What the Motor City and the Big Apple Have in Common
As we close the page on July, I am grateful that the good folks at The Commercial Observer are once again giving me the month of August off. As much as I enjoy writing this column each week, it is nice to take a bit of a break as I finish my fourth year writing Concrete Thoughts. Congratulations to editor in chief Jotham Sederstrom, publisher Jared Kushner and the entire staff for producing such a well-written and respected publication. It is hard to believe it has been four years already.
As I head into my break, I will leave you with some thoughts on a macro issue that we should all be cognizant of, particularly as we head into local elections later this year. These elections will greatly impact our economy, and therefore our commercial real estate industry. The issue to consider is the many similarities between New York City and Detroit, which filed for bankruptcy protection recently. This filing represents the largest municipal Chapter 9 case in U.S. history.
Yes, I am a huge fan of the Big Apple and think it is truly the greatest city on earth. However, throughout the course of human history, great civilizations, and great cities, have come and gone. To the casual observer, the plight of the Motor City will be blamed on the impact the broader economy has had on the auto industry. Upon deeper investigation, however, we see this is far from the case.
Detroit’s problems stem from decades of a declining population within the middle class, rising crime, political corruption and unending promises made by those corrupt officials to pay public-sector workers retirement benefits the city couldn’t possibly afford to pay.
Today in New York, the most well-off among us are leaving the city due to the tremendous tax burdens we face. This is a logical explanation for lower tax revenue in tandem with rising general population and more jobs today than before the great recession. So far, crime has stayed in check, and there is much credit to go around for this, but it will be a major concern under a new mayor. With regard to crooked politicians, our jails are home to more than our share, and our municipal pension obligations far exceed our capacity to pay them.
For decades, Detroit relied on state and federal handouts to keep its con game going. Bailouts and subsidies are much easier to rely on than doing the hard work of creating a system in which the work force works hard to build superior products and to deliver superior services to customers and residents at compensation levels that are sustainable for those who are working and those who are retired.
Today, it is highly unlikely that bondholders and public-sector retirees will see more than 10 cents on the dollar of the approximately $18 billion the city owes. In its filing, Detroit included sacred general-obligation bonds and pensions among the items it does not want to pay. This will likely impact the comfort level of bondholders and public-sector workers nationwide.
New York is about 12 times larger than Detroit, but even after adjusting for this difference, we have larger problems in some areas than it does. Detroit owes retirees $5.7 billion in health care costs. New York owes $88.2 billion, $20 billion more than Detroit after adjusting for size. Detroit owes $3.5 billion in unfunded pension obligations. New York has about $70 billion, $28 billion more. Our bondholder debt is not as bad relative to Detroit’s, but we still owe $77.3 billion. Detroit has its hands tied, as about one-third of its annual revenue is spent on health retirement benefits and debt. New York City’s ratio is one-third as well.
Clearly, New York has much more going for it than Detroit, in numerous ways, but tremendous lessons can be learned here. So when you speak to candidates running for office, ask them how they are going to deal with our astronomical taxes that are driving our biggest taxpayers out, how they are going to keep a lid on crime, how they are going to root out corruption and fraud among other elected officials and how they are going to deal with promises to pay municipal workers (while seeking their endorsements and financial support) that they know they can’t possibly keep. The answers could tell you a lot about how our commercial real estate market will be impacted if they are elected.