Independent Thinking^®

Time to Act in New York

Editor’s note: Richard Ravitch, the court-appointed advisor to the bankruptcy judge in Detroit and former New York Lieutenant Governor, addressed Evercore Wealth Management clients in New York on September 8, 2014. Here are some excerpts from that discussion and his recent book: So Much to Do: A Full Life of Business, Politics and Confronting Fiscal Crises.
 

New York City

It’s been almost four decades since the New York City fiscal crisis. The city was on the verge of ruin following years of fiscal mismanagement when President Ford endorsed legislation, including federal loan guarantees. That was then. Today, it is nearly impossible to get federal legislation passed to address an individual city’s financial problems. Cities must rely on their own resources, along with accurate and realistic forecasts, to confront their challenges.
 
It’s important to note that the Ford legislation followed a number of lifesaving moves by the city itself, including the creation of the Municipal Assistance Corporation and the Emergency Financial Control Board; the appointment of a new deputy mayor for finance; new city and state taxes; layoffs, wage deferrals, employee contributions to their pension funds, and increased commitments by the pension funds to invest in city debt; an independent audit of the funds’ actuarial soundness; and a reduction in subsidies like the city’s support for its higher education system. Together, these actions relieved the city’s finances until it could transform from its reliance on manufacturing to a more prosperous and diverse economy supported by finance, tourism, trade, media, arts, education and medical research, as well as a push into the technology sector.
 
The good news, for investors and residents, is that its experiences taught New York City to adhere to strict governmental accrual accounting. This much more accurately reflects the current financial situation than the approach used by most cities and states. In addition, there are a number of public and private fiscal watchdogs that regularly monitor the fiscal condition, both in terms of current operations as well as forecasting operating and capital budget needs. These watchdogs include the city’s Independent Budget Office, the City and State Comptroller, the New York State Financial Control Board, the Citizens Budget Committee and the Empire Center for Public Policy. It is unlikely, albeit not impossible, that New York will again get itself into the kind of trouble that it did in the 1970s.
 

The Metropolitan Transportation Authority

Editor’s note: Richard Ravitch was appointed chairman of the then distressed Metropolitan Transportation Authority, or MTA, in 1979.
 
Public transportation is governed by some stubborn facts. First, it costs more than private markets can provide through passenger fares. The rest of the system’s operating and capital funds come directly from local, state and federal governments.
 
Second, “public” means politics. Part of operating revenues come from rider fares, but every fare increase occasions a political ritual of posturing and protest, although funds are needed to keep the system running safely. Further complicating the situation is the power of the unions.
 
Today, the MTA is also grappling with its aging infrastructure during a continued period of diminishing federal assistance. It also must contend with infrastructure upgrades after the system was exposed to further damage from Hurricane Sandy and the need for storm preparedness. No one can question the importance of the public transportation system to the efficient functioning of the city’s economy. The multilevel government involvement in the financial and capital planning adds to management’s challenges. Finding the necessary combination of revenue streams from fares, tolls and various taxes is the key to providing stability to the MTA’s operations.
 

State Budget Crisis Taskforce

Editor’s note: Richard Ravitch and Former Federal Reserve Board Chair Paul Volcker created the State Budget Crisis Task Force in April 2011 to address growing concerns about the long-term fiscal sustainability of the states and the persistent structural imbalance in state budgets, which was accelerated by the financial collapse of 2008.
 
To address the declining fiscal condition of states, the Task Force hosted national dialogues focusing on the most urgent areas of concern, including infrastructure, underfunded retirement promises, Medicaid and managing the impact of federal deficit reduction. Its conclusion in January 2014 was unambiguous: The existing trajectory of state spending, taxation and administrative practice cannot be sustained. The basic problem is not cyclical, it is structural – and the costs of inaction are high. To get people to engage in self-inflicted pain requires either extraordinary leaders or, more likely, extraordinary leaders and exigent circumstances.
 
The nation and its states have made social commitments that are admirable but exceed their current financial resources. The media focus is on national budget issues, but it is the states and their local governments that bear most of the responsibility for delivering essential services to our citizens. The time to act is now.
 
For information on future events and related topics, including the firm’s approach to municipal bond research, please contact Howard Cure at [email protected].