The Mayoral Candidates Compete On Ways To Impoverish The City

Time to check in on the race for mayor again.  Last night there was a forum for the mayoral candidates at Cooper Union, sponsored by the League of Conservation Voters.  Subject: environmental sustainability. 

Could there be a more perfect topic to bring forth the New York conventional ignorance?  Of course the audience consisted mainly of environmental activists, all the more to encourage ridiculous statements from politicians striving to say what the listeners want to hear.

I have come across two reports on the forum, one from the New York Times City Room blog here, and the other from The Atlantic Cities here.  According to Sarah Goodyear of Atlantic Cities, the candidates "confidently advanced a series of proposals that would have seemed overly ambitious or even silly just a few years back."  Believe me, the proposals are just as silly today.

Let's start with the frontrunner, City Council Speaker Christine Quinn.  She started by agreeing that "reducing the city's carbon emission 80% by 2050 is 'where we have to go.'"  That's rather dramatic!  By the time we're done heating our houses, will we still be allowed to have electricity?  You're probably thinking, she must be in favor of nuclear power, because that's the only possible place that we can get all that power without carbon emissions?  Nope.  From the Times: "One candidate, Christine C. Quinn . . . was the only contender to express support for closing the Indian Point nuclear power plant, which supplies much of New York City's electricity."  ("Much of" our electricity would be up to 30% according to Wikipedia.)

We want to be moving toward cleaner, safer energy, she said to cheers from those in attendance at the forum, which was sponsored by Cooper Union and the New York League of Conservation Voters. Ms. Quinn suggested pursuing geothermal energy alternatives, like heat pumps that harness the Earth’s natural energy, to compensate for the loss of the plant.

So now you must be asking, is it really possible that a credible candidate for mayor of our largest city can be proposing to eliminate essentially all of our sources of electricity for this huge and complex economy and replace them with a source that is a multiple as expensive and hasn't been proven workable at all on this kind of scale?  Yes, she is the frontrunner.

Let's get a smattering of proposals from the other guys.  There's this from our Public Advocate:

Public advocate Bill DeBlasio called for aggressive financing structures to retrofit aging buildings to make them more energy-efficient.

I strongly suspect that de Blasio doesn't even know what "aggressive financing structures" he is talking about.  Does he really propose to exhaust New York City's borrowing capacity in giveaways to private landlords, leaving nothing for the water system, sewers, streets, subways, etc.?  Well, how about this from former Bronx Borough President Adolfo Carrion, running for the Independence Party

Former Bronx borough president Adolfo Carrión, running as an independent [sic - he's running for the Independence Party, not the same thing] said New York should be exploring vertical farming.

You know, Adolfo, there's a reason why farmers grow food out in the country where land is cheap instead of in the most expensive possible place, on the roofs of buildings.

Overall, you just can't help getting the impression that these people think that energy comes from the tooth fairy and all efforts to wipe out cheap and workable energy and replace it with expensive and unworkable energy are completely cost free.

Are the Republicans any better?  Not really.

Both Mr. Lhota and Mr. Catsimatidis sought to distance themselves from the national Republican Party, saying they believed that making alternative energy a priority would create jobs.

Yikes.  Using public money to subsidize high cost production of a good and to drive away low cost production that the market would provide without subsidy?  That's called "wealth destruction."  But here in New York City even Republicans are not allowed to say that.

And finally, the moderator (Jim Lehrer) asked all nine candidates at the forum if they "believe" that global warming is man-made.  Eight of nine hands went up.  Congratulations to John Catsimatidis on being willing to buck the conventional ignorance on at least this one point.

Could Anthony Weiner Really Be A Credible Candidate For Mayor Of New York?

Do you remember Anthony Weiner?  For New Yorkers, he's hard to forget.  He was the high-flying recently-married Congressman from a Brooklyn/Queens district who self-destructed spectacularly in the Spring of 2011 when he accidentally posted on a site accessible to his social media "followers" a picture of his crotch intended only to be tweeted to a young unmarried female college student from Seattle.  After initially digging his hole deeper for a few days by denying he was the tweeter, he ended up resigning about a month after the initial revelation.  Now, you would think, there is a guy who is never coming back in politics.

Not so fast!  Last week via an article in the New York Times Magazine, Weiner floated his name as a potential candidate for Mayor, in an election coming up this November.  According to this morning's New York Post, an initial poll shows him running a relatively strong second in a field of five.  Could this guy possibly be a credible candidate?

