Repost: The New York City Budget and the Great Recession -- Infrastructure

This post previously appeared on "Saying the Unsaid In New York." The data referenced is in a spreadsheet attached to this post.

New York City relies on its infrastructure for its prosperity and quality of life, and the deterioration of that infrastructure in the 1970s is one of the factors in the city’s near-death experience. The city borrowed so much money, in the Lindsay and Beame Administrations and before, for infrastructure and for other things, that by the time the fiscal crisis came around debt service was soaking up all the money, leaving no room for maintenance. It was a terrible legacy for that generation of city leaders to leave to those who followed, and the city has yet to fully recover from it. But this generation of city leaders, including the current Mayor and those running to replace him, may have repeated it. The state legislature, with regard to the MTA, almost certainly has. And while painful sacrifices would be needed to avoid a repeat of New York’s 1970s fate, that is not what any of the candidates running in New York’s rare actual elections (the one for Mayor) is suggesting. They are suggesting lots of goodies will follow if they are elected, almost none of which involve city infrastructure.

The priority of infrastructure agencies in the city’s “Budget Summary” document can be seen in their placement in the tables. They are lumped in with “all other.” But most of the city’s infrastructure spending is on construction contractors, not city employees, and is funded by the capital budget, not the operating budget. That is to say, it is funded by ever-rising debts. And those debts are rising, with the cost of servicing them rising from about $5 billion in FY 2012 according to the Budget Summary document, to a projected $7.4 billion in FY 2017. Despite record low interest rates.

On the other hand, none of the OMB documents – I looked at the Budget Summary, the Ten Year Capital Plan, and others -- make it clear what has happened, and is expected to happen, to capital spending over time. The best exhibit for figuring this out is a chart, not a table, and is on p. 31 of the Budget Summary. That chart shows that capital expenditures have been extremely high in the waning years of the Bloomberg Administration. Other charts in prior documents show the escalation began in FY 2005, very early on. The peak level of spending is expected to be FY 2013, with about $14 billion in total including $2 billion in federally-financed spending related to the recovery from Hurricane Sandy. Once all the projects commissioned under Mayor Bloomberg are completed, however, capital spending is expected to fall to about $4 billion to $5 billion per year (not including the MTA). Otherwise, debt service will explode even more and bankrupt the city.

In one sense this is fine. Mayor Bloomberg has added a lot of new capital facilities, leaving other Mayors to pay for it, but those other Mayors will benefit from the investment that has already occurred.

It is doubtful that future Mayors will find a need to add as much park space as Mayor Bloomberg has. Required new investment in the city’s water and sewer system, including the third water tunnel and large-scale facilities mandated by EPA rules, is finally getting finished off. NYC isn’t building more streets and roads, and doesn’t need more stadia no matter what the MLS says – a team could play at Citifield or in Nassau County. The replacement Department of Sanitation infrastructure associated with the closing of the Fresh Kills Landfill will also be completed soon, if the lawsuits finally stop. The proposed Ten Year Capital Plan includes $7.8 billion for new schools, more than would be spent on any other type of investment. But the city’s public school enrollment is not rising long term, and at some point its schools will have enough capacity.

Of course, the phrase “New York City’s infrastructure is finished” has been spoken before. Most recently, I recall, by Albert Appleton, a Deputy Mayor in the broke Dinkins Administration (though it might have been someone else). Finished, he seemed to believe, without East Side Access, the Second Avenue Subway, the Flushing Line extension, the Croton Water Filtration Plant, the Combined Sewage Overflow tanks, the new solid waste transfer stations, and the new parks, including the High Line, Hudson River, and Brooklyn Bridge parks. Most of the candidates for Mayor on the Democratic side would probably seek to resume the priorities of the Dinkins Administration, but with less concern for the poor.

According to the book Gotham, in the 1870s the city’s financial elite was alarmed by soaring city debts. Most of which were due to excess spending on, and corruption in, capital construction contracts during the reign of Boss Tweed. After Tweed was ousted, under new Mayor Havemeyer (p. 1011) “work on he uptown boulevards ceased. Grading of west side thoroughfares was halted. The viaduct railway was scuttled. Central Park expansion (and maintenance) was curtailed, and work on the proposed Riverside and Morningside Parks was pushed off into the future. The elaborate plans to develop the waterfront were cancelled and a cheaper, more circumscribed plan adopted. Declaring the city ‘finished,’ the mayor even argued that New York should refuse any further assistance to the Brooklyn Bridge, then rising in the East River.”

Of course a similar halt to new investment occurred in the 1970s. But with the city’s infrastructure far more extensive than in the 1870s, and in far better shape that in the 1970s or even the early 1990s, it may be argued that investment in new facilities could reasonably be slowed for a while until the Giuliani and Bloomberg debts are paid off.

