Monday, March 30, 2009

Balancing the Budget in Albany During a Recession

Leadership in Albany is often criticized, and none of us have forgotten the study that showed the the New York State legislature was the most dysfunctional in the United States. The events of the last two days might be a sign that Albany is changing in ways that are healthy for New York State, New York City, and our borough of Manhattan.

Democratic Control Means Democratic Responsibility

The State Senate is in the control of the Democrats for the first time in many decades, and the Democrats now control the entire legislature and the Governor's mansion. It is far too early to give the elected leaders in Albany an overall grade, but they deserve extra credit points for the compromise they have reached regarding increasing tax revenues  to bring the New York State budget into balance in the coming fiscal year and those to follow immediately thereafter. During a recession, taking steps aimed at generating economic growth or avoiding steps likely to deepen the recession are paramount. The tax compromise reached in Albany late last week has all of the appearances of an honest attempt to solve two incompatible problems, increasing state government revenues and avoiding further harm to our state's economy.

The Democratic Party must continue to make these good-faith attempts to do what is right in these complex and controversial areas. It will not be easy, but it will be necessary. If the Democrats cannot develop a record of good-faith hard work and compromise in Albany, there won't be anyone willing to see the blame for those failures as shared with the Republicans. The Democrats must deliver or find themselves back to the structure of the past several decades, where Republican control of the State Senate made success on nearly all controversial issues impossible.

With control of the Executive Branch and both houses of the legislature in both our nation's capitol and in Albany, the time has come for Democrats to deliver for the people. No excuses, and no blaming the Republicans . . . This election is the beginning of our journey rather than the end.
Economic Growth and Government Budgets

During economic downturns, the United States federal government should increase spending (and perhaps reduce taxes) in order to spur economic growth. The reduction in tax revenues from the reduced economic activity (coupled with lower taxes, potentially) and the increased government spending combine to result in deficits (or lower surpluses). The goal of ending recessions creates the environment in which deficits increase.

At the state level in the United States, budgets are less flexible. New York, like all fifty states, is required to have its revenues match its expenditures in each year's budget. It would not be wise to allow states to create deficits unless the sizes of those deficits were strictly limited. The capital markets would find it difficult to absorb the financing of large and growing deficits from fifty states, and only the Federal Reserve can create new cash. States would not be able to provide adequate certainty of repayment without strict limitations. The requirement of a balanced budget can promote longer recessions and slower recoveries by forcing state governments to reduce spending and raise taxes when the economy is in need of the opposite.

Here in the New York State, the government in Albany is in just that dilemma, and they are making the best of a bad situation.

Higher Taxes That Could Have Been Worse

Higher taxes, especially in a state like New York that is already at the top of the list of the states who impose the largest tax burden on their residents, are unwelcome and counterproductive. They are also often necessary during difficult economic times, and we are in such times.

The budget that is very close to becoming law in Albany could have been much worse on the taxation question. Many groups pushed for permanent or long term levels of much higher taxes. Others pushed for increases in sales taxes. Because both ideas were rejected in favor of a small increase in income taxes (a one percent increase for those earning over $250,000 per year and another approximately one percent for those earning over $500,000) for only 3 years, we should take a moment to appreciate the wisdom of the Governor, the State Senate, and the State Assembly in compromising amongst each other in what must appear to each of them to be a "no-win" situation.

New York State already relies heavily on regressive sales taxes, and because of that reliance, New York State's overall tax scheme is regressive (meaning that it imposes the greatest tax burden, as a percentage of income, on New Yorkers with the least income). Adding large new sales taxes to the New York State tax scheme would have made that bad situation worse.

A long term increase in income taxes would likely result in reduced economic activity as the workers subject to the higher tax rates move to other states or otherwise alter their economic behavior to reduce their tax burden. At least as important is that New Yorkers would reduce their spending to account for the reduced take-home pay resulting from the higher taxes.

With a short-term tax increase, New Yorkers are far less likely to reduce spending, leave New York State, or take other counterproductive actions that could have resulted from a longer term tax increase. The potential negative consequences are also mitigated by the small size of the tax increase. 

In the end, the leadership in Albany deserves credit for a job well done on taxes, and they are unlikely to be praised for it. Let's hope that they continue to pursue responsible compromises and earn praise in the months ahead.

Monday, March 23, 2009

Latest Battles in the War Against Manhattan

We have highlighted for you recently that the US government in Washington has been engaged in attacks on Manhattan in the form of legislation and through the lack of leadership from the US Department of Treasury. Since we raised these concerns earlier this month, the situation has become more troubling.

