Governor Vows To Cut Budget as Tax Revenue Falls
By Keith B. Richburg and Robin Shulman
Washington Post Staff Writers
Monday, August 4, 2008
NEW YORK -- Wall Street's woes are mounting. Investment banks are swamped by bad mortgage debt. Profits have fallen. Tens of thousands of jobs are being cut. And those lucrative year-end bonus checks are likely to be the stingiest in more than a decade.
And when Wall Street sneezes, New York catches pneumonia.
The city and state economies are inextricably linked to the health of the Street. Those reduced bonuses mean fewer dollars to be taxed -- and fewer dollars to be spent in high-end restaurants, boutiques and bars.
"You can feel it affecting the regular lunch crowd," said Corrado Goglia, the general manager at Delmonico's, a steakhouse in the financial district. "There's been about a 20 percent decrease in sales at lunch. People are doing away with larger lunches, the $40 to $50 steaks. They're going down to lighter burgers."
Last Tuesday, Gov. David Paterson (D) made a rare televised address to issue a somber warning that tumbling revenue from the Street means tough times ahead for the state. "The damage on Wall Street is affecting all of our communities," Paterson said, "and the effects on our New York state financing are devastating."
Paterson used one particular statistic to illustrate the depths of the crisis. In June of last year, the state's 16 largest banks paid about $173 million in taxes into the state treasury. This June, those same banks paid in $5 million -- a 97 percent decrease.
The impact on the state's budget is nothing short of calamitous. When Paterson took office a few months ago, after predecessor Eliot L. Spitzer became embroiled in a sex-for-pay scandal, the state was facing a $5 billion revenue shortfall. In a few months, that projected shortfall has grown to $6.4 billion.
New York City is bracing for a hit, too, but is in somewhat better shape. The financial services sector is estimated to account for about 10 percent of city tax revenue and about a fifth of the state's tax revenue, according to economists. "The state does not have the property tax to fall back on like the city does," said Nicole Gelinas of the Manhattan Institute, a conservative-leaning think tank.
Gelinas, for one, blames the city and the state for using Wall Street's boom years to essentially get drunk on spending, allowing government payrolls and expenditures to grow while avoiding tough decisions on reining in costs. Now, she said, "this cash cow could be in for a period of . . . decline."
"This is not the old 'crying wolf' kind of stuff," she said.
Paterson, in his address, said he is calling the state legislature back for an emergency late-August session to deal with the unfolding financial crisis, and he said he expects lawmakers to make tough budgetary decisions. "We will cut spending," he promised. "It is time for New York and other governments to cut up our credit cards. The era of buy now and pay later and later is over."
In tackling the issue now, Paterson is following the lead of a neighboring governor. Jon S. Corzine similarly warned New Jersey residents to expect hard times as the state's finances are a mess and are expected to get worse amid a declining national economy.
But the lessons from New Jersey should also be cautionary. After Corzine decided to seize the budget issue and impose tough fiscal discipline, his job approval rating in opinion polls plummeted to 38 percent, seriously clouding his reelection prospects next year.
"There is no political gain from being in any elected position of authority during a recession," said Nicholas Johnson of the Center on Budget and Policy Priorities, a liberal-leaning Washington-based think tank that monitors state budget issues.
In Paterson's case, the problem is compounded; he is, in a sense, the Accidental Governor, a man ascended to the position in unusual circumstances and had no articulated agenda. Some analysts said he appears to be making fiscal solvency his trademark issue, an issue he might use as his platform should he decide to run to keep the job in 2010.
"If you're going to try to develop a signature issue, now's the time to do it," said political scientist Douglas Muzzio of the City University of New York's Baruch College. "I don't think there's another issue that's as important and as dramatic as this."
Muzzio added: "Now the question is, can he deliver? Does he have the will and does he have the ability to move the recalcitrant and dysfunctional state government to fiscal responsibility? I don't know."
If he stumbles, there are believed to be several contenders eyeing his job, including New York Mayor Michael R. Bloomberg, an independent, and former mayor Rudolph W. Giuliani, a Republican.
Paterson has not laid out specific spending cuts, but he has indicated that everything -- including education spending -- must be on the table. That already has apparently set up a confrontation with Democratic leaders in the legislature, who are pushing for a plan to increase taxes on millionaires.
Grappling with the budget is difficult, because no one can be sure how much revenue will be available. But initial estimates are that Wall Street bonuses could be down more than $10 billion this year, and some struggling firms have announced plans to lay off tens of thousands of financial service workers.
Around the Street, the pain is already being felt.
At Ulysses', a popular restaurant and bar in the financial district, Dan Newman, the manager, said that people who might have racked up $100 tabs before are now spending more like $80.
And at the Tumi luggage store on Wall Street, "we've been feeling a pinch," said Toni Westley, a manager.
Domenick R. Fumai, 47, a financial analyst, is lucky to have a job but said, "There's a psychological impact of what you see and what you read in the papers." Fumai said he has been curtailing spending.
"I was thinking about replacing my car, a Mercedes from 2003," he said. "I'm pretty sure it's not going to be this year -- with the bonus I'll be getting."
He fingered $170 ties at the Hermes store and added, "I'm not spending whimsically."
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