News articles in New York frequently mention the dominance of so-called "special interests" in the affairs of the legislature and City Council, but it's unusual to see a lot of specifics. So today I'll pull together a few of the rip-offs of the public currently going on.
The general nature of the game is to lobby the legislature or other public agency for some kind of special give-away or perk that either hobbles the competition or directs money to your own coffers. Sometimes the courts even get into the act. Far and away the biggest practitioners of this art are labor unions, mostly of public employees but sometimes in the private sector. Crony capitalism, aka giveaways to politically favored businesses, is actually less of a problem in New York than in some other places (New Jersey in particular is a champion of corporate subsidies); but there are plenty of dramatic examples of this as well.
Last Wednesday March 26 we had the argument before the Court of Appeals (New York's highest court, located in Albany) of a rather important case involving public access to information about public employee pensions. Here is a report from the Albany Times Union. The case is between the Manhattan Institute think tank, seeking access under public records disclosure laws, and the Teachers Retirement System, seeking to prevent disclosure of the amount of anyone's individual pension. The argument of TRS is basically that privacy should be protected; also that disclosure of names and amounts could lead to identity theft. Are you sympathetic? Or, does it seem like kind of an unimportant issue to you? Actually, this issue is critical to the taxpayers. Until a few years ago, access to this information was open, and that led to the discovery by the curious (e.g., New York Post) of such things as the fact that 97% of Long Island Rail Road workers retire on "disability" pensions, enhancing their pensions by an average of around $1 million (lifetime) per head; or that three quarters of New York City firemen have retired on similar "disability" pensions to similar effect; or that de Blasio's new school chancellor Carmen Farina gets a pension of $199,579 in addition to her salary of $212,614 (Isn't a pension only after you retire?). The unions long ago figured out that the best place to get paid is by pension, because that is the easiest way to hide abusive practices and massive wealth transfers from public view. Yet in the case before the Court of Appeals, the lower courts have upheld changes by the pension plans to prevent disclosure of the information. The good news is that the judges of the Court of Appeals appeared skeptical at the oral argument. Decision expected in a few months.
From a wholly-owned politician's perspective, the best public sector union entrenchment is the one that can be cynically sold as "for the children." And thus we have Mayor de Blasio's signature pre-K initiative. The sales pitch to the public is that this will somehow fix income inequality, although how a pre-K program will have any measurable effect on income inequality in less than about 20 - 30 years, if then, is a mystery. But how a pre-K program will benefit the teachers' union is not a mystery. The pre-K program means adding another 5% or so to the ranks of teachers. But will they be unionized? The teachers' union in recent years has come under serious threat from (largely non-union) charter schools, many of which way outperform the public schools, and which have gone from nothing to about 6% of students over the last 10 years or so, and could go to as much as 10% by 2017 according to the New York Times here. And thus you will not be surprised to learn that current state law prohibits charters from participating in publicly funded pre-K, and moreover that Mayor de Blasio's proposed program would continue that restriction. So you can decide if de Blasio's program is really "for the children" or for his paymasters at the teachers' union. Meanwhile, in a fascinating development, charter advocates have been putting on an advertising blitz that seems to be having some effect. The recently announced state budget deal contains several protections for charters from de Blasio's threatened depredations, but I can't find anything in various descriptions of the deal as to whether the state-funded pre-K program will continue previous restrictions on charter participation. I guess we'll know in a few days. Meanwhile, even in a worst case de Blasio gets several thousand more teachers union members.
Moving to a situation involving private sector unions, consider the case of union versus non-union hotels in New York. When I first came to New York in the 70s, the hotel industry was more or less 100% unionized. Almost all hotels were either in mid-town or at the airports, much of the rest of the City then being considered too dangerous for tourists. Since then the City isn't so dangerous any more, and the unionized hotels are way overpriced, giving a big opening to non-union competitors. How much of a difference does it make to a hotel operator whether it is union or non-union? There undoubtedly is a wage differential, but that actually turns out not to be the most important factor. According to a Complaint in a case by a hotel owner against Marriott filed early last year (follow this link) the bigger problem of getting unionized was being subject to a Work Rules Agreement with the following effects:
As a result of the Work Rules Agreement, the number of permanent employees at the Hotel increased by more than forty seven percent (47%); operating costs skyrocketed by more than $2 million annually; and the Hotel's net operating income dropped by approximately fifty percent (50%) to $4 million per year. . . . Ultimately, due to the Hotel's abysmal financial performance over several years as a result of the forced unionization of its workers by Defendants, Madison was driven into bankruptcy, where the Hotel was sold for a fraction of its true value.
