Local Government Expenditures: What Changed from 1972 to 1987, 2000 and 2007?
As noted in the spreadsheet attached to this post, direct expenditures by the City of New York fell from $210.97 per $1,000 of city residents’ personal income in FY 1972 to $164.77 per $1,000 of income in FY 1987, a decrease explained by having the Medicaid program shifted to the state’s books and the end of massive public school expenditures on the Baby Boom generation. A similar decrease was recorded for local governments in the rest of New York State. Since then, total direct expenditures by the City of New York have been essentially unchanged as a share of residents’ personal income in peak economic years, based on FY2000 and FY 2007 data, while local government expenditures increased in the rest of New York State, the United States and New Jersey.
The total salaries and wages paid to employees of the City of New York, however, fell as a share of the income of all New York City residents from FY1987 to FY 2000 and from FY 2000 to FY 2007. So did the city’s direct expenditures on Libraries, Corrections, the Fire Department, the Department of Sanitation, and Judicial and Legal. Police Department expenditures increased as a share of city residents’ income from FY 1987 to FY 2000 and fell from that year to FY 2007, while Parks, Recreation and Culture and Housing and Community Development expenditures fell and then rose, but all were lower as a share of city residents’ income in FY 2007 than they had been 20 years earlier in FY 1987. Mass transit operating expenditures plunged as a share of city residents’ personal income over the period. Where is all the money going? Download the spreadsheet attached to the post linked above, print out the worksheet marked “output,” and read on.
The first thing to be aware of is that wages are not the only compensation public employees receive, but are often the only compensation captured in expenditures by function. Local governments generally do not report the cost of purchasing health insurance on behalf of public employees and retirees separately for each agency, so in Census Bureau data they end up in the General Expenditures Not Elsewhere Classified category, which also includes Judgments and Claims from lawsuits. New York City’s expenditures in this category increased from $12.14 per $1,000 of city residents’ personal income in FY 1987 to $14.45 in FY 2000 and $18.42 in FY 2007. The same upward trend is observed for local governments in the rest of New York State, the U.S. as a whole and New Jersey, though at a slower pace to a lower level.
One way of looking at this is that public employees, here and elsewhere, have chosen to take more of their pay in the form of health insurance rather than in cash, because Americans in general are spending more on health care and less on other things. Had the public employees been required to pay for their own health insurance, as is increasingly the case in the private sector, but been paid more in cash to make up for it, some of the decline in wages relative to city residents’ income would not have occurred. As it is, however, the rich health insurance benefits public employees receive in New York may or may not be appreciated as much as the wage income foregone. In addition, health care providers and health insurers may be charging New York City more for health insurance in order to keep costs lower for the private sector, where negotiations are tougher.
Regardless, rising health insurance expenditures for public employees are not the sole explanation for falling New York City local government employee wages relative to the total income of city residents. New York City’s local government employment fell significantly from 1990 to the present according to data from the New York State Department of Labor, even though the city’s population rose as it continued to recover from the devastation of the 1970s. Local government employment in the rest of New York State increased by 130,000 during the period, despite stagnant population in Upstate New York. That is one reason total local government worker wage and salary payments were higher in the rest of the state, as a share of the income of those who reside there, in FY 2007 than in FY 1987, though lower than in FY 2000.
In New York City, spending on public services produced by current public employees in New York City fell in part because spending on past public employees increased. As data for the City of New York’s separate public employee pension system shows, pension payments to retired beneficiaries increased from 18.4% of the wages of active workers in FY 1987 to 30.4% in FY 2000 and 33.7% in FY 2007. In theory the level of those payments should not affect current spending, because enough money should have been set aside for pensions while today’s retirees were working. But even as the number and cost of retirees was rising, due to political deals in the state legislature and City Hall to allow public employees to retire earlier with inflation adjusted or otherwise enhanced pensions, the amount contributed to the pension plans was cut – from 18.2% of wages in FY 1987 to 4.8% in FY 2000. No wonder those pension deals were described as “free.”
Taxapyer pension contributions also fell as a share of wages in the rest of New York State and New Jersey, and to a lesser extent in the U.S. as a whole during the 1987 to 2000 period. Meanwhile, in the U.S and New Jersey retiree benefit payments were soaring as a share of active worker wages, though not to as high a level as in New York City. (Please ignore data in the table on pension benefit payments in the rest of New York State, for reasons described in this post.)
