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Spending Their Way Out of Debt:

The New York Solution to a Budget Crisis

NEARLY ALL 50 states are experiencing budget crises, with California in the worst shape, facing a $38.2 billion deficit. Even Arizona has a $1.3 billion shortfall. Washington state has had to close schools. Connecticut is cutting 2,800 public employees. In this context, New York state’s $11.5 billion deficit on a $92 billion budget is only slightly above average, while New York City’s $4.5 billion shortfall in a $40 billion budget wins an honorable mention.
What distinguishes New York is that nowhere else in the country are public officials increasing spending in response to the crisis. Here, even as the city drowns in Medicaid expenses, Mayor Bloomberg continues an “outreach” effort to sign up more recipients. In Albany, Republicans and Democrats have joined hands to restore $2 billion that Governor George Pataki had cut from their $92 billion budget. Otherwise, as the New York Times lamented, schools and hospitals might have to reduce spending.

With belt-tightening off the table, the debate has concentrated on personalities. Pataki is said to hate New York City and to be grandstanding for Washington because he opposes tax increases. Joe Bruno, the formerly conservative Republican senate majority leader, is made out to be the city’s savior for switching sides and voting with the Democrats. Assembly Democratic majority leader Sheldon Silver, the Mephistophelean figure who kicked off the crisis two years ago by abolishing the city’s commuter tax, only smiles in the background.

Mayor Bloomberg has become the barker for the Grand Guignol. To soften up the public for tax increases, he trotted out the usual doomsday budget, which proposed, among other things, closing the Prospect Park and Queens zoos (savings: $8.6 million). Albany came through with the tax increases, of course, yet the mayor has come off as an insensitive businessman out of touch with the needs of ordinary people.

If there is one reason for New York city and state’s budget deficits, it is Albany’s 1969 decision to employ Medicaid as a tool for leveraging federal dollars. In 49 other states, the state shoulders the entire Medicaid burden. Each dollar is then matched by federal dollars. In an effort to pump more money out of Washington, however, Albany decided that for every dollar the state spent, local government would cough up another dollar. This effectively doubled the number of dollars Washington had to match.

Medicaid is busting budgets in every state, but in New York it is taking over the economy. To put the burden in perspective, New York City’s 2003 Medicaid bill–$3.5 billion–will exceed the entire municipal budget of every American city except Los Angeles ($4.5 billion) and Chicago ($3.9 billion). One out of every five city residents is on Medicaid. Per capita, every New Yorker pays $875 a year for other people’s medical expenses.

Upstate is suffering the same fate. In Broome County (Binghamton), Medicaid absorbs 78 percent of the local property tax and will take 200 percent by 2012. The county expects to run out of cash in November. The only conceivable solution is for Albany to assume complete responsibility for Medicaid and let the state legislature work out the problem. Not in New York. Even as local governments go broke, the state legislature is busy pushing more Medicaid spending down to their level.

This social-service economy is strangling the hub of American capitalism. While one in five Wall Street employees has lost his job since 2000, the city’s health and welfare sector grows 3 percent every year. Of New York City’s top 25 employers, nine are hospitals. Only six are banks and investment houses. Social services recently passed financial services as the city’s largest economic sector.

Such hospitals and social service organizations live on taxes. Medicaid pays 26 percent of the bill in private hospitals and 59 percent in the New York City Health and Hospital Corporation’s sprawling network of hospitals and clinics. Medicare picks up another 37 percent and 20 percent respectively. Of course, none of these facilities pay taxes. They are all municipals or nonprofits.

That’s why Kenneth Raske, president of the Greater New York Hospital Association, joined hands with Dennis Rivera, president of Local 1199, the largest hospital union in the world, to create an $11 million “Healthcare Education Project” that ran TV ads all spring warning of the horrors that would occur if taxes weren’t raised. With 220,000 members, Local 1199 already represents a significant portion of the electorate. Governor Pataki initiated the crisis himself in 2001 when he bought Rivera’s election-year support by guaranteeing union members a “living wage” out of Medicaid funds. This year’s debate climaxed when Senator Bruno told a cheering throng of 25,000 hospital workers brought to Albany by the Healthcare Education Project: “We will make sure your needs are met.”

“In New York City, there are 38 government and health care workers for every 100 private sector workers,” says Steve Kagann, chief economist to Pataki. “In the rest of the country it’s 29. That’s the difference.”

And so, taxes in both the city and the state are going up as usual. The city’s sales tax will rise from 8.25 percent to 8.63 percent. (Large numbers of New Yorkers already shop elsewhere to avoid the tax.) Individuals with incomes over $100,000 and couples making more than $150,000 will have their rates raised from 3.65 percent to 4.25 percent. Anyone making over $500,000 will pay 4.45 percent.

At LeFrak’s Newport, a 600-acre development right across the Hudson, the average applicant for an apartment is 29 years old and makes $120,000. The exodus has already begun.

The U.S. Customs House, which has resided in Lower Manhattan since the 18th century, has moved all but a handful of employees to Newark. J.P. Morgan Chase & Co. is outsourcing research to Bombay. In 2002, John Wiley & Sons, the original publisher of “Moby Dick,” moved to Hoboken after being in Manhattan since 1807. Rather than lower taxes across the board, the Bloomberg administration continues the disastrous policy of giving huge tax exemptions to a few high-profile companies (Pfizer, Bear Stearns), while raising taxes on everybody else.

Witnessing a New York budget crisis is like watching Greek tragedy. No matter what the characters say, you know exactly what they’re going to do. In 1969, Mayor John Lindsay solved his shortfall by imposing a city income tax, practicing “deferred maintenance,” and raiding capital funds for day-to-day expenses. The result was a municipal meltdown that brought the city to its knees within five years. In 1990, Governor Mario Cuomo and Mayor Dinkins responded to a national downturn by raising taxes. As a result, New York lost one out of every four jobs eliminated by the 1990-92 recession.

Now city and state officials are determined to turn another national slowdown into a permanent downward ratcheting of New York’s fortunes. By the time Republicans arrive in Manhattan for their 2004 convention, there may be little to celebrate.

William Tucker is a senior fellow of Discovery Institute and columnist for the New York Sun.