New York City Comptroller William C. Thompson, Jr. today issued, “The C-Note,” his periodic column focusing on economic and budget issues affecting New York City. Today’s column is titled: “The State of New York City’s Economy.”

You can view the column by visiting www.comptroller.nyc.gov and by clicking on the ticker at the top of the home page. In previous weeks, the Comptroller addressed issues such as future city job losses, what needs to be done to meet the future economic challenges facing New York, and the importance of investing in City bonds.

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By William C. Thompson, Jr.

We are amidst the gravest economic downturn the nation has experienced in a generation, perhaps since the Great Depression.

Last week, the National Bureau of Economic Research determined that the nation has been in recession since the beginning of the year.

By now we’re all familiar with the reasons for the crisis. We know about greedy sub-prime lenders, lax financial regulations, collateralized debt obligations and credit default swaps, and how they all somehow came together at this very moment to form a perfect storm of financial chaos.

Despite the rescue plan passed by Congress in October, and actions since then, the stock market continues to rise and fall like a seesaw. It seems as if each day brings more surprises.

As the city braces for a significant downturn, the question on everyone’s mind is: How bad will it get?

While New York City’s labor and real estate markets outperformed those of the nation for most of 2008, the pain we’ve suffered on Wall Street over the past several months makes this one of the grimmest economic periods our city has seen in many years.

In recent weeks my office has forecast that as many as 170,000 payroll jobs will be lost throughout the city’s economy from the peak in July 2008 through the anticipated trough, which we expect to be reached in late 2010. Some 46,000 of those jobs will have been lost in the city’s financial sector, although another 60,000 job losses will be indirectly attributable to the financial industry’s difficulties, with the remaining losses stemming from the effects of the general U.S. recession on New York City businesses.

Currently, approximately 12 percent of our city’s tax revenue is attributable to the financial sector. That includes corporate and bank taxes, unincorporated business taxes, personal income tax on industry wages, and pro-rated shares of the commercial rent tax and commercial real estate tax.

At the same time, we expect Wall Street cash bonuses to be down by at least 50 percent this year, their lowest level since 2002. As a general rule each drop of 1 billion dollars in Wall Street cash bonuses results in a 20 million dollar drop in NYC personal income tax, or PIT, collections. As a result of the financial industry losses and the recession, we expect NYC tax revenues to fall 4.3 percent in Fiscal Year 2009, and to increase only three-tenths of a percent in FY 2010.

While the talking heads have highlighted the collapse of venerable Wall Street firms like Lehman Brothers, Bear Stearns and Citigroup, away from the cameras, thousands of average New Yorkers are suffering. For every stock broker who gets less of a bonus, there are numerous back office workers worrying about their jobs, worrying about being able to put food on their tables and pay their rent. Middle class New Yorkers know that their jobs will be gone long before their bosses’.

And for every executive concerned that the declining value of their stock options may delay their retirement, there are thousands of New Yorkers and other Americans worrying that they’ll never be able to retire at all – watching the only savings they have disappear in what seemed like the blink of an eye.

Those personal impacts are tied directly to an alarming oversight failure in the regulation of leveraged banking activity in our nation. That oversight failure is typified by the 2004 rule change by the Securities and Exchange Commission that allowed five investment banks -- Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – to move beyond their debt-to-net capital ratio limit of 12-to-1, so that we saw firms leveraged at levels as high as 30- and 40-to-1.

I believe the recession is likely to last well into 2009. Whether the economy begins a slow recovery thereafter or descends into a truly epic slump depends on whether additional shocks to the financial system occur. Our forecasting assumption is that the cumulative effect of Federal Reserve, Treasury Department, and FDIC actions, combined with an anticipated federal fiscal stimulus program of significant magnitude, will be sufficient to stabilize financial markets and reverse the downward trajectory in our economy.

However, recent events suggest that additional financial traumas cannot be ruled out and that economic recovery could be delayed further. The current economic downturn is already far worse than most forecasters expected. It is difficult to see how the vicious cycle can be broken soon without massive government intervention in the economy. Already, the Federal Reserve has implemented unprecedented steps to provide liquidity to the market and to guarantee the safety of interbank and other corporate lending.