Bonus Tax

Last week, the House of Representatives approved (by a very wide margin) proposed legislation that would tax all bonuses at a 90% rate for employees of companies that are recipients of TARP funds whose annual income is more than $250,000. This continues a very troubling trend that we saw in a provision that became law as part of the Stimulus Bill.

We have expressed concern that, in New York City where more than one-third of all employee earnings come from the financial sector, limitations on bonuses are an attack on our city and on the borough of Manhattan. The bonus limitations that are currently law limit bonuses to one-third of base salary for all employees of TARP recipient companies. The House Bill, if it becomes law, would essentially eliminate all bonuses and amplify the counterproductive impact of the bonus limitations already in place.

Because the vast majority of compensation at financial services firms is in the form of bonuses, the push by the House of Representatives to eliminate bonuses has some very negative likely consequences  - 1) in the near term, it will retroactively tax recent bonuses at 90% and thereby confiscate the wealth of thousands of employees, many of whom live and/or work in Manhattan or the rest of New York City; the confiscation will further burden the economy of our city. 2) firms may be forced to increase salaries dramatically for their best employees in order to compensate for the bonuses that have disappeared, thereby increasing the cost base of those firms and reducing the incentives for those employees to make the sacrifices ad supply to effort to achieve the very best results possible. 3) the most effective employees from the divisions and groups with the best prospects will leave the TARP recipient firms for non-TARP large firms and boutiques; because the US taxpayers have invested hundreds of billions of dollars in the TARP firms, policies that shift the best employees out of TARP firms into other firms should be avoided.

It is our hope that the Senate or the President will prevent this disastrous legislation from becoming law - in order to protect our nation's financial sector and to avoid increasing economic pain for employees in this troubled economy.

Quantifying the Attack on Manhattan

The New York Post calculated the cost to New York City of the 90% tax on bonuses for employees of TARP recipient firms as $12 billion. The New York Post arrived at the $12 billion figure by calculating the bonuses recently paid by Goldman Sachs, Merrill Lynch, Morgan Stanley and Bank of America. The New York Post estimated that 50% of all bonuses paid by those four firms would end up as revenue for the US government through this confiscatory tax. The New York Post's methodology is flawed, but it ultimately understates the impact on New York City. The Post includes Merrill Lynch, but Merrill Lynch never received TARP funds. Merrill paid bonuses before it closed its sale to Bank of America, a TARP recipient. In the other direction, the Post's $12 billion estimate ignores Citigroup and JP Morgan Chase (which now includes Bear Stearns and Washington Mutual). Citigroup and JP Morgan Chase are massive financial institutions and might have bonus pools as large as or larger than the group that the Post considered. The Post failed to consider that not all employees live or work in the New York metro area.

Whether the correct figure is $12 billion to $15 billion or as high as $50 billion or more, the loss of such a large amount of wealth is a tragedy for our city and for our borough.

TALF - A Victim of the Attacks on Manhattan

Late last week, investors showed a real reluctance to apply for funds from the Federal Reserve to purchase "toxic assets." TALF - The Federal Reserve's Term Asset-Backed Securities Loan Facility is suffering because of the attacks on Manhattan. The toxic assets are securitized loans that were previously purchased by financial institutions at values far, far above the values that they would achieve in the open market today. A solution to the toxic assets problem is the single most important ingredient in the recovery of the financial sector that we all seek and that is so crucial to the economy of Manhattan and New York City.

Investors have not taken advantage of the offer by the Federal Reserve to loan them cash at favorable rates because they see the danger of accepting government assistance. 

In the TARP experience, Goldman Sachs and Morgan Stanley did not want to accept TARP money originally. After being forced by the Bush Administration to accept TARP money, the ex post facto restrictions on those firms have caused those firms to regret caving into the demands of the Bush Administration. The restrictions seem to get worse every few weeks, and now both of those firms are aggressively moving to pay back all of the TARP funds they received in order to escape the restrictions. By forcing firms to pay back TARP early (because of the foolish restrictions imposed after the TARP funds were initially dispersed), the US government is reducing liquidity in the US capital markets at exactly the wrong time. Our economy needs credit to flow, and our government is attempting to impose restrictions on financial institutions that will result in less credit availability.

For TALF to succeed, investors need confidence that they will not regret accepting the TALF funds and that there will not be Congressional attacks on TALF recipients when the public realizes that TALF recipients are making millions or billions of dollars in profits from investments that were heavily subsidized by the Federal Reserve. 

