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What If New York Goes Bust?
UPDATE: Looks like the tsunami has arrived in California, with state legislators one vote short of a spending cut and tax-hike compromise to close a $42 billion budget deficit. (By comparison, that's twice the national debt during the Great Depression.)
California has been sending out IOUs instead of tax refunds, bills aren't being paid, workers have been furloughed two days a month without pay, and now Arnold is preparing to send out 20,000 pink slips—10 percent of the governor-controlled state headcount—in an attempt to save an additional $750 billion a year.
It's never a good idea to raise gas and sales tax in a recession, but at least it's a balanced plan: $15 billion in spending cuts, $14 billion in tax hikes, and $11 billion in new borrowing. But it won't solve the underlying problems facing the Golden State, where prison guards can earn 300k a year with overtime pay. Costs are going up, pensions are coming due, and expect more towns to follow the lead of Vallejo in declaring bankruptcy to get control of their budgets. States don't have that option, but many will wish they did before this year is over (I'm talking to you, New York).
What's really needed is a new Bear Flag Rebellion—citizens in afflicted states rising up to demand changes in their state constitutions if necessary to restore some political and fiscal sanity to their dysfunctional legislatures. But that's another column.
My previous post on this subject below:
Forget the car companies and Lehman Brothers. Two of the biggest states in the country are teetering on the edge of bankruptcy, thanks to ridiculous union agreements that can’t be changed.
If California and New York State were businesses, they'd be going bankrupt. If you're among the nearly 20 percent of Americans who live or work in these two states, the fiscal crisis is coming home for the holidays. And the worst is still on its way.
California, the world's eighth largest economy, will run out of money in March if the deadlocked legislature and Gov. Arnold Schwarzenegger can't come to an agreement on tax-hikes and spending cuts. Its bonds have been reduced to near-junk status after decades of borrowing and spending. State Treasurer Bill Lockyer summed up the situation in terms unhelpful to the tourist industry: "California's fiscal house is burning down."
We're not facing a cyclical downturn; we're facing a fundamental alteration of the facts of financial life in New York.
In New York, Gov. David Paterson is trying to control a deficit, which has doubled to $15 billion since August. He proposed a potpourri of taxes and fees totaling $4 billion, ranging from non diet soft drinks, taxis, and iTunes purchases to high-end luxury items like fur coats and boats.
Soon after assuming office, Paterson said, "The era of buy now, pay later and later is over." To his credit, he is trying to walk the fiscally responsible talk, proposing $9 billion in spending-cuts and resisting a rise in state income taxes. But government budgets have become a beast that is almost impossible to tame. Paterson announced a hard line hiring freeze in July, only to find out in October that 31,684 new employees had been added to the state payroll.
Here's the really bad news: the full impact of the financial crisis in New York has yet to be felt.
The dirty secret of Empire State budgeting is that New York City depends disproportionately on Wall Street for its budget and New York State depends on New York City.
In the last four months, the financial landscape has changed dramatically. Investment banks that have been the engine of the city's tax revenue for decades have disappeared entirely or morphed into restricted new entities. According to E.J. McMahon, my colleague at the Manhattan Institute, between 1980 and 2007 the securities industry's share of wages in the state rocketed from 3 percent to 18 percent, with the average Wall Street salary and bonus rising to $379,000. Wall Street revenues made up 20 percent of the state's budget. So the 40,000 local jobs lost in the financial sector are only the beginning. We're not facing a cyclical downturn; we're facing a fundamental alteration of the facts of financial life in New York. And the 20 percent unemployment in some upstate counties will not help ease the squeeze.
But New York is playing Ford to California's GM at this stage of the crisis. While the Golden State economy is comparatively diversified, its financial meltdown is further along, with entire cities and towns throwing in the towel and declaring bankruptcy.
The city of Vallejo—population 120,000—declared bankruptcy earlier this year because it was locked into spending 74 percent of its $80 million general fund budget on public-safety salaries. Police captains were entitled to receive $306,000 annually in pay and benefits, while 21 firefighters earned more than $200,000 a year, including overtime. After five years on the job, all were entitled to lifetime health benefits. Now two smaller towns north of San Francisco, Isleton and Rio Vista, also appear on the brink of bankruptcy.
In a preview of political fights to come, both New York State and California budgets are being crippled by outsized public sector union pension obligations that are now coming due in a perfect storm—a combination of an aging population, a declining tax base, and a fiscal crisis.
The Democrats who narrowly control both state legislatures have a notoriously cozy relationship with unions and they will be unlikely in the extreme to bite the hands that feed. But the unsupportable absurdities of the current arrangement are becoming evident.
The average state and local government employee now makes 46 percent more in combined salary and benefits than their private sector counter-parts, according to the Employee Benefit Research Institute—including 128 percent more on health care and 162 percent more on retirement benefits. New York City, for example, not only spends 10 times more on pensions than it did ten years ago, it now spends more on pensions and benefits for firefighters than it does on firefighters' salaries.