The Treasury Department has also stepped in to stabilize the financial system, primarily through the $700 billion Troubled Asset Relief Program, or TARP, enacted by Congress in October.

To avert an even deeper and prolonged recession, however, additional steps are necessary. In late November, the Federal Reserve announced that it would purchase up to $600 billion of debt issued or backed by government-sponsored enterprises and Federal Home Loan banks.

That measure represents the largest effort to date to directly affect the flow and cost of mortgage credit. The in-coming administration also appears likely to step-up federal efforts to modify home mortgages that are in default or that are otherwise in jeopardy of foreclosure.

The federal government is also likely, within the next several months, to implement another, much larger fiscal stimulus package than that provided earlier in the year.

It is my expectation that the package supported by President-elect Obama – what would be the largest public works program since the creation of the interstate highway system half a century ago – will be an important shot in the arm to the national economy in 2009 and 2010. Among Obama’s stated goals are rebuilding “our crumbling roads and bridges, modernizing schools that are failing our children and building wind farms and solar panels, fuel-efficient cars and alternative energy technologies that can free us from our dependence on foreign oil.”

We should embrace this package as a critical chance to move from an economy whose growth is driven by financial gimmicks and sleight of hand to one which is sustainable and tied to real assets that will expand productivity, generate employment and create lasting value.

As Tom Friedman pointed out in his New York Times column last Sunday, “We not only need to bail out the industries of the past, but to build up the industries of the future.”

Our City and our State must campaign actively for those infrastructure dollars. Such investment will help to prime our economy, putting New Yorkers back to work while nurturing our economic development goals and keeping us competitive. It will also help to restore greater fairness in our relationship with Washington. With his Fisc report, our late, great Sen. Daniel Patrick Moynihan documented time and again the large discrepancy between what our state pays to the federal government in taxes versus what we receive in the form of Federal assistance.

No investment could better honor Sen. Moynihan’s commitment and contributions to our state than the new Penn Station to be named in his memory. Financing from the federal stimulus package could help make that plan a reality while employing thousands and improving one of New York’s critical transit hubs.

As we enter a new period of fiscal austerity, we must return to basic fundamentals that have served us in the past. Much has been made of the fact that in recent years, when the surging real estate market generated historic surpluses for the city, the mayor—with the support of my office and others—took the responsible step of dedicating a good deal of those surplus funds for the future.

How did we do that? We committed more dollars to pay-as-you-go capital spending. We prepaid city expenses as much as two years ahead of time. We wisely instituted a retiree health trust fund that put money aside in flush times.

At the same time, I worked with the mayor to ensure that General Obligation bonds are issued in a prudent, cost-effective way. Our GO bonds are now rated in the AA category by all three ratings agencies, our highest ratings since at least the 1930s.

While this downturn will make pay-as-you-go spending for our long-term capital projects more difficult, the instinct toward greater fiscal discipline in our budgeting that has characterized the city’s financial management in recent years is one that has served us well and should not be abandoned.

We earned our reputation as a premiere place to live and do business by keeping crime down, pursuing exciting new economic development initiatives, luring new industries like motion pictures and high tech, and expanding a thriving entertainment and hospitality industry.

We must continue to do all we can to maintain that reputation, while resisting the temptation to pursue the easy fixes that have gotten us into trouble in the past. And I believe it’s also important to recognize in this period of uncertainty that we have every reason to expect that Wall Street will be back.

Time and again, the financial sector has faced challenges that seemed too tall to overcome. But, in the end, the industry always reinvents itself. It always evolves to create a new era of prosperity.

What will Wall Street look like a year or two from now? I’m not sure anyone can answer that question. One thing that is painfully clear is that a boom based on toxically leveraged assets is no model for a healthy financial industry. We are all realists here and there are some very real obstacles that lie ahead. We have a new administration coming in with some creative approaches to address the problems we face. It will take time.

But it is my firm belief that a new investment focus on real assets with tangible, lasting value on the one hand, and a commitment to fiscal discipline on the other, will enable us to weather the current financial storm and put New York City on a path to economic growth and stability long into the future.

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