Virtually no money, meanwhile, had been set aside for the health insurance benefits of retirees. And while a pay-as-you-go system may be equitable between generations if costs are not increasing, that is not the case with retiree health insurance. Taxpaying New Yorkers of FY 2007 were providing health insurance for many more retirees than the taxpayers of FY 1987 had been required to carry, while those residing in the city in FY 1987 received the benefit of the work of more active public employees (at least outside the city’s underfunded schools). The soaring cost of health care means that the cost per retiree the taxpayers of FY 2007 have been forced to pay for retiree health insurance, with no public services in return, was much greater than in FY 1987 as well.
Even in a primarily “pay as you go” funding system, therefore, a substantial amount of money – perhaps 25 percent of the current cost of retiree health insurance each year – should have been set aside for future needs to keep that cost from exploding. And public employee unions, if they were looking out for their younger members (which they never do), should have demanded that money be set aside for retiree health care while those members were working, to guard against exploding costs that would cause that retiree health care to be cut, perhaps due to the bankruptcy of municipalities.
It should be noted that the rising cost of health care (or extent and quality of health care, to take another point of view), has also increased the amount of Medicaid aid the city sends to New York State for that program. On the other hand, expenditures on New York City’s public hospitals fell from $14.78 per $1,000 of city residents personal income in FY 1987 to $13.31 per $1,000 of personal income in FY 2007, while remaining much higher than the U.S. average. The city’s expenditures on public health, which includes extensive preventive care, increased from $2.66 per $1,000 of personal income in FY 1987 to $3.13 per $1,000 of personal income in FY 2007.
Overall, however, the central trend is that the rising cost of the retired, a debt shifted from those who lived in the city in the past, was thus already squeezing public services and current workers in FY 2007 – before the issue exploded nationally. The cost of retirees, soaring in the wake of the unfunded enhancements agreed by then-Mayor John V. Lindsay, also played a key role in the collapse of public services during New York City’s 1970s fiscal crisis, a collapse that seems likely to recur and in many more places this time. Bear in mind that in 1972, after those “Tier I” deals and as Lindsay was about to leave offices, pension benefit payments equaled just 12.2% of the wages of active city employees, compared with 33.7% today.
Another factor in NYC’s 1970s fiscal crisis was debt, and state and local debts as a share of personal income was approaching similar levels as of FY 2007. New York’s state government debt was essentially unchanged at $119 per $1,000 of state residents’ personal income in from FY 1987 to FY 2007, but New York City’s local government debt increased from $123.94 per $1,000 of city residents’ personal income in FY 1987 to $215 per $1,000 of personal income in FY 2007. (Since, for historical reasons, New York City Transit is counted as a city agency by the Census Bureau, some of that might have been debt that the state and city foisted onto the MTA). A smaller increase is recorded for local governments in the rest of New York State during those years. Including the city’s share of state debts, New York City’s total state and local debt burden increased from $243.75 per $1,000 of personal income in FY 1987, 31.1% above the national average, to $334.15 in FY 2007, 64.6% above the national average. That is almost as high as the $348.32 in FY 1972, just before the city’s fiscal crisis exploded.
While New York City’s debts have soared as a share of city residents’ personal income, the city’s capital expenditures on transportation and utility infrastructure construction has not, based on data for the four years covered (a year-by-year tabulation will follow later). One exception is Water and Sewer infrastructure. The city’s direct expenditures in this category, which is heavily capital intensive, increased from $5.48 per $1,000 of city residents’ personal income in FY 1987 to $8.05 per $1,000 in FY 2007, as the city spent heavily on legally mandated pollution control and water quality infrastructure and the third water tunnel. Non-construction capital expenditures in this category included purchases of land and development rights in the upstate watershed to protect water quality. Additional expenditures in this category will likely be required, as seen here.