Based on the experiences we've seen in the TARP experiment, investors are smart to be very cautious on TALF.

Monday, March 16, 2009

Annex Governor's Island

The time is right for an historic island only one half mile from Manhattan to become a part of New York City. Governor's Island has been the site of several key moments in recent US and world history, and has been transformed very recently into a wonderful car-free playground for families from all over the New York City area. Ownership of Governor's Island has evolved from complete ownership by the United States Coast Guard (as part of the US Department of Transportation) to joint ownership by the state of New York and New York City. In its most recent incarnation, Governor's Island would be an appropriate and excellent addition to New York City.

Annexation Proposal

In 2003, the United States sold the 172 acre island to New York City and New York State for a purchase price of $1. Earlier this year, Mayor Bloomberg offered to have New York City take full responsibility for Governor's Island and another major park project in exchange for New York State taking full responsibility for Javits Center, New York City's key convention center located on the West Side of Manhattan.

The Mayor's proposal deserves serious consideration. Governor's Island is already a key part of the life of our city. The State of New York has proposed that it invest zero dollars in Governor's Island for the upcoming fiscal year, and the corporation that administers Governor's Island has proposed to cut its own budget by nearly 40% to attempt to respond to the difficult fiscal times facing New York City and New York State. In order to continue to improve the quality of the facilities and programs on Governor's Island and to make the location more and more a part of the lives on the people of New York City, additional funds will be necessary. If New York State will not support the financial investments needed on Governor's Island, New York City should take full ownership of the Island and fund its future infrastructure development without the help of the State.

We expect that Governor's Island would become part of the borough of Manhattan and add land area (but not population) to New York County. The southern tip of Governor's Island would be the southern most point of Manhattan.

Governor's Island is as important as ever to New York City, and it is more than appropriate for something so directly linked to the life of our city and our borough to be under the authority of our city's leadership. New York State has so many other priorities, including many priorities that would be orphaned without the careful guidance and attention from the state government. By making Governor's Island part of New York City, New York State will be free to focus on those priorities for which it has no able partner to move forward without assistance from the state government, and New York City will be free to make the most of the enormous opportunity that Governor's Island's 172 acres represent.

The History

Governor's Island has a rich history. The Governor's Island Accords, an attempt to bring peace to Haiti during the Clinton Administration, were negotiated and signed on Governor's Island. President Reagan and Mikhail Gorbachev of the Soviet Union met in 1988 on Governor's Island. It was a key strategic location for every military conflict that touched the New York City area from the 1660's until the War of 1812. Its location at the southern tip of Manhattan where the East River and the Hudson River meet made it the perfect place from which to defend southern Manhattan from naval attack. It was a prison for Confederate soldiers during the Civil War, and it was a key military supply post during World War I and World War II.

Memory of 1986

One of the most memorable events of my lifetime took place at Governor's Island. In July 1986, the Statue of Liberty celebrated its 100th anniversary, and the celebration was headquartered on Governor's Island. Elizabeth Dole, as the Secretary of Transportation at that time, was the host for the event, and Senator Bob Dole (only ten years before he would capture the Republican nomination for the President of the United States) stood silently by her side throughout the festivities. With the Cold War still raging, the celebration of 100 years of "Liberty" was also an attack on totalitarian regimes around the world and a direct rebuke of the Soviet Union. Soviet born comedian Yakov Smirnoff, performed on Governor's Island that day, and the largest fireworks display I have ever witnessed capped off that evening. From my vantage point on Governor's Island, it seemed that the fireworks were so close that I could have grabbed them with my hands as they exploded in the sky just overhead. The Statue of Liberty was re-lit, and its new shining torch held the attention of millions of viewers across the United States and around the world. As a 14 year old boy, I was lucky to be the son of a father who had a friend with connections at the Coast Guard; lucky to be in New York and on Governor's Island on such a special day. I cheered Lady Liberty, the Doles, and Smirnoff (who became a US citizen on that July day); I was proud to be in New York and proud to be an American.

Monday, March 9, 2009

Is Washington a Foe of Manhattan?

For many decades, the key driver of the Manhattan economy has been the financial sector. More than a third of all employee earnings in New York City come from the financial sector, and one of the other key economic drivers of Manhattan and of NYC, real estate, is driven in part by the engine of the financial sector. In fact, while midtown Manhattan is the largest business district in the United States, the financial district in lower Manhattan is the third largest such district.

