As a rule, people in New York City don’t pay much attention to what goes on up in the sticks of Albany.
New governor Eliot Spitzer has managed an impressive twofer, then, with the ongoing Bruno-Troopergate to-do: Not just grabbing the city’s attention, but also turning New York State Senate Majority Leader Joe Bruno, a cheerful rogue with a penchant for flying in style on the dime of taxpayers and political donors (and who’s presently the subject of an FBI investigation), into the victim in a captivating morality play.
But while New Yorkers watch the unfolding melodrama of what the governor knew and when about his aides’ plot to take down a political foe by leaking state police records to a complicit newspaper, the state and city stand together at the cusp of a fiscal crisis that both Mr. Spitzer and Mayor Bloomberg have chosen to ignore.
The problem, in short, is a chain of unhealthy dependencies: The state depends on the city for more than half of its total tax take (far more than any other state takes from a single city; only Chicago and Illinois are even comparable) and the city in turn depends on Wall Street for the lion’s share of its revenues. With the ports and manufacturing long gone, the financial industry has become the only game in town, providing just 5.6 percent of the city’s jobs, but more than 20 percent of all earnings, and, owing to the city’s sharply progressive tax code, a far higher percentage of tax revenues. As other industries have foundered, Wall Street has accounted for more than half of the city’s income growth over the past twenty years.
The city has done well year-to-year under Mayor Bloomberg, with record-high bond ratings from S&P, Fitch and Moody’s, and higher–than-expected tax revenues as the Dow Jones Industrial Average climbed more than 20 percent from when the mayor took office to the start of this year. But with the real estate balloon bursting and threatening to bring the stock market down with it, the state and city, which have spent their cut of the ongoing Wall Street windfall as fast as it’s come in, have little set aside to paper over a market slowdown, let alone a downturn.
Even as New York has become more dependent on Wall Street, the industry has been leaving New York, which currently hosts just 22 percent of America’s Wall Street jobs—compared to more than 50 percent thirty years ago. As City Journal Contributing Editor Nicole Gelinas has noted, when New York City collapsed in the mid-70's, there was nowhere else for financial firms to go. Today, those that remain do so out of choice and convenience.
At the same time that jobs have dispersed, New York’s dependence on lucre from the financial industries has grown, with the city drawing some 34 percent of its tax revenues from the sector today, as opposed to 15 percent in 1970. In New York State, the wealthiest one percent of filers now account for well over one-third of all revenues raised by the state's largest tax, and a half a percent of tax filers account for about a third of the city’s income tax revenue. The upshot: New York City and State can afford to pay their bills without going deeper into debt only when a predictably unpredictable industry that it has little control over does well and issues big bonuses. It’s the equivalent of long-term budgeting based on a hot weekend at Atlantic City.
Messrs. Spitzer and Bloomberg have both seen this coming crisis, even as they’ve done little to halt it. Mr. Spitzer promised to reform Albany’s high-spending, business-as-usual culture, drawing a sharp distinction between himself and his free-spending predecessor and vowing to “rebuild our economy so that it is ready to compete on the global stage in the next century.” But despite coming into office with 69 percent of the vote and a mandate for reform, his first budget surprised many observers by proposing a rate of spending more than two-and-a-half times the rate of inflation. (State Comptroller Tom DiNapoli warned that “…spending is still increasing at an unsustainable rate… and the result is a three-year budget gap of $13 billion…”).