The problem is that as at the MTA, very little of the total “capital” spending is for investment in new facilities. Most of it is for the ongoing replacement and rehabilitation of existing plant and equipment as it wears out. That is an ongoing cost that is really little distinguishable from maintenance, and often takes the place of maintenance in the operating budget, so it can be funded with borrowed money. And if that kind of capital spending were to stop, the city would not only fail to gain new infrastructure and facilities. It would start to lose the ones it already has.

Let me give you a few examples. According to the Budget Summary document, the city plans to borrow $1.3 billion over the next ten years to mill and resurface streets. But the streets won’t be “finished” in ten years. Other streets will wear out, and need to be milled and repaved. But the city will still be paying off the next ten years of street resurfacing, for the next 30 years. Paying interest on debts. So how much money will be left for street resurfacing ten years from now?

The city plans to borrow $1 billion to replace garbage trucks. But they won’t last forever either. More trucks will have to be purchased ten years from now, but the city will be deeper in debt with more money going to pay it off and less available for new trucks.

The painting of the rusting Brooklyn Bridge? Almost certainly paid for with borrowed money. Will the city never have to paint the bridges again? But if it is still paying off bonds from painting them the last time, where will it get the money to pay them again? No wonder so many of our facilities are left to rust to begin with. Can you imagine going to the bank and taking out a 30-year mortgage to pay for painting your house? That’s the sort of thing that was done during the housing bubble.

This kind of subprime infrastructure finance is exactly what is going to doom our mass transit system, starting with the non-funding of the next MTA capital plan in 2015.

Speaking of the MTA Capital Plan, back in the Dinkins Administration (also the late Mario Cuomo Administration at the state level) New York City and State cut a deal. New York State would cut off virtually all general fund support for the MTA Capital Plan, and New York City would too! That was 20 years ago. Through two booms and two busts, that money was never restored. Money was borrowed instead. And now, Mayor Bloomberg’s proposed ten-year capital plan includes virtually nothing for the transit system. Even in 2015 and after, when the capital plan – mostly maintenance in reality – becomes completely unfunded. And what do the candidates for Mayor have to say about this? Nothing. Nothing. Nothing. Nothing. Nothing. Nothing. And from the former MTA head, cut toll-based funding to the MTA and blame the state government for not making up the difference.

The city’s situation is part of a national situation after 30 years of high consumption, and low investment outside of housing and IT. After WWII, the infrastructure of America’s cities was allowed to deteriorate as they were taxed to build the suburbs and the Sunbelt. Now the housing, roads, schools, and water and sewer systems of the suburbs and the Sunbelt is reaching age 50. As was the case for the cities in the past, that infrastructure has once again been inadequately maintained – to allow lower (past) taxes and higher (past) spending on other things. With the federal government facing rising health care and old age benefit costs, the states facing rising pension costs, and more places facing the harm of a deteriorating housing stock and public physical plant for the first time, no help for NYC is going to be coming from outside. It never does. The reverse is more likely.

And who speaks for infrastructure here in New York City? Well, the construction unions and contractors are in favor of construction spending, but not in favor of actual construction: they have hiked up the prices they charge to cover the soaring cost of their own retroactive pension deals and past underfunding. And they apparently have a new suggestion to keep getting paid as the infrastructure deteriorates: a big subsidized housing plan financed by even more borrowed money.

There would be one good reason to halt capital spending, even ongoing normal replacement and rehabilitation spending, in New York City. Rather than allowing the contractors to escalate costs with higher bids project-by-project, the city and MTA could demand that contractors do the work for the same price as for similar projects back in 1995, plus inflation. The winning bidder would be whoever had the best plan and track record, at that price. If no one were to meet it, no work would be done, and the contractors would get nothing.

But that is not what is likely to happen. The contractor’s association has asserted that the big problem in public construction is that their prices and margins are too low. So that $4 billion per year, which Mayor Bloomberg says is the most the city will be able to afford in the wake of his administration, will buy less and less actual work if they get their way. And, expecting that the deterioration of the infrastructure would probably not lead to disaster until they have moved on to other jobs, New York’s careerist candidates for Mayor and Generation Greed state politicians will see no reason to do anything about it. After all, private unions and contractors make campaign contributions too.

Mayor Bloomberg may thus be leaving New York City on the brink of another infrastructure disaster. It is not currently physical. It is financial. But that will eventually become physical. It takes some time, and that may provide what the city’s political class, which represents those cashing in and moving out, needs. A chance to make a yet another grab on their way out of town. The next Mayor may not be inheriting a disaster, but may leave one behind. We may be electing the next Mayor Beame, and since they will have done nothing to stop us from getting in this mess, and have no plans to get us out, they will not have my sympathies.