These tax-payer sponsored paychecks cannot be renegotiated in tough times to balance a budget. They can only go up, never down.
The Alice in Wonderland absurdity of the current budget debates was nicely illustrated by the president of the United Federation of Teachers, Randi Weingarten. She was quoted without irony in The New York Times saying, "We understand there will be cuts. The real question, will there be cuts, not just cuts against growth, but real cuts that will turn back the clock."
A close reading reveals that for union leaders like Ms. Weingarten, the only acceptable "cuts" are not cuts at all, but rather reductions in the rate of increase for public spending. She is willing, in effect, to receive a reduced bonus this year, but not the cut in pay or benefits that would constitute shared sacrifice in a financial crisis.
From East Coast to West, we've all become addicted to living beyond our means over the past decade. Members of Congress are all Keynesians now, and there doesn't seem to be a deficit hawk left in D.C. Wall Street's dizzying fall from inexcusable excess has left some investors decimated and wondering whether the entire financial industry was a self-serving fraud to begin with. But the real reckoning for tax-payers is still to come.
John P. Avlon is the author of Independent Nation: How Centrists Can Change American Politics. Avlon also served as Director of Speechwriting and Deputy Director of Policy for Rudy Giuliani's Presidential Campaign. Previously, he was a columnist for the New York Sun and served as Chief Speechwriter and Deputy Communications Director for Mayor Rudolph Giuliani. He worked on Bill Clinton's 1996 presidential campaign.
The Right Dumps Carrie
Jacob Bernstein is a senior reporter at The Daily Beast. Previously, he was a features writer at WWD and W Magazine. He has also written for New York magazine, Paper, and The Huffington Post.
What's Joe's Problem?
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
Geithner's Stock Plummeting
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
Wingnuts of the Week
John P. Avlon writes a column for The Daily Beast and is author of the forthcoming Attack of the Wingnuts, to be published in January by Beast Books. He is also the author of Independent Nation: How Centrists Can Change American Politics. Previously, he served as chief speechwriter for New York City Mayor Rudy Giuliani and was a columnist and associate editor for The New York Sun.
The Next Wingnut Attack
John P. Avlon writes a column for The Daily Beast and is author of the forthcoming Attack of the Wingnuts, to be published in January by Beast Books. He is also the author of Independent Nation: How Centrists Can Change American Politics. Previously, he served as chief speechwriter for New York City Mayor Rudy Giuliani and was a columnist and associate editor for The New York Sun.
Glenn Beck's Mob Rule
John P. Avlon writes a column for The Daily Beast and is author of the forthcoming Attack of the Wingnuts, to be published in January by Beast Books. He is also the author of Independent Nation: How Centrists Can Change American Politics. Previously, he served as chief speechwriter for New York City Mayor Rudy Giuliani and was a columnist and associate editor for The New York Sun.
I hate to be the one tapping on his watch all the time, but where were you John, BEFORE all of this came to pass? I was out and about warning people of the impending crisis, while a Lunacy Commission was being appointed in my honor. What is your point, now that all of this is fait accompli?
Just a short calculation for you, John. You have to predict these things at least a year in advance so that kids can be resettled in new schools, houses can be sold, jobs moved and new Living Quarters secured for your family. All of that takes at least a year. How much time does it take, in addition to that, to actually 'decide'. You think. Maybe it won't happen. Maybe I am being an 'economic girly man'. Maybe I have it analyzed incorrectly. Maybe the Lunacy Commission is right (not that their previous record is anything to brag about). So many 'Doubts'. Add another year for that decision to occur. Now where are you left?
These things must be predicted at least 2-3 years BEFORE they ocurr so that people have enough time to escape. As for me, I so enjoyed watching Kramer on CNBC declaring a 'Housing Shortage' at the same time I was packing up the last of my things for the quick getaway.You see John, Kramer was also the loud mouth doofus on "Seinfeld". That might be referred to as the 'sparkle' on the Bubble.
It is refreshing to see that you caught on so late. Even a blind squirrel ... Ahhhh forget about it. You wouldn't understand anyway. It's a Religious thing to know these things, so if you don't even go to Church there is no chance to begin with. Giuliani huh? Nice call on that one as well.
"The era of buy now, pay later and later" government finance is mentioned but the headline writer features public employees as the prime evil doers. I guess we should expect it. On Wall Street they want us to believe helping the working poor caused the financial meltdown. It can't be the decision makers, it must be the working guy. Ask Rudy's speechwriter.
I must admit, The city of Vallejo seems like an insane asylum, but does that mean we should go after public employee pension funds in order to balance the budget? Who is going to live in four bedroom, pool and lenai homes in Florida if not retired New York public employees?
