Historians, urbanologists, and editorial writers are gearing up to declare what they believe constitutes Rudolph Giuliani’s greatest legacy. This is a tricky business. When the former Chinese Premier Chou En Lai was asked about the French Revolution, he said it was  “too soon to tell.”

With the former Mayor, it’s even harder to tell what he accomplished. Some of his most famous accomplishments, like crime reduction, may not be entirely due to his efforts; others, like his handling of 9/11, may have little permanent effect.  With still others — the reduction of the welfare rolls from over a million to under 400,000 — the social accounting is still murky; we don’t know whether opportunity or immiseration will prevail as the City’s recession deepens. 

The Debt Spectacular. In light of these difficulties, I would like to suggest a legacy item that no one has so far suggested, but which passes many of the tests failed by the others: It is a truly spectacular performance that no previous Mayor has ever matched, and: it will be with us for at least a generation: New York City’s debt.

One indication of its significance: By 2005, only education will represent a bigger item in the budget than debt service. The first article in the daily press that even begins to suggest the full dimensions of the City’s debt problem appeared as a New York Times op-ed piece by Steven Rattner from the prestigious investment banking firm Lazard Freres. He computed the debt to be $40 billion, but that is only part of it; the Citizen’s Budget Commission estimates it at about $58 billion, without even counting the City’s unfunded pension liabilities. Talk about a long-lasting legacy. Even without refinancing, it should survive all but the most junior of us. 

Unlike crime rates, his admirers can’t seriously claim that this is the result of forces outside his control or the product of someone else’s efforts. Of course, some of the debt was old. When Giuliani came in the debt was $28 billion. He more than doubled it. And it took him only two terms. In gross terms, this was the biggest borrowing binge by any Mayor in New York history.  To be fair, Dinkins was on course to borrow almost as much, but he lasted only one term. 

This raises the question of whether Giuliani has brought the City back to its 1970’s default mode. Rattner says we’re not that bad off. He points out that, in constant dollars, we owed $7,000 per capita in the bad old Beame days.  However, if you use Citizen’s Budget Commission numbers on gross debt, you get about $8,000 per capita.  No one disputes that the City owes more money per capita than any other City in America. The issue is whether that is too much. 

How much is too much? The answer to that question depends on financial back-up. What crippled us last time was that the City began to go bust just at the time that State agencies were defaulting as well. How is the state doing today?  It’s in an even worse financial position than the City. Depending on which rating agency you use, we’re either next to last or tied for last with Louisiana.  New York owes $40 billion.worth of General Obligation debt, but there’s another $65 billion in debt floated by New York State agencies.

Together, the two New York entities owe more than Argentina. How did the debt get so far out of hand?  New York City has a constitutional debt ceiling, 10% of the moving five-year average of the market value of the City’s real estate’s, or about $40 billion. Why isn’t the debt even close? How did the Mayor tweak it up to more than 40% over the limit?

The answer is that, while the City cannot borrow more than 10% of the value of its real estate, it has numerous alter egos who can borrow pretty much whenever and whatever they want. They are the “authorities”.  The biggest of these is WFA, the Water Finance Authority.  Giuliani didn’t invent it, but he pumped it up quite a lot. Now it owes more than $11 billion, more debt than is owed by all but three states.

And then there is TFA, the Transitional Finance Authority, which owes nearly $9 billion. TFA was invented in 1997 by the former Mayor, arguing that the City had many capital improvements to make,  and it was being irrationally constrained by the constitutional debt limit. The debt limit was a moving target, gyrating around with real estate values. Meanwhile, bridges were in danger of falling. 

TFA bonds are paid for out of personal income tax revenue.  This could turn out to be a serious problem, given the importance of Wall Street to these revenues and the volatility of that source.

Then, in 1999, the Mayor created TSASC, the Tobacco Settlement Asset Securitization Corporation.  This is supposed to issue about $3 billion worth of bonds, to be paid off with proceeds of the tobacco court settlement. The thinking is that these securities should be safe: as long as addicts keep on puffing and paying and no one else wins any major suits against big tobacco. 

Under Giuliani, many other agencies and authorities got into the borrowing act: NYC Housing Authority, Health and Hospitals Corporation, Housing Development Corporation and the Brooklyn Navy Yard Development Corp.  They owe another $5 billion and are not even counted in the City’s gross debt. 

Finally, there is something called the Samurai Funding Corporation, which owes only about $160 million (it issues Yen-denominated bonds). If Samurai cannot pay, it will presumably just take out a sword and commit seppuku.
Could this have been avoided? Was there no way to avoid all this debt?  Was there no way to avoid having it pile up? One way to have paid for the improvements would have been to pay up front. 

Could this have been avoided? Was there no way to avoid all this debt?  Was there no way to avoid having it pile up? One way to have paid for the improvements would have been to pay up front. 

How would this have been possible?  It might not have even been necessary to raise taxes, but it certainly wouldn’t have been possible to cut them. The cuts have been very substantial, 2-3 billion each year.  Commercial real estate has gotten the biggest cut. Here’s an example. When the Mayor came in, Class IV commercial real estate was paying 52% of the real estate bill. Now it is below 43%. Essentially, the Mayor cut the big boys’ tax bill by 20%. 

Early in his term, the Mayor also cut the Hotel Tax.  “It’s a bad tax - it’s cutting down on tourism,” said the Mayor and the Hotel Trade Council.  The Japanese were staying away from New York because they refused come up with that extra $10 on their Plaza Athenee tab. What was wrong with the Hotel tax?  Who pays it?  In good times, rich out-of-town tourists whose companies are generally picking up the tab. In bad times, the tax is shifted onto hotel owners — Leona and The Donald. Is this bad?   This is a progressive tax that falls on non-New Yorkers, easy to collect and hard to evade. Admittedly, the revenue loss wasn’t huge. But it was maybe the best tax we had.  The Mayor gave it up and went instead to the credit market. 

Overall, who benefited?  Investment bankers from marketing the debt; construction companies who got the capital budget contracts; real estate and hotel owners whose taxes were cut. 

Who protested?  As far as I can determine, the enormous run-up in debt, with its huge transfer of wealth from the bottom to the top, and the risk to City jobs and services, were never seriously debated.  The usual watchdogs barked, but it was a very modulated bark.

Given the tacit support he received from the City’s Establishment, it is likely that the Mayor will escape censure for the City’s financial follies. He won’t be turned into a political piñata as John Lindsay was.  More probably, even though the debt was pumped up to its present proportions before 9/11, our problems will be blamed on the terrorists.  Who else is left to censure? It strains credibility to repeat the 70s fiscal crisis litany, blaming welfare moms and greedy municipal workers. Welfare costs have been cut in half. And City workers swallowed the famous double-zero contract. But those who enforce fiscal discipline may have no trouble finding scapegoats. As Bertolt Brecht said, “Those who take the meat from the table, always demand sacrifice.” 

Robert Fitch is author of The Assassination of New York, and an adjunct professor of political science at Long Island University.
 

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