New York City has had some bankruptcy brinkmanship – in 1975 it was bailed out in the last second by the teacher’s pension, and in 1907 by Hetty Green (a wealthy millionaire who bailed the city out with a check). Today, the economy is performing spectacularly, and yet the State of New York and New York City are both running very large deficits. If both government entities are struggling in great economic times, how poorly will they perform if there is a recession? The combination of overspending and high taxes (of all types) is already prompting residents and businesses to flee the Empire State and NYC in droves for lower-tax locales. The resulting statistic highlights the problem: NYC’s long-term debt is $257 billion, or $82,600 per household.
Adding gasoline to the debt bonfire is NYC’s current Mayor Bill de Blasio. Whether de Blasio is calling himself a socialist, a communist, or a progressive – his policies are financial train wrecks. (We will not comment on the recent scandal of his wife being unable to account for $850 million in taxpayer money he gave her to run “Mental Health Anxiety programs.”)
- The current NYC budget deficit for 2019 is -$3.9 billion
- Since his election in 2014, he has run up city spending by 32%, now at $89.2 billion
- He added an additional $3 billion in new spending in that $89.2B
- He announced a new $100 million universal health care system
- He has hired an additional 33,000 public employees
The State of New York cannot help NYC because they are already struggling with their own budget deficit of -$2.3 billion. The state’s response to the deficit isn’t reducing spending or lowering taxes to sustainable levels, but to increase the numbers of income tax auditors to try to claw back some money from the wealthy residents that have already left the state. What is unpredictable is the number of residents leaving NYC to save money on taxes this year, not to mention the future. A few people emigrating from a state is normally not a big deal. But NYC has the highest income-tax rate in the country, and 50% of all taxes collected is from a tiny number of the wealthiest households. So if just 2 hedge fund zillionaires leave the state, it can have a catastrophic impact to the state’s budget. New Jersey, Maryland, and Connecticut discovered this exact phenomenon when they introduced a “millionaire’s tax,” and so many wealthy residents left the state that the government collected far less money than before the millionaire tax was introduced.
While the credit rating for New York City is Ok for now, the credit rating agencies are notoriously slow in responding to the deteriorating finances of government entities. I would not hold any bonds issued from states that have enormous unfunded pension obligations for state employees that they can never pay – such as New York, Illinois, California, Ohio, Connecticut, Massachusetts, Rhode Island, or New Jersey. I can anecdotally confirm the upper middle class fleeing the high-tax northeastern states: a relative who moved to Florida to reduce his taxes says he meets lots of new state residents on golf courses that have migrated from that list of northeastern states. The state of Florida has no income tax and low-property taxes. He tells me, just like him, their move was prompted by tax increases and they know exactly much they are saving in taxes per year from their move.