Wednesday, July 08, 2009

The Party's Over

The NY Times does a real public service this morning with its report on the pension black hole facing the State of New York in the coming years-obligations sharply on the rise, while revenues are swiftly shrinking: " Local governments in New York State face an unprecedented increase in pension costs that will force them to triple their contributions to the state pension system over the next six years, according to an analysis prepared by the comptroller’s office.By 2015, pension costs borne by local governments upstate, on Long Island and in New York City’s suburbs will exceed $8 billion a year, compared with $2.6 billion last year, under the analysis, which was circulated to legislative and county leaders and obtained by The New York Times this month."

So, where exactly will the new money be coming from? Hold on to your wallets everyone: “It is staggering,” said Peter Baynes, executive director of the New York Conference of Mayors. “The only way they’re going to deal with it is through property taxes and reductions in the work force.” Put that "fair share" in your pipe and smoke it!

The reality here is that the public payroll-and the concomitant pension benefits-have been spiralling out of control for years; and that holds true for NYC, the surrounding counties, and all of the towns throughout the state. All of this was brought home in a brilliant analysis given in a lecture we heard yesterday by E.J. McMahon of the Manhattan Institute-riffing on his article in the latest City Journal (forthcoming).

The days of wine and roses are certainly over-and the dependence on an annual 8% return on investment (who doesn't wish for that?) has left public pension obligations seriously underfunded. But, in NYC, the situation was exacerbated by the fact that Mike Bloomberg kept hiring more workers; and each of the new hires is immediately integrated into the pension system and becomes an unavoidable obligation for the shlubs who foot the bill-the already beleaguered tax payers.

"Tax the wealthy," goes the cry of the WFP. How's that working out in California, where the state relies heavily on about 144,000 high net worth individuals who are-guess what?-out migrating to avoid getting hosed for a state work force that is unsustainable. But the out migration there is dwarfed by our own. We have lost over one and one half million higher taxed individuals over the past decade-with an accompanying drop of about one billion dollars in revenue.

In NYC, the shrewed businessman mayor-who has padded the city's payroll every year he's been in office-presides over a city whose tax obligations are 90% higher than any other municipality in the country; and Bloomberg has, thankfully, stopped smugly talking about how New York is some kind of "luxury item."

McMahon captured this last month in the following NY Post Op-Ed: "Because public pensions are guaranteed by the state constitution, they are a risk-free proposition for the employees who collect them. But these pensions are financed by investments that expose taxpayers to substantial financial risk -- as was illustrated vividly by the two sharp downturns in this decade. As recently as 1984, two-thirds of New York’s pension funds were invested in less-risky fixed-income investments -- bonds, commercial mortgages and cash. By 2008, the proportions had more than reversed. As the meltdown began, nearly 72 percent of the state’s pension-fund assets were in equities, including stocks, private equity and hedge-fund holdings. This was typical of the investment mix in public-pension systems across the country -- which is why they’re all about to dump bigger bills on taxpayers."

Funny, we didn't hear Mike Bloomberg's warning cry on this. But, Mr. Indispensable, is now needed to get us out of the mess that he bears a great degree of responsibility for-including the 80% increase in the education budget that now accounts for 4 out of every ten dollars the city spends. Is it any wonder that Randi Weingarten and the mayor were dancing cheek to cheek in last month's press conference on mayoral control? If your Weingarten, Mike Bloomberg has meant more teachers and more revenue for-why the UFT, of course.

And getting out won't be easy-especially when we are continuing to, "let it ride," on rising stock market fortune. As the Times tells us, our state comptroller has it all under control-perhaps not: "Mr. DiNapoli’s office cautioned that the figures it circulated represented only one possible chain of events, and depend in part on a healthy stock market recovery in the first half of the next decade. The analysis envisions a market rebound similar to the one after the crash of 1987, with a return of 1.5 percent in the current fiscal year, annual returns in excess of 13 percent in the next two years and more than 10 percent in the succeeding three years."

Don't we all wish. But the real elephant in the room here is the WFP-and the fact that the public employees are the majority faction that Madison warned us about. Although the Times hits us with this knee slapper: "If there is any silver lining, the trends appear to have somewhat curbed Albany’s appetite for extending pension enhancements to public employees to placate labor unions, which wield enormous clout and lobbying dollars in the capital. “I’m alarmed,” said Assemblyman Peter J. Abbate Jr., a Brooklyn Democrat and the chairman of the Assembly’s Labor Committee, who is one of the capital’s more reliable union allies. “Bluntly,” he said, “I’ve spoken to a lot of the union leaders and their lobbyists and said I don’t want to see bills that will cost the counties and the state millions of dollars.”

Yeah, sure. Before last year's crash, Wall Street accounted for 20% of the state's revenues-and that's much higher for the city. This year on the state level, we glommed about six billion dollars of federal stimulus money; something that McMahon rightfully calls the, "fiscal bridge to nowhere." The money was supposed to allay the need for any new local taxes. How did that turn out? $6.1 billion in new state taxes and fess were added by the legislature-and Bloomberg hiked up the city's sales tax.

Our pension obligations are simply symptoms of an even more serious malady. The belief that we can continue to grow government and keep forcing New Yorkers to pony up more. Now, with the Feds looking to expand health care and tax energy use-watch out! We are all heading down the California path-with New York City and State seemingly in the biggest rush to catch the bankrupt Golden State.