The Streets Were Paved with Gold (13 page)

Inflated costs were one result; too many people chasing too few doctors and facilities made medical care prohibitively expensive. Corruption was another; it was invited by a system with too few auditors and cost-plus contracts for unscrupulous nursing home profiteers. Medicaid was the compassionate thing to do, but it was a classic case of good intentions subverted by ill-considered legislation.

It was also to prove very expensive. Rockefeller said it would cost the state only “$90 million,” and on May 22, 1966, he declared it would “save money for New York City.” By 1977, over 2 million state residents received Medicaid benefits, 70 percent of them residing in New York City. Even after tightening eligibility standards, the city, which was to “save” money, spent $573.7 million for Medicaid in fiscal 1979—more than it expends on welfare. When counting the state’s share, the city cost is over $1 billion. If we count the cost to the federal, state and all local governments in New York, the cost is $3 billion.

Time-Life Books closed its Rockefeller Center offices on October 1, 1976, and said goodbye to New York. The company, employing 312 people, spent $2 million to move to Alexandria, Virginia. Despite this expense, company officials estimated that they would save a total of $4 million in reduced taxes and space rental costs in the first year alone. In contrast to New York business taxes amounting to 22 percent, their Virginia taxes were 6.5 percent.

The “bottom line” dictated the move, Vice President Nicholas Benton told the Washington
Star.
Benton conceded that Alexandria was not New York—he missed the theater, the shops, the restaurants. But there were other compensations. In New York, he spent forty-five minutes on two buses to travel one mile to his office. Today, he has a big house in McLean and drives to work in twenty-nine minutes, including time out to deposit his daughter at school.

Time-Life was not alone. Many businesses fled—or went out of business—and taxes had a lot to do with it. In 1965, according to
the Tax Foundation, New York ranked tenth in local and state taxes, averaging $372 per person. By 1975, it ranked first, averaging $1,025 per person. In those years, New York’s taxes multiplied thirteen times faster than the national average, expanding by 178 percent. It was no surprise, then, that the Fantus Company, the world’s largest business location consultant, concluded in 1975 that New York had the worst business climate of the fifty states.

Sometimes, increased taxation was perceived by New York officials as a less painful, more expedient short-term solution than cutting the budget. “It never was recognized (or, if recognized, never was accepted politically),” observed the final report of the Temporary Commission, “that the City’s taxpayers, its revenue providers, represented a long-term asset of the City that had to be maintained rather than a short-term asset that could be exploited.”

This exploitation was on view during the city’s tax fight of 1966. Early that year, Mayor Lindsay proposed a $520 million tax package, including a first-time city income tax, new business taxes, and a stock transfer tax. The stock exchange let out a scream, threatening to move. They’re bluffing, declared City Comptroller Mario Procaccino, speaking for most city officials. Business leaders protested, prompting an attack from the Mayor and newspaper editorials about their “selfishness.” It was presumed that business needed New York and that passive acceptance of new taxes was part of their civic duty.

Needing state approval, the Mayor took his tax package to Albany. State legislative leaders declared that Lindsay was asking for more taxes than were needed to balance the budget. At first, the Mayor heatedly denied this. By March, he conceded that the package would leave $130 million for new expenditures. Not wanting to accept responsibility, the City Council joined Lindsay in demanding that the state legislature mandate these taxes upon the city. Not wanting to accept responsibility, the state insisted that the city request permissive legislation and then mandate the taxes itself. The feud was not about whether to tax but about who would get blamed. On July 13, 1966, after a series of feints and jabs, including Lindsay’s first public brawl with Governor Rockefeller, the Mayor signed the new tax package into law, declaring that city taxes were now “at their upper limit.”

By December, as city officials were laboring on the next year’s budget, word was leaked of the “strong possibility” of new taxes. New taxes is what the city got. The commercial rent occupancy tax
went up, as did the utility tax, the insurance corporation tax, the unincorporated income tax, the commuter tax, the sales tax, and an array of nuisance taxes. The corporate income tax was raised in 1971 from 5.5 to 6.7 percent, and again in 1975 to 10.05 percent. The city’s personal income tax more than doubled. Real-estate taxes zoomed 33 percent between 1970 and 1975.