If we can pump hundreds of billions at Wall Street, shouldn't we be concerned about Florida's retail economy? Sure the Walmart in Spring Hill, Florida isn't Lehman Brothers but it does support its share of illegal immigrants trying to catch the bottom wrung on the ladder of success in America.
And retired firemen and police are such likable and enlightened people! I'm proud of the transfer payments made on behalf of these renaissance men through the New York state government. Let's keep it up folks, we are performing multiple public services.
Just don't raise my taxes moron, or I'll move to Florida!!!!!!!! They've got no state income tax there and my kids aren't in school anymore, so I don't care how underpaid the teachers are.
Frankly, I'm flummoxed by the equities and personalities involved here.
Realistically, bankruptcy is probably the most viable option for many of the towns and cities in both New York and California. Along with the auto industry. This way, at least we might have a shot at re-negotiating the union contracts to bring them back down to earth a bit more.
Becoming addicted to living outside of our means is correct. Police officers making over $300,000 a year is not only ridiculous, but fuels the drive for many of the middle-class (or should I say upper-middle class at that point) to continue living outside of their means without any financial education to teach them how to control themselves.
The unions need to take a step back and look at what they're doing to the bigger picture before they decide to try and hike up the salaries and bonus checks of the employees they represent.
The federal government should probably be considered bankrupt too; the only difference between the US government and state governments or corporations is that Congress gets to set its own credit limit.
The problem of retiree health care should have been addressed long ago with national health care. Pensions are supposed to be pre-funded. Is it the unions' fault that local governments (and some corporations) didn't bother to pre-fund those pensions?
And all this hasn't occurred in just the last decade...it's been a long time growing. Spend now and pay later might as well be the national motto, but the times they are a changin'. America's been hitting the snooze button for close to twenty years (maybe more), and now we're really, really late for work.
A rude awakening for the land of pleasant living...
I don't see anything in this column that would qualify as a vision that could plausibly serve as a springboard to enhanced prosperity in the future.
Such a vision is what's needed, however, at this juncture. Jawboning to the effect of "Woe is us" won't do anybody any good. Neither will assigning blame to unions or anybody else for that matter.
"From East Coast to West, we've all become addicted to living beyond our means over the past decade."
I love this continued wide brush treatment of the way "everyone" has been overspending for the past decade. The rich got richer. They did it by passing risk of all kinds to consumers. Now there is no more money, and the rich are suffering. Oh, the consumer is at fault again. The engine of the economy can't run your apps anymore.
I love cops, firemen, janitors, teachers, administrators, state benefits managers - I love them one and all.
I love them so much that I am willing to make less and less every year and pay more and more in taxes. I want them to have lifetime job security, even though I can't even dream of it. I want them to have the best of health and retirement benefits, even though my plan involves suffering more than a few indignities of old age.
It is only appropriate that Public employee get everything they want, since they work so much harder than the rest of us.
The evidence of their hard work is right in front me. It is in every pothole my car hits, pothole that was fixed three weeks ago and again last Thursday, and in the resulting blown-out tires. It is in the 4 wasted hours at the DMV. It is in the speeding ticket I got for driving 5 miles above the speed limit. It is in the drunken firemen Santa parade that my daughter got to see last night. Their hard work is right around us. How can we begrudge them pay and benefits that a vast majority of us will never see, no matter how hard we actually work?
If New York State, New York City, et all are paying wages out of line with the private sphere, it is the fault of Republican and Democratic governors, mayors, et al who have negotiated the contracts. To blame one side of the bargaining table is to reveal a bias that undermines the credible of the assertions in the rest of the article. I'd like a more objective source so that I can believe claims that government employee salaries are out of line with the private economy. They certainly aren't out of line with Wall Street salaries, are they now?
Fewer officers available to police Vallejo schools
http://www.thereporter.com/news/ci_11287492
City and district officials met again Dec. 15 to discuss a solution to keep police at Vallejo schools for the rest of the academic year, despite the department's shrinking manpower... At least seven students have been arrested in recent weeks for crimes ranging from sexual assault to fighting to firing a pistol on campus...
Yeah, sounds like a union problem, all right. Don't you just hate it when overpaid union workers force the young 'uns to rob and assault fellow students.
i like how you itemize the union related indebtedness but no mention of the TRULY RIDICULOUS levels of wall street compensation in the past decades scamming of the taxpayer and investor. union abuse can never, never compare to the abuses of the executive suite and the white collars around them.
get a life dude!
@Issywise: "Just don't raise my taxes moron, or I'll move to Florida!!!!!!!! They've got no state income tax there and my kids aren't in school anymore, so I don't care how underpaid the teachers are."