To answer that question, you need first a recognition of the importance of the Democratic party nomination, and second an understanding of the various buffoons who are the other candidates for that nomination.  Given that the Republican candidate has defeated the Democrat for mayor in all of the last five elections spanning 20 years, you would think that the Democratic nomination cannot be all that important.  But you would be wrong.  The Democratic nominee will undoubtedly be the strong favorite, no matter how loony.   Democrats have a voter registration advantage over Republicans of about 6 to 1.  Mike Bloomberg has managed to hang on for three terms under the Republican banner, but by spending vast sums of personal money and with increasingly narrow margins of victory.  No Republican candidate will come remotely close to raising the sums that Bloomberg has spent of his own money to get elected.  And on top of that, he's not a real Republican in his policies.  So at best any Republican candidate will start out as a serious underdog.

Now let's consider briefly the Democratic alternatives.  I wrote about current city Comptroller John Liu a few days ago here.  Although as Comptroller he is in charge of the pension plans for the city workforce, from all indications he has no clue that there are multi billions of annual dollars of increase in required pension contributions baked into the current system and ready to explode upon us.  Instead of telling us his solution to that problem, he proposes a collection of new non-starter spending programs, all to be financed with tax increases on a handful of "the rich" who just got hit with big increases at both the Federal and State levels.  No amount of arithmetic can make his numbers add up, but hey, he's only the Comptroller, so what can you expect him to know about numbers?  Also, he's the darling of the city worker unions, although he hasn't yet been endorsed in this cycle by their political arm, the Working Families Party.  Oh, and did I mention that his former campaign treasurer is about to start a Federal trial for corruption?

Well, how about Christine Quinn, Speaker of the City Council and representative from the trendy precincts of Greenwich Village -- my own councilwoman!  She's the current frontrunner in the polls, and thought to be allied with Bloomberg.  Many think she is at least somewhat saner than the typical Democratic NYC pol, who believes that more government spending is the answer to absolutely every problem.  Well, but her signature issue is vast expansion of "permanently affordable housing," otherwise known as lifetime subsidies to non-poor people and the least cost-effective expenditure of public funds ever devised.  No mention from her campaign that I can find of recognition of the pension problem or any proposed solution.  Since she is a Manhattanite, we think we can expect her to be not quite so overtly on the take as her colleagues from the outer boroughs.  Oh but wait, let's check out this from yesterday's Wall Street Journal.  It seems that as Speaker of the City Council Quinn has total personal discretion over some $17 million of funds known as "member items," and that she has requested in each of the past three years that $100,000 of such funds be directed to an outfit called the Association for Neighborhood and Housing Development specifically to "advocate" for Quinn's signature issue, permanently affordable housing.   Directing public funds to lobbyists to lobby for your pet campaign issues -- that takes a little chutzpah!  In her favor, I guess we have to admit that she didn't just pocket the money personally (well, maybe we shouldn't be too quick to jump to that conclusion). 

Deeper down in the polls we have Bill de Blasio, current Public Advocate (citywide elected office with no responsibilities that anyone can name).  This fellow is a true member of the Loony Left, desperately trying to run to the left of everyone else on every issue, and to get the endorsements of the city worker unions.  He has never seen a tax increase or a spending program that he would not support.

Are you starting to see why Weiner might actually be preferable to the alternatives?  Spending most of his career in Washington (he was an aide to Schumer before running for Congress), there is every reason to think that he is far less in debt to the city worker unions than the other candidates. 

And did I mention that every one of the labor contracts for the city workers has expired.  Some blame Bloomberg for not negotiating new contracts, but I don't -- there is no way the unions will do a deal with Bloomberg, when the alternative is to wait until after an election where it is entirely likely that their support will have put the winner in office.

Yikes, Weiner may be our best hope.  Amazing but true.

State And Local Government Financial Data Are Also A Problem

The series over the past week on fraudulent government economic data focused on data published by the Federal government, the reason being that most of the economic data for the U.S. come from the Federal government.  But the state and local governments put out substantial amounts of data too, mostly about their own financial condition.  What is the level of trustworthiness there?  Not good.

Thankfully state and local governments have much less ability to practice financial fraud than the Feds, in part because they have restrictions on the incurring of debt, in part because they have statutory or even constitutional balanced budget requirements, and in part because they can't print their own currency to pay their debts.  But like all politicians, state and local pols have powerful incentives to use the public fisc to pay off favored constituencies today while hiding what they are doing from the voters, thus allowing obligations to accumulate out of view to spring upon the next generation after those who took on the obligations are long gone.