Low interest rates may be causing a false sense of security. The interest payments on City of New York (including New York City Transit) debts soared from $7.30 per $1,000 of city residents’ personal income in FY 1987 to $15.35 in FY 2000, but fell back to $9.83 per $1,000 of personal income in FY 2007, even though the debts kept rising. The reason is the rock bottom interest rates of recent years. Those rates could soar at any time, as a result of rising inflation, fear of municipal defaults, or an end to financial inflows to the U.S. from saving nations abroad. Money borrowed in the past comes due for repayment all the time, and unless the city, state and MTA have the cash to pay those loans back, money might have to be re-borrowed at much higher rates, causing enormous amounts of money to be diverted from public service to debt service. In some cases, both for the City of New York and MTA, money has been borrowed at variable rates, meaning interest costs could soar even if bonds do not come due for replacement.
An interest rate spike could thus send New York City’s public services into a downward spiral due to its high debts. But a continuation of low interest rates, and thus low rates of return generally, could crush city services by inflating the unfunded cost of its retiree pensions. Damned if you do or you don’t.
A few more notes on expenditures. New York City’s direct local government spending on higher education fell from $8.33 per $1,000 of personal income in FY 1972 to $2.06 per $1,000 of personal income in FY 1987. That is probably the result of the state takeover of the City University of New York in the 1970s fiscal crisis, leaving local government higher education spending for community colleges only, as in the rest of the country. Expenditures in this category plunged to $1.25 per $1,000 of personal income in FY 2000 before rising to $2.00 per $1,000 of personal income in FY 2007. I wonder how much money could be saved, and how much better education would be, if the equivalent of the senior year of high school, when some students take college level courses and other should be taking vocational training but often do little, were spent in community college instead?
New York City’s public school spending was about at the same level per $1,000 of city residents’ personal income in FY 1972, FY 2000 and FY2007. I’ll do a year-by-year chart comparing the city with other places later.
I have always been critical of those groups who carped on about welfare spending, given data that showed it amounted to very little money. But perhaps those groups were merely not updated in their thinking, as I see that cash welfare payments equaled $25.56 per $1,000 of New York City residents’ personal income in FY 2007, a significant 2.6% of income. On the other hand, cash welfare expenditures equaled just $2.75 for every $1,000 of city residents’ personal income in FY 2007, and that was well above the even lower U.S. average of $0.77. And as I pointed out in this post, inflation-adjusted cash welfare expenditures across the entire country, during all the years from 1958 to 2005 put together under federal programs (AFDC, TANF), cost about the same as the financial bailouts over a few months in 2008 alone
New York City’s expenditures on social services, on both city agencies and vendor payments, has varied modestly during the 1972 to 2007 period. It was at $11.48 per $1,000 of personal income in FY 1972 and $12.42 per $1,000 of personal income in FY 2007. So any shift from the falling cost of cash welfare to additional non-cash (and non-Medicaid) social services was limited. The share of income spent on the poor, accordingly, has fallen significantly in New York City while remaining well above virtually all other places.
As the cost of retired public employees, and interest on growing debts, continue to soar, the question is what will be left of New York City public services? Some of the losses could be offset by public employees becoming more efficient and productive, but the usual solution preferred by politicians and public employee unions – lower pay and benefits for future public employees to pay for the enhanced deals of those cashing in and moving out – works against this. New York City’s state and local tax burden, meanwhile, was already 47.0% higher than the U.S. average as a share of its residents’ personal income in FY 2007 and higher than in either FY 2000 or in FY 1972 – just before tens of thousands of residents and thousands of businesses left.
One difference this time: the pension-related portion of this disaster is now spread across the country, and also affecting the New York suburbs and New Jersey, so there will be fewer places to flee to. But as a result that older generations, and particularly politically organized members of older generations such as the public employee unions, it is hard to either be optimistic about the future of public services and benefits or to recommend a career as a future public employee.
I’m up to 44 pages in this series of posts on comparative state and local government finance, with more to come. There is more information here that I have time to analyze and write about in my spare time, more than my wrists can tolerate given than I type and work with spreadsheets on the job as well. For example, the spreadsheet contains similar data for local governments in California, Illinois, Massachusetts, Connecticut, North Carolina and Texas for 1972, 1987, 2000 and 2007, albeit not set up to print. I suggest that readers might want to look over that data themselves.
Meanwhile, while the past spreadsheets and analysis have provided an overview of all the categories of revenues and expenditures for one or a few years and a few locations, so it may be seen how they may compare with each other, the rest of the spreadsheets and posts will focus on one or a few data items across many more years and areas.
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