In this context, it is obvious that improving the state of the financial sector in the United States is crucial for the economy of Manhattan and for the rest of NYC, but with so much of Manhattan's success riding on the health of the financial sector, forces in Washington DC are on the attack against the financial sector. In so doing, they are also attacking Manhattan.

Dodd Amendment to the Stimulus Package

The recently enacted stimulus package included a frontal attack against the health of the financial sector, and the author of the offending position was Senator Christopher Dodd of Connecticut. Separately and ironically, despite the fact that many Wall Street executives and high earners live in Connecticut, Senator Dodd has also threatened to force all recipients of year end bonuses at Merrill Lynch to give their bonuses back to their employer. The Dodd attack contained in the stimulus package is aimed at limiting the bonuses of employees at companies that are recipients of the TARP (Troubled Assets Relief Program) funds provided to financial companies since the market meltdown began in September 2008. All major banking institutions and a very large number of smaller such institutions are recipients of TARP funds, therefore, regulations affecting all recipients of TARP funds have the practical effect of regulating the entire financial sector of our nation's economy.

Dodd's amendment results in a regulation that prohibits the paying of bonuses in excess of one-third of base salary to the top 25 or more earners at companies that received TARP funds. In financial firms, employees receiving the largest amounts of compensation receive well over half of their compensation in the form a bonus, and bonuses often represent more than 90% of the compensation for a high earner.

This new law is very bad news for the financial sector and even worse news for Manhattan.
  1. Firms may choose to dramatically increase salaries so that bonuses can be no more than 33.3% of base salary while compensation remains competitive for the best performing employees. This approach will result in less incentive for those employees to maximize on their talents. The modest salary approach coupled with the possibility of an enormous bonus results in the best performers giving their best effort. The financial reward for success is contained in the bonus that is provided AFTER a full year of effort, creating the urgency for each such employee to succeed enormously every year in order to take advantage of that potential financial reward. With the higher salary and small bonus, the incentive for such effort is dramatically reduced, and the overall performance of the top employees at these firms will like be less successful than it would have been if a large bonus was still available as a reward.
  2. Top performing employees may choose to work for small firms that haven't received TARP funds. With that approach, they can work in institutions with less regulation and with greater potential for large bonuses. The movement of these top performers to smaller firms leaves the larger firms with fewer high quality employees right at the time that they need the help of the most talented people in our country. Moreover, as taxpayers, we are all investors in the firms that have accepted TARP funds, and we should encourage the Congress and the President to avoid new regulations that make the success of the TARP recipient firms less likely.
  3. TARP recipient firms may scramble to pay back the TARP funds as soon as possible in order to escape the restrictions represented by the Dodd amendment. Such an approach may undermine their liquidity and cause them to undertake business approaches which are not healthy for themselves or for the economy. We should remember that several of the firms that accepted TARP funds were not eager to do so and were told by the Treasury Department that accepting the funds was both their patriotic duty as well as a requirement of Secretary Paulson. If the TARP funds exist to improve the likelihood of success of the firms that received the funds, the Dodd approach seems designed to create the opposite trajectory.
The Dodd restrictions leave us wondering whether the Congress is attempting to undermine the already weakened financial sector. If so, they are also working to weaken Manhattan and NYC.

Nobody Home at Treasury

The current Treasury Secretary might be feeling lonely as well as inadequate. Secretary Geithner has yet to propose a plan to promote the recovery of the overall economy or of the financial sector. When he was nominated for the Treasury Secretary position, his previous failures to pay taxes were overlooked because he was expected to be an excellent captain of the economic recovery and because he was viewed as uniquely competent and prepared to do the job. Instead, his performance has resulted in reduced investor confidence, a lack of a plan for the recovery, and no team in place at Treasury. In fact, Secretary Geithner is the only leader appointed at Treasury in the new Administration. None of his deputies have been appointed, and the financial markets have continued to experience increasing turmoil.

Manhattan Needs These Trends to Stop

Manhattan needs the attacks and the procrastination in Washington with regard to promoting a healthier financial sector to end immediately. We need a recovery plan that we can support, and we need to get started right away.

Monday, March 2, 2009

Food Stamp Folly and Farewell to Morgy in Manhattan

Mayor Bloomberg's decision to reject additional food stamp support from the Federal Government demonstrates a growing lack of sensitivity in his office to the challenges faced by non-billionaires in these tough times. 

Separately, the retirement of the Manhattan District Attorney causes us to reflect on his 35 years of service in that role as well as a lifetime of public service. Finally, we say thank you to the Bill Tatum for his leadership in the Black media world and for his leadership in Upper Manhattan.

