Wall Street Losses a Disaster for New York City Finances

One of the shifts in leading edge conventional wisdom is the “cities are cool” sentiment. It’s a lagging indicator, so lagging as to set for a near-term reversal.

Mind you, I like cities and particularly like not owning a car, which limits me to particularly densely populated and/or enlightened metropolises. The logic of the new-found enthusiasm for city living among the chattering classes was in part a recognition that high cost energy makes suburban living much more expensive (it’s not just the driving but also the expense of heating an isolated home versus even a similar-sized space ensconced in a larger apartment building). The other factor os quality of life, which until recently, was perceived to be better in the ‘burbs. But now that kids no longer amuse themselves in the neighborhood but instead have activities and play dates, and cities offer convenience, street life, and closer proximity play dates, suddenly urban living looks child-friendly.

But the charm of cities depends on adequate municipal budgets. It wasn’t until the Giuliani era that the number of parents deciding to remain in the City grew sharply, and with good reason. Even in the fat years of the 1980s, Manhattan wasn’t entirely safe. I was lucky. I merely had my wallet stolen more times than I can remember,

Perhaps a better indicator: during the later 1980s, I lived in a townhouse on a very nice block (69th between Park and Madison). The building had an outer door that was unlocked and a keyed inner door. I was the first person out of the building in the morning and inevitably had to step over a homeless person sleeping between the two doors. I would walk down Madison and there would be at least one homeless person on each side of the street sleeping in the doorways of the fancy boutiques.

All cities will be hit by declining tax revenues, but New York will fare worse due to its dependence on financial services. Despite the view that foreign buyers will keep the real estate market from declining too far, a return to 1980s conditions may dampen their enthusiasm.

From Bloomberg:

Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they prepaid, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a “safe harbor,” protecting against penalties for underpayment.

“I think it will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. “They will carry forward all of those losses.”…

New York Governor David Paterson called the Legislature back to work next week in an emergency session to address widening deficits as revenue, including tax receipts from Wall Street, declines. Sixteen of the state’s largest banks sent taxes totaling $5 million to the state treasury in the most recent reporting period, a 97 percent decrease from a year earlier, when they accounted for $173 million in revenue, Paterson said.

The state faces a $26 billion deficit over the next three years and a $630 million shortfall in the current year that began April 1, Paterson has said. The governor yesterday outlined $630 million in administrative spending cuts he intends to apply this year, and he called upon the Legislature to cut at least $600 million more later in August.

“A lot of what we’re facing now are the diminished revenues from Wall Street…,” Paterson, a Democrat who took over as governor in March following Eliot Spitzer’s resignation, said yesterday.

In the city, where Wall Street provides about 5 percent of jobs and more than 20 percent of total personal income, deficits are projected to widen to $2.3 billion in fiscal 2010 beginning next July, growing to $5.96 billion and $5.4 billion in 2011 and 2012, city Comptroller William Thompson has said.

“I think we still haven’t come to grips with how deep will be the impact on New York City’s and the state’s economy and budget resulting from this credit crisis,” said Kathryn Wylde, president of the Partnership for New York City, a civic group of corporate chief executives organized to promote commerce….

“I am worried about the state’s bond rating, and it will start to fall if the governor doesn’t do something about his budget problems now,” Bloomberg said. “The rating agencies are cognizant of what’s happening to our economy.”

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  1. Unsympathetic

    The rating agencies are cognizant

    Oh, the irony. The companies will remain AAA until after the cows have come home, grown old, and been turned into brisket.. yet, the ratings agency is extraordinarily quick to notice the decreased taxes sent to the state government from those same companies?

  2. Anonymous

    Hope this doesn’t see, too off topic, but looking at JPM and Bear Stearns bailout, the recent write downs on wall street are indicative of the corruption still firmly in place there and the lack of confidence remaining.

    The Fed engineering of accounting fraud is unprecedented and the damage going forward seems headed towards a deflation crisis — which will be far worse than having Bear exposed for what it was. The systemic collapse of banking is related to fraud and thus failure to root out the Enron-like criminals and to not provide a symbolic show of justice will continue to erode this system and result in less confidence and an extension of economic decay!

    I found this to be interesting:

    Fraudulent Conveyances.
    Constructive Fraud:
    Conveyance made by a person who is insolvent or will be rendered insolvent by the conveyance is fraudulent as to creditors without regard to intent, if made without fair consideration. Md. ComL. § 15-204.
    “Insolvent” for business = engaged or is about to engage in a business transaction for which the property remaining in his hands is an unreasonably small capital. Com.L. § 15-205.
    Entity has an unreasonably small amount of capital. Com L. § 15-205.
    About to incur debts beyond his ability to pay. Com. L. § 15-206
    “Fair consideration” = received in good faith, in an amount not disproportionately small. Md. ComL § 15-203. “Not disproportionately small” depends on the circumstances.
    Conveyance in anticipation of future debt can be fraudulent. Com.L. § 15-206. Future creditors may avoid transfers if:
    Person is or will be insolvent because of the transfer; and
    The insolvent intends or believes that he/she will incur debt that he/she will be unable to pay.

  3. Anonymous


    New York is the next frigging Detroit. It has been obvious for the past few years that the entire city is due for a cratering, but the bubble was able to plaster over the problems.

    Now the chickens are coming home to roost. Couldn’t happen to a nicer place.

    Tip for those looking for the bottom: When you can buy buildings in Manhattan, demolish them, sell the building materials as scrap, and make a profit – then you will know the bottom is close.

  4. Anonymous

    New York is going to be hit by a double whammy of a decline in financial services and a intermediate-term U.S Dollar rally.

    Foreigners have been helping to prop up NY real estate. Guess what happens if the Euro trades back at parity with the USD?

    Just an opinion, not investment advice.

  5. Peripheral Visionary

    Yet another reason why municipal taxes (and I would argue Federal taxes) should be based primarily on assets, not incomes–in this case, real estate rather than profits. When the economy craters, sales taxes go down and income taxes disappear, but real estate isn’t going anywhere and the municipality that taxes on it can stay aflot.

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