If your goal is to pay off your political supporters while not revealing for many years the obligations you are incurring, then probably the perfect vehicle for you is the defined benefit pension plan.  In a state or local government defined benefit pension plan, the sponsoring entity takes on obligations that are not due to be paid for 10, 20 or even up to 80 years.  It is perfectly appropriate that the obligations due many years out are valued today based on a discount rate, the idea being that you can put money aside today against the discounted value, and the money will then earn the assumed rate of return over the years, resulting in sufficient funds to pay the obligations when they come due.  Nothing wrong so far. 

Now just think like a politician for a moment.  The higher the discount/return rate that you assume, the lower today's liabilities will appear to be.  If you assume an aggressive rate of return today, then you can promise generous pensions while putting aside little money to fund them.  However, when the markets fail to produce the assumed rate of return, required contributions will gradually accelerate, but over many years.  With any luck, you will be long gone.

The states with the worst pension problems today are probably Illinois, California and New Jersey, in that order.  New York is not far behind.  (Does anyone notice that these states have in common their deep blue politics?)  Anyway, I'll use New York City as an example, because I live here and I follow it closely.

New York City has five main pension funds for its workers:  New York City Employees' Retirement System (ERS), New York City Teachers' Retirement System (TRS), New York City Police Pension Fund (Police), New York City Fire Department Pension Fund (Fire), and New York City Board of Education Retirement System (BERS).  All have long assumed an 8% discount/return rate for valuation purposes.  Such returns can only be had in the stock market or even riskier investments like hedge funds, and any such investments can go down as well as up.  In fact, the stock market, after recent large gains, is only now approaching the records achieved in early 2000 -- that's 13 years with no gains whatsoever, against the 8% assumption.

What's the result?  In fiscal 2002, when the contributions were set based on the stock market values in 2000, New York City made required pension contributions of right around $1 billion, which was about 2.5% of a budget of then about $40 billion per year.  By 2012, with the stock market flat for a decade, required contributions had soared to $8.4 billion out of a budget now at $70 billion -- 12% of the total. 

In 2012 Richard North, chief City actuary, issued a report recommending lowering the assumed discount/return rate all the way to 7%.  Believe it or not, it takes an act of the state legislature to make that change!  A bill was presented in the 2012 session of the legislature, and it never came to a vote.  I guess the legislators understand where their interest is on this matter, namely continuing to keep the public in the dark.

In his actuarial valuations for the funds that came out in October 2012, North went ahead and used the rogue 7% rate.  The result was to reveal dramatically lower funding levels than previously advertised using the 8% rate:  ERS funding went from 78.6% funding to 64.2%; TRS from 64.1% to 58.9%; Police from 71.3% to 60.1%; Fire from 56.8% to 48.2%; BERS from 68.7% to 57.8%. 

But isn't even 7% rather aggressive for a public pension fund?  In a very valuable blog, John Murphy, the long time (1990 - 2005) Executive Director of ERS, commenting on the dramatic declines in funding resulting from use of the 7% rate, wrote on January 9, 2013 as follows:

The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.

We outsiders don't have the data available to make a precise calculation, but based on average funding declines of close to 10% resulting from a 1% drop in assumed discount/return, it would be a good bet that taking the assumed return rate down to 5% would cause further declines in the funding ratio in the range of 15-20%, dropping funding ratios into the mid-30s to low 40s.  Or to put it in dollar terms, the five funds have total assets of around $105 billion.  Valued at 7%, the actuary put their liabilities at around $171 billion.  Valued at 5%, those liabilities are likely to be more like $250 - 300 billion.  In short, there are huge, huge increases coming in the required pension contributions.  While the data to figure this out are publicly available, they can be quite hard to fine.  Few people know about it.

PS.  I have submitted an op ed to the New York Times on this subject.  They say they are going to run it, but they have been sitting on it for months.

The Mayoral Candidates Are In For A Rude Surprise

Yesterday Christine Quinn -- Speaker of the City Council and a leading contender to be the next mayor -- delivered a "State of the City" speech.  I don't find a transcript anywhere, but the Gothamist web site has one of the more detailed accounts, as well as a link to a video if you want to watch the whole thing, and also another link to a report issued at the same time by Ms. Quinn titled "The Middle Class Squeeze."

A fair summary of Ms. Quinn's speech is that the City must "help" the middle class by passing out one after another of various grants, subsidies, tax breaks, handouts, free stuff and other goodies and graft from our benevolent masters.  Front and center was her proposal to have the City finance the building of 40,000 new "middle income" apartments per year for the next decade.  Next in significance was her proposal for tax breaks for landlords who make their apartments "affordable" for middle income families.  For both these purposes, middle income is defined as going well above $100,000 per year.