We start with food stamps.

No Thank You, Mr. President

During the Clinton Presidency, the United States Government took steps to "end welfare as we know it." Amongst those steps was the limiting of food stamp benefits to only three months for any three year period for an able-bodied adult without children. As the country sinks deeper into a frightening and, in some ways, unprecedented recession, advocates for the poor have suggested the elimination if the three month limitation.

Those advocates got their wish in the Stimulus Bill signed into law earlier this month.  In that legislation, the United States Government has granted municipalities the right to extend food stamp benefits to able-bodied adults without children for an unlimited period. Even before most the recent severe economic turmoil, many municipalities have asked individually and on a case by case basis to be permitted to extend these benefits beyond the three month time limit. Now, those municipalities are welcome to extend benefits.

New York City refused to join in the stampede to seek additional food stamp resources for its citizens and now has announced that it will reject the U.S. Government's offer to extend benefits in New York City. While the New York Post praised NYC's decision to turn down federal resources targeted toward the poor in our city, we should all be very disappointed. Food stamps are available to people who earn less than $14,000 per year, and they provide less than $200 of food support per month. Those who live in New York City with such modest incomes are unlikely to be corrupted by $200 of federal support, and the $200 will be spent in New York City, thereby boosting our economy and creating jobs that will reduce poverty and reduce our city's fiscal crisis.

Whether or not one agrees with the philosophy of forcing poor people to work for no pay in order to receive public assistance, everyone can agree in periods when the economy is experiencing a negative shock and when jobs are disappearing faster than any of us can count, a city that refuses to use money from the federal government (food stamps cost the city nothing and are paid for entirely by the United States Department of Agriculture) is failing its citizens. When job losses begin to turn into job creation and when the current economic shock is replaced by stabilization or growth, the ideological and philosophical debate about the need to force poor people to work for government benefits can be reinitiated. For now, our city, with growing poverty, unemployment, dislocation, and a massive budget deficit that must be filled using anti-expansionary policies such as tax increases and reductions in the number of municipal jobs, must eagerly and aggressively take advantage of opportunities such as the food stamp expansion to bring relief to those who are suffering in NYC and to help bring new spending into our local economy to hasten the end of our local depression.

We call on the Mayor to reverse course and see the poor as constituents and fellow New Yorkers rather than an enemy to be punished or an annoyance to be pushed aside. There are far more of us who are poor now than there were only a few months ago. We are reminded of a version of an old cliche: Be nice to people on your way up. You will meet them on your way down. With so many of us on our way down, let us not stand in the way of the efforts of the federal government to help the poor here in NYC. 

Robert Morgenthau Retires

Having first been elected in 1974 and having served with distinction and honor ever since, Robert Morgenthau announced late last week that he would not seek re-election in 2009. His tenure teaches us so much. For those who advocate term limits and who argue that power corrupts, we offer you the Manhattan District Attorney as the counterargument. For those who underestimate the impact of skin color in our criminal justice system, we present you with the youths convicted by Morgenthau's deputies in the Central Park Jogger case. Those Black youths served their full sentences for crimes that they did not commit, and when Morgenthau asked a judge to vacate their sentences and remove them from the sex offender rolls, the prosecutors who worked to wrongly convict these Black youths opposed Morgenthau's efforts to correct a terrible injustice. 

There are too many lessons to address here, but we offer a hearty congratulations to Robert Morgenthau for a career of which any of us would be proud.  At age 89, we wish him a long and fulfilling retirement.

Voters will chose the Democratic nominee seeking to replace Morgenthau in September.  We will offer our views on his potential successors in the months ahead.  The Manhattan District Attorney is extremely powerful and influential, and we must choose wisely. We will seek a nominee who will bring the fairness and integrity that Robert Morgenthau brought and who will aggressively advocate the repeal of the Rockefeller Drug Laws while respecting the people of Upper Manhattan. We are eager to support candidates who demonstrate those qualities.

Fallen Giant - Bill Tatum

Bill Tatum died last week.  He was the longtime publisher of the Amsterdam News before turning that job over to his daughter in 1997, and he remained the owner of the paper at the time of his death. Bill Tatum was a leader in Upper Manhattan and throughout the United States and remains an inspiration to so many people from so many geographies and backgrounds. He was appropriately remembered in the press, by the Mayor, and by so many others. We send our prayers of comfort to his family and thank him and them for being voices for Black people, employers of Black people, and successful Black businesspeople so that the next generation can grow up knowing not to let others limit their aspirations.