Which is precisely why our public schools here in Florida are in such deep trouble. The people with the money (mostly retirees) don't want to spend it on education, and the people with kids don't have money. So we get governors like Jeb and Charlie who suck up to old people and anything tourism-related and leave the rest of us flapping in the wind.
Anyone who is blaming this problem on unions or workers has no idea what he/she is talking about
It troubles me that UNIONS are being blamed for this, while the vast majority of people who should unionize are still out in the cold. The UNION MOVEMENT stalled some time ago, being content with with the Steel & Auto industries and the Post Office, but where are the clerks and retail workers?
Its the Banks and Lobbyists that are responsible for this mess.
If a city, county or state is spending 74% of it's budget on "public-safety" saleries, it's doesn't much matter where you assign fault. It just won't work.
In fact, the country might be approaching similar $ figures soon. We need to find some answers. Now.
Unions ruined the airline industry-
Unions ruined the auto industry-
Next to go Public Worker Unions-
As a condition of my 37 years service to California government the taxpayers agreed to provide for me a monthly pension. Of course I paid in a significant amount of my monthly paycheck into the retirement fund as well.
I do not recall a time when the taxpayers said to me that I should not do a specific job or task for them or that spending 7 years away from my family in service to the taxpayers was not a condition of my employment....no....the taxpayers never said a word...they expected me to perform....I did. I now expect them to provide for my monthly pension. We are all adults and promises given and words exchanged between trusted individuals are one's bond!!
I personally don't care about these states. I've never thought much good came out of them. I did hope that this article would support some type of doomsday scenario in which all of the US would start to crumble. I love speculators.
Oh, Unions are killing America because they are unchecked. As it is right now, Unions have, or act like they have, 100% of the bargaining power. They don't or shouldn't.
Rome is afire and no one in power can decide which way to turn the valve on the water pump!
The basic problem with unions is that while it would all be well and good for every Tom, Dick, and Harriet to be treated fairly by his or her employer, it just costs too much. The capitalist system doesn't work if there is no oppressed working class. The unions refuse to accept this fact, and the wheels stop turning.
Anyone who says, "Anyone who is blaming this problem on unions or workers has no idea what he/she is talking about," has no idea what he/she is talking about.
With respect to state and local governments, the historic "sacrifice" of civil servants is a nice myth from the past. These workers are massively overcompensated, particularly w/r/t pensions and other benefits the kick in after relatively brief careers, and last a lifetime -- decades. In the case of the public sector, there has been a shift from "tax and spend and elect" to "let unions pay for campaigns then give them massive benefits." Term limits have, if anything, exacerbated the problem, because the elected officials agreeing to these contracts are more concerned about campaign funding sources as they float from office to office than they are about their own constituents. The public is kept out of these negotiations, and the results are rarely reported in terms of taxpayer impact, but we are expected to pay 100 percent of what was "bargained" away.
Bankruptcy is much to be prayed for, if you're a taxpayer or you want a functioning state government and economy.
East Coast and West, but no, not East Coast to West
Other states keep public employee unions under control. They outlaw public employee strikes,prohibit government officials from engaging in collective bargaining, don't allow dues withholding from government paychecks, and have right-to-work laws banning the closed shop.
Guess how much trouble public employee unions cause those states? Guess how bankrupt they are?
And, while in New York you can blame the politicians for the current state of affairs, you can only blame the people of California for theirs. They have the initiative process; they can extract themselves from the situation whenever they choose.
We need solutions, not blame. Include benefits in W-2 income and give everyone the $5K tax credit to offset the extra tax. If the credit does not offset the additional tax then the people will demand alternative benefit plans. McCain had this one right.
Avalon stated in substance: NYC now spends more on pensions and benefits for firefighters than it does on firefighters' salaries.
Mr. Avalon, when making such a statement, a critical reader might ask why is this so. Did you perform any research to determine why this is occurring? Let me save you some time. The increase in spending for pensions and benefits for NYC firefighters is directly due to the increasing the number of firefighters that are becoming disabled as a result of the WTC attacks. I believe Rudy wanted to claim something similar but was laughed at. I don't know if you ever was permitted to register or not.
It appears that the overarching theme of your post is that Public Employees should a great deal more to save the State from insolvency. My question to you is this "were you asking that they receive MORE when the State was experiencing boom times". I don't think so. It appears that you'd like to scapegoat the Public Sector Employees now that they are the few that have job security, a decent salary and a pension, something that the architects of this debacle no longer have. Take a look in the mirror Mr. Avalon before you begin blaming those who did nothing to cause the current crisis.
California has the ( 8th ) Largest economy in the World.
Imagine one state in the U.S., that is broke, has a bigger economy than most countries in the world.
One aspect of the state's collapse is the fiscal
toll of the illegal immigrant population on the
healthcare and welfare systems.
(Cue the knee jerk xenophobic accusations)
As California goes . . . so goes America.
Thank you.
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