In the early sixties, many of the city’s industries began to suffer job losses, though these were camouflaged by the growth of government jobs. Not until 1969, however, did the city overall suffer a massive employment decline, eventually losing one of every six private sector jobs. Taxation was a chief culprit. “High levels of taxation have been a major contributing factor in causing job loss,” said the 1976 report of Governor Carey’s Special Task Force on Taxation, which found that in 1974 New York’s taxes were 55 percent above the national average. A 1974 study by the city’s Budget Bureau estimated that between 1966 and 1971 the city lost 44,500 factory jobs that it would not have lost if its tax burden had been less severe. The Temporary Commission estimated that by 1981 the city’s 10.05 percent business income tax would result in the loss of an additional 149,000 manufacturing jobs. Reducing this tax, they said, would mean the immediate loss of $90 million of city revenues. But, if the city failed to act, an equal amount of revenue would be lost by 1981 because of lost jobs.

The flight of fifty-five of the Fortune 500 companies attracted publicity, but the city’s job loss cannot be traced to large firms moving to the Sunbelt or Connecticut. According to the Special Task Force, of the 660,000 jobs lost from 1969 to 1976, only 27,000 resulted from the exodus of large headquarter corporations. Most of the lost jobs came from smaller firms quietly going out of business. New York is the nation’s premier beer market. Once the home of 121 breweries, today New York has none. Schaefer, Rheingold, Schlitz, Piels—they moved because it was too expensive to do business here.

Taxes also help to explain the flight of middle- and upper-income taxpayers. In 1974, according to a survey by Nicholas Kisburg of Teamsters Joint Council 16, 20.9 percent of the average resident’s income was drained by local and state taxes—nearly double the 1959 rate. “The tax collector, rather than the employer—at least in New York—is the worker’s major adversary,” said local Teamsters President Joseph Treretola in 1977.

“Past policies have led to the dissipation of our economic assets,”
Governor Carey’s 1977 budget message declared. “We have diverted too much of our resources to the public sector. Over 80 percent of the employment growth between 1970 and 1975 was in government—only 20 percent was in the private sector. We failed to recognize that in the long run only growth in the private sector would enable us to pay for our public programs. This left us particularly vulnerable to economic recession.”

With that year’s budget in mind, that year’s election, that week’s crisis, city and state officials adopted a soak-the-rich—soak-everybody—tax policy. Politically, this was better politics than cutting the rate at which expenditures were rising. Besides, officials sincerely believed the rich should pay more. They should, but they don’t have to stay in New York, not when there are forty-nine other states.

Passing the buck is mother’s milk to politicians. One way to view the city’s strange fiscal behavior is as a history of buck passing—first to the state, then to the capital budget, then to next year’s budget, future taxpayers, the federal government, or some third party. The rules of the game are simple: take credit and avoid blame.

The police/fire pay parity dispute is a classic case of buck passing. For years, police sergeants complained that fire lieutenants—who they believed did comparable work—should not be paid more. On January 4, 1967, Mayor Lindsay’s Office of Collective Bargaining (OCB) passed the dispute on to an impasse panel for study. The panel recommended a compromise, one which rewarded police sergeants less than fire lieutenants but widened the gap between a sergeant’s and a patrolman’s pay. Lindsay accepted their recommendations. The result was a truce.

A brief one. Two years later, sergeants again complained that they should be equal to fire lieutenants; patrolmen complained that the gap between their pay and sergeants’ pay was too wide. The patrolmen’s union, the PBA, threatened to strike. Their timing could not have been better. Lindsay was seeking reelection, and the last thing he wanted was another strike. On April 29, 1969, Herbert L. Haber, Lindsay’s Director of the Office of Collective Bargaining,
quietly initialed an agreement with the PBA granting patrolmen what they wanted, including a $2,700 retroactive bonus.