You can understand why a hotel owner might not think that inflating the staff by 47% is a good idea. From the public's point of view, non-union hotels have numerous benefits: lower prices mean more tourists, more tourist spending on other things, more economic activity, and more and higher productivity jobs. Anyway, non-union operators have swooped in. The most active is a guy named Sam Chang of McSam Hotels. According to a New York Times article in 2009, he had 37 hotels open and 22 more in development in the City. Recent articles from The Real Deal indicate that Chang continues today to be as active as ever. So this is not a small phenomenon. If you're the union, how to stop him (and others like him)? The answer is, by getting friendly politicians to hobble the competition. The Wall Street Journal reports in this morning's edition that a City Councilman from Brooklyn, Jumaane Williams, has introduced a bill that would put any new hotel in the City through a process of review and special permitting by local community boards. In other words, we can subject your proposed hotel to a two year delay if we feel like it, and then maybe we'll just kill it. And all of this in a formally "public" process that in reality is controlled by a few insiders. The WSJ is clear that the motivating force for this initiative is the hotel unions.
Mayor de Blasio has been making noises that he intends to be pro-development in his new administration. Let's now see if he really means it when that goal comes into conflict with the entrenchment efforts of a key union ally.
And for crony capitalist of the day, we present Mr. Larry Silverstein. You've probably heard the name -- He's the guy who effectively bought the World Trade Center (actually a 99 year lease) a couple of months before it was destroyed, and since then has gotten himself into the position of principal developer of the replacement. Anyway, you have to hand it to this guy -- he is truly a master of the art of crony capitalism. Although he's known to be a billionaire already, that doesn't stop him from trying every trick in the book to make his next billion at the public trough. There are three buildings on the WTC site that are Silverstein's to develop, numbers 2, 3 and 4. He has recently completed number 4, and next up is number 3. For many months the story has been that he needed a big lease from a big company in order to get the financing to proceed. Then in December 2013 he signed the big lease -- 516,000 square feet with media giant GroupM. According to the Times here, Silverstein and GroupM squeezed City and New York State officials for a $15 million cash subsidy and $75 million in tax breaks in connection with that lease. Still, upon signing of the lease the Post's Steve Cuozzo promptly reported that "3 WTC is finally on the rise." But three months later nothing seems to be happening. What's up? According to the Times article, Silverstein is back at the well for more government goodies. This time he is asking the Port Authority for a loan guarantee of no less than $1.2 billion to facilitate financing for number 3. Yes, over a billion dollars. The March 31 article in the Times by Michael Powell is appropriately critical, in my view. Powell interviews Port Authority board member Kenneth Lipper, who is doing his best to stop the train before Silverstein gets the next billion. Lipper describes the proposed loan guarantee deal as a one way benefit to the developer, where if the project succeeds "he gets the gain" and if it fails "we take the hit." Try to oppose the deal and "you hear a lot of talk of patriotism." Yikes. Powell concludes:
Along the way, [Silverstein] has internalized a developer’s rule of thumb in New York: Only a rube puts much of his own money at risk.
Well, as long as they even seem to be considering the guarantee, that building will remain unbuilt. If they could just say no convincingly, my bet is that the building would be under way within a month or two. But probably they will say yes. If so, Silverstein will get his loan guarantee; the loan will be a point or two cheaper than otherwise; and the interest differential will end up as hundreds of millions of dollars in Silverstein's (and his investors' and heirs') pockets over the next 20 years or so. And our airports and bus terminal will remain wrecks.