Completely lacking from the speech was any recognition that these kinds of proposals have a cost, and that the payment of the cost must inevitably come primarily from the very "middle income" people who are supposed to benefit.  It is not possible for anything close to a majority of them to come out ahead -- the programs are just transfers from most of them to a small minority of the politically connected.  Of course, a prime idea behind these sorts of programs is to keep the cost as opaque as possible so that no one can figure out that they are getting screwed.  But to take just the top example, the 40,000 units of middle income housing per year is completely unachievable; a realistic number might be around 10,000.  After ten years of that, you'd have 100,000 units that might house about 3 - 5% of the population.  If you assume that the "middle class" is half the population, that leaves 45% that get nothing from this program and must pay.

Of course, the other leading candidates for the Democratic party nomination immediately came out criticizing Quinn for not proposing enough handouts and subsidies.  Hey, this is New York.

But don't worry, because there is a very nasty surprise coming down the road for whoever is the next mayor, in the form of vastly increased pension contributions.  The state legislature has passed one pension sweetener after another over the past 20 years for the municipal unions, the cost of which has been largely hidden by adoption of deceptive 8% returns assumptions by the pension plans.  Failure to meet those return assumptions has led the City's annual contributions to the pension plans to go from about $1 billion per year in 2002 to $8.4 billion in 2012.  That number may hold for a while given good stock market performance in the past 12 months, but the chance of achieving 8% annual returns indefinitely is about nil.  So the $8.4 billion per year could easily shoot upwards by multiple billions during the next mayor's term.  That will wipe any new spending initiatives right off the agenda.

I don't think that any of the Democratic candidates for mayor understands the pension plans well enough to know what is coming.  (One of the Republican candidates, Joe Lhota, probably does.  He may even have a chance to win!)

Meanwhile, there is another obvious way to benefit the middle class far more than the subsidy/handout/tax break/free stuff model of Quinn and her compatriots.  And that is, lower costs for everyone, by some combination of reducing taxes and reducing the restrictions on building that limit the supply of housing in New York.  Even as that would benefit the middle class far more, it would also have far less opportunity for graft for the politicians.  This is not a model that Democratic politicians in New York find acceptable.

Remembering Mayor Ed Koch

Much in the news these past couple of days on the passing of our larger-than-life former mayor, Ed Koch.   Koch was a man of great energy and enthusiasm, always in good humor and good spirits.  He took the helm of the City at about its lowest point (1978), and left it far better off twelve years later.  But what about an objective assessment of how much credit we can give Koch for the improvement in the City since the 70s?

Koch had one huge achievement as mayor, which is that he got the City budget under control by dramatic cuts in spending.  The number of City employees shrank by close to 100,000 in his first term.  By 1980, that number was down to about 200,000 total.  It then gradually crept back up until it was back to about 250,000 when he left office.  Here is a graph post-1980.  (The number today is around 280,000.)  Koch did not meaningfully lower City taxes, but he also did not meaningfully increase them, which is a great achievement compared to his predecessors.

There were two major issues that needed tackling during Koch's tenure and that he did not tackle:  public safety and welfare.  Crime did not meaningfully decline.  Here is a chart of number of murders in New York City over the years.  The number was 1504 in 1978 and 1905 in 1989.  (In 2012 it was 414.)  Welfare recipients numbered well over 1,000,000 throughout his tenure.  (NYC had 343,000 welfare recipients by 2011 according to this NYT article.)

In the 1980s when Koch was mayor, the real estate market in New York took off, and the population of the City, which had shrunk by almost a million during the 70s, started a rapid recovery.  Koch certainly deserves some credit for the rebound, for showing that the budget could be tamed.  But I would give far more credit to something else that was not in Koch's control:  the lowering of the New York State top income tax rate from almost 15% to about 8%.  Main credit for that goes to Koch's contemporary, Governor Hugh Carey, who served from 1975 to 1982.  Also, don't forget the huge assist added by New Jersey, which had no income tax at all before 1976, and was eating New York's lunch.  Their top rate started at 2% in 1976, but once they had it it just went up and up.  Today, their top rate is almost 9%.  Today, nobody moves to New Jersey to save on taxes.  

One other major (and unappreciated) factor in the revival of New York City has been the (painfully slow) phase out of rent regulation.  Again, that came well after Koch, and at the initiative of the State government (mainly Governor George Pataki), not the City.