In an attempt to keep the sergeants happy, Lindsay appointed another impasse panel, this one chaired by Theodore Kheel, one of the “power brokers” Lindsay denounced in 1966. The panel waited until after the mayoral election before recommending that the ratio determined by the first panel be raised. “The Lindsay administration accepted the second OCB recommendation as well,” wrote Columbia Professor Raymond Horton in a book on municipal labor relations, “despite the fact that it clearly conflicted with the PBA agreement reached in February.”

After the election, the city had second thoughts and reinterpreted their February 1969 agreement with the PBA. Gone were the $2,700 bonus and the higher pay ratio of patrolmen to sergeants. The PBA immediately took the initialed agreement to court and eventually won. The city appealed. Understandably irate that the city broke its word, patrolmen went on strike for six days in January 1971. Shortly thereafter, the city lost its case in court.

But the city lost more. Since the pay of all the uniformed services is pegged to the parity principle, an increase for sergeants or patrolmen ensures an increase for everyone else. Sanitation men, for instance, are supposed to be paid 90 percent of what a patrolman gets—when patrolmen’s pay goes up, so does that of sanitation men. “By the time other groups, like firemen and sanitation men, came forward with their related demands,” Horton wrote, “the cost to the city was considerable—variously estimated from $150 million to $215 million.” That is the additional cost
each
year.

The dispute helped convince elected officials to free themselves from responsibility for ticklish labor disputes. Soon, under the state Taylor law, compulsory arbitration of public disputes was called for. The buck was passed to nonelected mediators, who in the future would command even more generous settlements.

And the city paid another price for the pay parity debacle. New York had suffered strikes from its transit workers, its teachers, its sanitation men, its hospital and welfare workers. Some of these strikes, particularly the 1968 teachers’ strike, savagely polarized the city and reminded citizens that their government did not necessarily represent their interests. But until 1971, it had been almost unthinkable that those responsible for public safety would strike. Police are our last bastion against lawlessness. Hell, it was against the law to strike. But cops struck anyway, and with that strike went
another piece of the city’s social fabric.
What’s happening to New York?
was a question everyone asked.
How could cops strike? Who will protect us? Where’s the government? Do I want my kids to grow up in a place like this? If my business has a future, and this place doesn’t, why should I stay?
As people asked these questions, they picked away at that intangible sense of confidence and faith which is as important to a city’s life and stability as “investor confidence” is to its bonds.

It’s easy to condemn politicians for the fiscal crisis—and Lord knows, they deserve blame. But it would be a form of buck passing to assume that a handful of individuals partook in a giant conspiracy. It would also be misleading to excuse the public from blame. Many bad decisions were popular. Some good policies were vetoed by the public.

On November 7, 1967, the voters of New York State rejected a new state constitution by the lopsided margin of 3,487,513 to 1,327,999. The reasons were varied. The Convention was a partisan affair, composed of traditional politicians who created a hodgepodge of amendments designed to protect various interests. A key factor, however, was the proposed repeal of the Blaine Amendment, which strictly prohibited state aid to church-related facilities.

The 1967 constitutional convention was the first in twenty-nine years and likely the last for quite some time. But for the city of New York—which cast 56 percent of its ballots against the constitution—passage would have meant dramatic budget savings. New York City pays much more for services than do other cities partly because New York State—unlike other states—does not assume a larger share of city costs. The constitution would have corrected much of that.

No other state, for instance, requires its cities to swallow 25 percent of welfare costs. The closest state is New Jersey, which requires cities like Newark to pay 12 percent.
Article X, Section 16
of the proposed constitution would have required the state to assume the full local costs of welfare over a ten-year period. In fiscal
1979, the city would have been relieved of more than $500 million, or half its cumulative deficit.

Most states assume the full cost of their court systems. Not New York—at least not until 1977 legislation agreed to phase these costs into the state budget over three years.
Article V, Section 25B
of the proposed constitution required state assumption over ten years. In fiscal 1976, the city spent $94.2 million for its courts.