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.”