NYC’s fiscal fiasco vexes real estate industry

De Blasio’s budget crisis feeds narrative that city is falling apart

New York /
Sep.September 10, 2020 11:30 AM
Mayor Bill de Blasio’s response to the budget crisis has been to seek federal aid and borrowing authority. (Getty, iStock)

Mayor Bill de Blasio’s response to the budget crisis has been to seek federal aid and borrowing authority. (Getty, iStock)

Back when it was flush with cash, the de Blasio administration heeded developers’ request to add technical staffers at the Department of Buildings. Now with 350 of them — 20 percent more than in 2016 — the agency gets projects approved and onto the tax rolls faster.

For the city and real estate industry, it’s a virtuous cycle. But now they face a vicious one.

A budget crisis caused by the pandemic — and exacerbated, critics say, by the de Blasio administration — feeds the narrative of a deteriorating city with trash piling up on the streets and rising crime.

Poisonous to property values and rents, it influences decisions by ordinary people and CEOs about whether to be in New York.

“If you have this momentum that we seem to be developing, that’s just going to erode the city’s credibility to sell itself,” said James Whelan, president of the Real Estate Board of New York.

When Bill de Blasio became mayor in 2014 in the midst of a protracted rise in the city’s population, he often spoke of its inevitable climb to 9 million. Then the unexpected happened: It peaked in 2016 shy of 8.5 million and fell for three straight years by a total of 132,000. When the pandemic hit, some 420,000 fled.

“That’s people voting with their feet, deciding things aren’t going in the right direction,” said Whelan. “There’s a lot of concern that the flight out might be permanent.”

City planners say the population initially dwindled because of a decline in immigration — which the administration blamed on Trump administration policies — and a declining birth rate. Pre-pandemic, the usual flow of people leaving the city was more or less steady.

“I talk to New Yorkers all the time,” de Blasio said at a press conference this week. “They’re not going anywhere. They’re not even thinking about going anywhere.”

In fact, a July survey found two in five New Yorkers would leave if they could. Outer-borough residents were most likely to want out. The departures that have occurred are pushing apartment rents down, especially in Manhattan, where the vacancy rate has doubled to more than 5 percent. Sublease space is flooding the office market, landlords are offering concessions and retail tenants are trying to get out of pricey leases.

The mayor’s confidence has gotten him in trouble before. When the city’s economy was humming and tax dollars were pouring in, he largely ignored budget watchdogs’ pleas to prepare for a recession. For the first few years of his tenure he failed to build a substantial rainy-day fund or set agency savings targets. He grew head count to nearly 327,000, or 11.3 percent more than its post-recession trough in 2012.

Pushed by the City Council, de Blasio did finally put several billion dollars in reserve, but when the pandemic hit and city revenue projections plunged by $9 billion, it was quickly exhausted in this year’s budget.

Upon taking office, the mayor also abandoned his predecessor Michael Bloomberg’s practice of relentlessly forcing agencies to find savings, such as by cutting needless positions and outdated programs. Eventually de Blasio resumed it, but with far less intensity.

“When I was in city government, you found stuff,” said Andrew Rein, a former executive deputy commissioner in Bloomberg’s Department of Health and today the president of the Citizens Budget Commission. “Three years after we started doing this, we’d still find savings, rocks I didn’t realize we hadn’t turned over.”

“BACKED-UP PIPELINE”

Despite widespread sentiment among business leaders that the mayor should have prepared better for a downturn, they are now focused on his response to it, which they find similarly problematic.

Some already perceive troubling results, such as delays at agencies, overflowing corner waste baskets and shootings.

“The public sees the effects in outward-facing agencies such as police, sanitation and parks but doesn’t see the effects on critical functions such as rezoning and agencies with large capital budgets,” said Kenneth Fisher, a land-use lawyer at Cozen O’Connor and a former City Council member. “Longer lead times because of staff cutbacks may be invisible to the public but act as a huge drag” on the recovery.

Waiting for city approvals is a bane to builders such as Domenick Chieco, who has been navigating projects through agencies for three decades. “Depending on the cuts, manpower could delay you weeks and possibly months,” said Chieco, the CEO of Milrose Consultants. “FDNY is so thin in the inspection division, we’re looking at massive delays just because they don’t have enough manpower.”

Fisher said the Department of City Planning has “a backed-up pipeline of projects all competing for attention in the hopes of completing public review before the administration changes at the end of next year.”

Whelan pointed out that the Department of Buildings is the rare public agency that actually makes money, and said cutting it would be counterproductive. But Fisher said when money is tight, priority goes to debt service, social entitlements and education. “Fiscal crisis–driven cuts fall hardest on agencies where services aren’t mandated by law,” he noted.

To wit: Kathryn Garcia — perhaps de Blasio’s most trusted administrator — condemned cuts to her agency as she resigned Tuesday as sanitation commissioner. While Garcia might have viewed litter-strewn streets as damaging to the mayoral bid she is pondering, the real estate industry perceives them as a threat to its bottom line.

“It is unclear that there has been a thorough analysis of how the city can cut spending with minimal damage to essential services and without jeopardizing economic recovery,” said Kathryn Wylde, president and CEO of the Partnership for New York City, a leading business group. “For example, deep cuts in sanitation services will contribute to perceptions of decline in the livability of the city.”

Instead, she said, the mayor could have pressed city employee unions for savings, such as by increasing their medical co-pays.

MISSED OPPORTUNITIES

One former Bloomberg budget aide laid out numerous steps de Blasio could have taken to cut costs during the pandemic, including deferring wage increases and freezing hiring.

In addition, the source said, city workers making up to $62,000 a year could have been furloughed with no loss of income when Congress supplemented unemployment benefits by $600 a week through July.

“There probably were savings there,” agreed Rein, whose business-backed nonprofit has proposed dozens of ways for de Blasio to save. “This was hard and fast, this recession. Of all the times that preparation could have helped, this was it.”

New York’s real estate industry is already struggling to lure tenants and office workers back. Budget decisions that lead to visible signs of distress such as crime, graffiti, street homelessness will only make that task harder.

The mayor, meanwhile, has for months been seeking a multi-billion-dollar municipal aid package from Washington, despite opposition from President Donald Trump and Senate Republicans. As a fallback, he is requesting authority from Albany to borrow $5 billion, ignoring long-term real estate players who say issuing debt should be a last resort because it would shift the bill for today’s operating expenses to future generations.

“When you’re talking about repayment on a 30-year basis, the debt service is quite modest,” the mayor told reporters this week. In the context of an $88 billion budget, he said, “it is a small amount.”

Meanwhile the city’s fiscal mess is growing by the day, portending service cuts and perhaps tax increases. “The loss of revenue in a very short period of time in such a shocking manner has caused a reality where we have to get ready for layoffs on a huge level,” the mayor said on Aug. 18.

Critics said using attrition — about 20,000 city employees leave city service each year — to reduce payroll months ago would have been less disruptive.

“If the Department of Buildings does see cuts, the public won’t realize it until something falls off a building or a worker gets hurt,” said Fisher. “They won’t see the projects that can’t pull permits or the unoccupied finished buildings that can’t get certificates of occupancy.”





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