As the issuer of a sovereign currency, the U.S. federal government can always “print” its way out of debt. That would, of course, be inflationary and reckless, rather like the Weimar Republic in the aftermath of World War I. But low inflation and a more fiscally responsible national government might be able to reduce or even eliminate that debt one day if leaders are able to steel themselves and recognize that they’re merely stewards of the republic, not its owners.
America’s states and cities have no such luxury. They don’t print their own currency. And there’s the rub: The budgets of major cities have to be balanced year after year with real money. Yes, cities and states can take on debt, but sound fiscal management requires that debt be taken on only for longer-lived capital assets. So if you’re building a toll bridge that will last 90 years, you can sell bonds for, say, 30 years and roll over those bonds as they come due, reducing the principal amount owed, until at the end of the 90 years, the balance is zero. Since there’s a particular source of funding—the bridge tolls—to repay the bonds, those bonds are called revenue bonds.
But what if cities need more money to carry out everyday expenditures, to, say, pay overtime to clear streets after an unforeseen blizzard? Then, they can also issue what are called general obligation bonds, or tax anticipation notes. General obligation bonds aren’t committed to any particular project but are just debts that the city promises to repay from its general tax revenues. Tax anticipation notes are rather like commercial paper: short-term obligations required for expenses that are secured only by a state or municipality’s future tax revenues. (They can also be issued in anticipation of a future bond issue. Say a bridge washes out and a new one is needed. A tax anticipation note would be issued to draw up plans, hire engineers, pay the bankers and lawyers who issue the bond, and so forth.)
Creating the ‘Rust Belt’
Most U.S. cities were built around a robust industrial manufacturing base, with a core—or Tier 1—manufacturing facility. Akron, Ohio, was built around tire manufacturing; Buffalo, New York; Pittsburg, Pennsylvania; and Gary, Indiana, were built on their steel mills. Detroit—aka Motown—was built on automobile manufacturing, Baltimore on its ports. Each of these industrial centers, with thousands of workers, had suppliers nearby that, in turn, employed tens of thousands of other workers, often with high-wage union jobs.But beginning in about 1970, the environmental movement led Congress to pass laws such as the Clean Air Act and the National Environmental Policy Act that imposed costly environmental regulation. States soon followed with their own environmental standards. Then, in the 1990s, the United States entered into the World Trade Organization and the North American Free Trade Agreement. Simultaneously, the development of container ships caused U.S. companies to move Tier 1 heavy manufacturing—and their Tier 2 and lower-tier supply chains—overseas, where environmental and labor regulations were far less imposing. The completed foreign-manufactured goods could be shipped via giant container ships or over the Mexican border and imported into the United States.
Within 20 years, the denouement of U.S. regulatory and trade policy had created what we now call “the Rust Belt”: Workers saw their low-skill, high-paying, middle-income jobs at Tier 1 manufacturing companies and their counterparts at Tier 2 and lower suppliers forced to accept minimum-wage jobs as Walmart greeters or burger-flippers. The former factories that churned out billions of dollars in manufactured goods were either closed or turned into residential apartments.
The offshoring destroyed the fiscal health of major cities. Today, nearly a third of the population of Gary, Indiana, is impoverished, according to the U.S. Census. The City of Detroit, the center of the top-tier U.S. auto manufacturing industry, filed bankruptcy in 2013, leaving the city’s current and former employees’ pensions in shambles.
Enter COVID
All that changed in 2020 with the onset of COVID-19. Government-forced “lockdowns” of some major cities accelerated what we'll call “the keyboard economy”—professionals, analysts, bankers—to adopt remote work, with meetings taking place over Zoom.The move to remote work, however, would likely have taken place anyway as the generation that’s been reared with the internet moved into the executive suite and balked at paying high urban rents. But COVID-19 shutdowns gave companies no other choice than to adopt—and cities were unprepared for the change.
Today, in New York, the nation’s largest and most economically diverse metropolis, office buildings have a 20 percent vacancy rate that’s anticipated to last through at least 2026. But even with ostensibly “occupied” office spaces, work-from-home causes much of Manhattan, the city’s business center, to be vacant, as people are “in the office” only three or four days per week. Since office rentals have long terms and are a lagging indicator of business conditions, it’s likely that the vacancy rate will increase as leases expire. That means property values—and, hence, property tax revenue—will decline somewhat, not only now but far more precipitously as office space is abandoned when leases expire.
A Stanford study, cited by Bloomberg, estimated that work-from-home saved Manhattan workers roughly $12.4 billion annually. Bloomberg reported further that “the average (Manhattan) worker is spending $4,661 less per year on meals, shopping, and entertainment near their offices in New York.”
“That compares to $3,040 in San Francisco and $2,387 in Chicago,” the report reads. “These behaviors are most entrenched in cities with longer commutes, a higher proportion of white-collar workforces and longer-lasting pandemic restrictions.”
Assuming that the majority of that $12.4 billion in lost Manhattan purchases is subject to sales tax, that works out to more than $500 million in lost New York sales tax revenue.
New York is particularly vulnerable these days, largely because the progressive aspirations of its elected leaders can’t be met by its fiscal means. Billions of dollars—perhaps tens of billions—will be required to feed, house, educate, and provide medical care for the 100,000 asylum seekers that the city’s progressive leaders had welcomed before it was overrun by them.
Further, New York simply doesn’t have the means to contend with such challenges. A survey of 149 American cities by WalletHub.com found that New York ranked 147th in the quality of its management. It ranked 145th in its long-term debt per capita and 103rd in WalletHub’s assessment of “fiscal stability.” It ranked 143rd in its economy. On top of that, a recent New York Post story highlighted that managers with a trillion dollars of funds under management have decamped New York, looking at cheaper rents, lower taxes, and a better quality of life in Texas, Florida, and elsewhere.
Unchecked, New York’s slow-motion economic demise will have deleterious effects throughout the national economy. Lenders will be adversely affected by its real estate demise, as will the municipal bond market. (And given that high-net-worth individuals who purchase such bonds have left New York for jurisdictions with lower or no income tax, why would they buy “triple-tax-free” NYC bonds—bonds for which the interest is exempt from city and state income tax as well as federal income tax? If they’re in a no-tax state such as Florida or Texas, it doesn’t make sense.) Worst of all, New York’s looming fiscal challenges will have national implications, including on too-big-to-fail commercial banks that hold New York mortgage obligations and are creditors on commercial loans. Imagine another Lehman Brothers collapse, the starting gun for the financial crisis of 2008–09.
What Can Be Done?
The means and standards by which independent bond rating agencies rate states and municipalities are largely opaque. One just recently upgraded the New York City bond rating!The raters generally issue qualitative judgments, but any quantitative assessments aren’t available and would likely be considered “trade secrets,” even assuming they support the ratings.
It shouldn’t be so.
Investors, creditors, and, most importantly, citizens should be able to assess the fiscal viability and performance of cities in a completely transparent and readily understandable manner, in much the same way as the WalletHub survey attempts to do.
However, a better means would be to define a criterion, quantify it, and then post the cities with their peers in a four-quadrant scatterplot diagram with the highest performers in the upper right and the lowest performers in the lower left. If segregated by population, users could view the data for the city under consideration. Viewed as an animated time series, even a grammar school child could tell if the city is getting better or doing worse.
Maintaining the fiscal wherewithal of America’s cities is a critical consideration for the states and the nation. Millions of people live there and their futures are at stake, as well as the fiscal well-being of the lenders, creditors, and property owners. It’s critical that failing cities be managed to improve their performance or, if nothing can be done, that their decline be so managed as to ameliorate the suffering and losses of citizens and other stakeholders.
