local governments. “It may take until Biden gets in,” she said, “but Janet Yellen is not going to let the states collapse.”
This appears to be what de Blasio is counting on, as well. “They’re waiting,” says Rein, who contends that the prospect of federal aid has distracted the city government from grappling with what could potentially be large and lasting effects. “The pressure is off right now,” Rein says, “and quite frankly, that’s part of the problem.”
At the MTA, the pain is right here in the present. “This is deadly serious,” says Pat Foye, the authority’s chairman. “This is not a negotiating tactic or a stunt.” To illustrate the depths of the crisis the MTA faces, Foye also cites a historical precedent. During the depths of the Great Depression, subway ridership declined by 13 percent. Right now, he says, even after a modest recovery during the pandemic’s summer lull, ridership is still down around 70 percent.
This is particularly relevant because — to a greater degree than transit systems in many other cities — the MTA relies on “farebox” revenue, as opposed to government tax subsidies, to fund its operating expenses. Roughly half of the operating budget for New York’s buses and subways comes from fares, according to Jeff Davis, a senior fellow at the Eno Center for Transportation in Washington. Office workers may be paying their income taxes regardless of where they are living, but until they start riding the subway again, the MTA will continue to suffer. Earlier this year, an agency official estimated that it was losing $800 million a month running empty trains.
The MTA received around $4 billion in federal aid from the first stimulus package Congress passed earlier this year, around one-sixth of the entire amount it allotted for mass transit. The agency burned through the entire sum by the beginning of September. In November, the agency put out a budget proposal based on a worst-case scenario for the return of riders over the next four years.
According to the projections the MTA is using, based on a study prepared by the (ubiquitous) consulting firm McKinsey & Company, the transit system will only see a 27 percent return of ridership next year, a usage trend that climbs gradually until 2024, when it plateaus at around 80 percent. McKinsey is forecasting that with more remote work and less in-person shopping, ridership may never return to its pre-pandemic levels.
The MTA leadership admits these are just projections of future human behavior, which might prove to be too pessimistic. And the agency has weathered crises before — most recently after the 2008 financial crash and flooding from Hurricane Sandy. But Foye calls this “financial calamity” the greatest challenge the agency has ever faced, and says it is necessary to plan accordingly.
“This is dramatically larger by orders of magnitude,” Foye says. “In the past, usually the state has come to the rescue, and that can’t happen here.”
The state government cannot help because, of course, it faces its own fiscal calamity — just as most every other state in the country does, to one degree or another. The latest federal stimulus proposal, worked out by a bipartisan group in the Senate, would include $160 billion in aid to state, local, and tribal governments, as well as $15 billion for mass transit. But these huge sums would still only cover a fraction of the need. And the compromise package still faces uncertain prospects of passage before the lame-duck session of Congress ends later this month. Senate Majority Leader Mitch McConnell has opposed what he calls a “blue-state bailout,” and has suggested that state governments could potentially “use the bankruptcy route” instead, something states cannot do under present law, but which in recent years has been tried (with very limited success) in Puerto Rico. If McConnell blocks the current package, the prospects of further federal aid could rest on the outcomes of the special elections for two Senate seats in Georgia.
The MTA is planning for a future without a bailout, which means it is considering what its chief financial officer describes as “unattractive, ugly choices.” At the November meeting, he outlined a 40 percent service reduction on subways and buses, to be achieved by running fewer trains during the week, curtailing night and weekend service, and eliminating some underused bus routes. Service on the LIRR and the Metro North lines would also be reduced by half.
The MTA estimates the austerity measures would yield a total of $1.2 billion in savings. Even with the cuts, though, the agency would still have to raid its capital budget and borrow billions of dollars to close its deficit, adding to its already large debt burden. By 2024, the state comptroller estimates, the MTA’s debt service will be around $4 billion a year, almost a quarter of its revenue, and the figure could rise significantly if the agency has to borrow more to make ends meet.
Scary as those figures may be, they are perversely comforting to the city’s budget hawks. At least the MTA appears to be seriously trying to grapple with calamity, they say, unlike the city government. “You may be thinking that you’re not upsetting a lot of the public unnecessarily,” Kellermann says. “But it’s making the people who watch this stuff very nervous, that we don’t really seem to have a plan of what to do if we don’t get the stimulus.” The pleasant surprise contained in New York City’s current tax collections could turn out to be fleeting, if high-income families that are living elsewhere decide to go to the trouble of changing their residency next year. (“Every tax accountant and tax lawyer in town is going crazy 24/7, working on the tax implications of relocating from New York to Florida,” one influential voice in New York’s business community gossiped to me this summer.) Shifting a tax residency is not simple, even for wealthy people — it usually requires selling a primary home in New York. But even a small migration could make a major impact. Gelinas points out that in 2018, around 1,800 city households earned more than $10 million, and they paid $2.1 billion in local income taxes, nearly a fifth of the total.
Then, over the horizon, there are the property tax implications. The taxable value of commercial properties is based on the revenue they can generate, and market values are reassessed annually, meaning that the tax bills for many of those empty storefronts, hotels, and office buildings are likely to go down. Some analysts foresee a potential wave of property tax appeals from owners of distressed buildings. Property taxes are structured in such a way that the hit will be spread out over time. That means the most serious financial pain from the pandemic will be a lagging indicator. In the meantime, the city has drawn down its rainy-day funds and its supply of onetime tricks. “If there is no stimulus,” De Blasio has warned, “we’re going to have to make extremely difficult choices.” He has left vague, for now, what those choices might entail, and how deep any cuts to the budget — which for now, is still projected to hit an all-time high of $100 billion in 2023 — might be.
“The second wave will probably make for a grim Christmas emotionally,” Gelinas says. “But with the fiscal situation, the real questions are still a year away.”