Opinion | 23 Million Reasons to Not Let States Fail


Imagine that cities and states were considered an industrial sector, like automobiles or airlines. Collectively, they employ about 23 million essential workers like teachers, police officers and firefighters. They contribute over three trillion dollars to the nation’s gross domestic product.

Now imagine that one of the most important industry players was New York City, which employs about 325,000 workers. They, along with the city’s 3.5 million private-sector workers in finance, entertainment, communications and other industries, add $1 trillion annually to the country’s gross domestic product.

Would the federal government allow such an enormous industry to fail?

There is a realistic risk that this might happen, not just for New York but for states and other cities across the country. Because of the pandemic, these local economies are cratering. Estimates of total revenue losses from 2020 to 2022 for states and cities range from $400 billion to $1 trillion.

There is no magic solution to these financial problems. Without federal help, states and cities must cut essential workers and put off equally essential infrastructure projects. Even then, they must take on debilitating debt that will need to be repaid even as they try to recover. Or worse, some cities may be forced to declare bankruptcy.

President-elect Biden had the right idea when he said on Monday that any relief package must include aid for cities and states. So far, though, the federal government has not come to an agreement to this coming catastrophe. Congress addressed the immediate impact of the pandemic in March with the $2.2 trillion CARES Act, but further action has not been forthcoming. While the House passed the Heroes Act, which offered almost $1 trillion in aid to state and local governments, the Senate failed to act on it, offering a paltry substitute instead.

Worse, President Trump and Senator Mitch McConnell, the Senate majority leader, have seen the crisis through a partisan lens. The president said in May that the revenue shortfall was a blue state problem caused by liberal politicians, even though red states are also in trouble. In April, Senator McConnell said states should consider filing for bankruptcy as a solution. Apparently he has never read the Constitution, which does not permit states to avail themselves of the bankruptcy laws.

The Federal Reserve Board tried to help by creating an emergency loan program, the Municipal Lending Facility, which buys state and local bonds. But this program, which expires at the end of the year, has not been widely popular because it charges an above-market interest rate and the loans must be repaid in no more than three years.

President-elect Biden must address this crisis, as urgently as he has addressed the pandemic. He could start by appointing a task force that should begin by understanding the scale of the problem over the next five years.

The task force should then review what conditions should be imposed on state and municipal governments receiving new federal aid, particularly with respect to the uses of this new money.

President-elect Biden should also consider reinstating former President Obama’s Build America Bonds program, which from 2009 to 2010, during the financial crisis, covered part of the interest paid by states and municipalities on more than $181 billion that they borrowed to fund necessary infrastructure.

Today there can be no solution without focusing on New York City, not just because of its size but because of its centrality to the nation’s economy. New York is the center of finance, entertainment and communications, and if it is seriously encumbered, the entire country is put at risk.

New York faces huge losses in income and sales taxes. And in the long term, New York will contend with decreasing revenue from property taxes, which is expected to constitute one-third of New York’s revenues. Huge numbers of commercial and residential tenants are either not paying rent at all or are paying reduced amounts. That means, the city will be inundated with applications to reduce the assessed value of properties.

There is also the substantial risk that businesses and high-income individuals will decamp from New York to low-tax states, in part because Republicans added to their tax burden by capping federal deductions for state and local taxes.

New York State isn’t in position to help, given its own rapidly growing debt. In fact, there will surely be reductions in state aid or a reallocation of Medicaid funding.

Without help, New York faces an uncertain future. One of the most immediate risks is the public transportation system, without which the city cannot function. Right now, the Metropolitan Transportation Authority’s subway system is operating at 30 percent of capacity, not nearly enough to cover expenses. The agency will borrow about $3 billion from the Federal Reserve. That loan would be due in three years and is practically unpayable.

This crisis has played out before. In 1975, when New York City was at the brink of bankruptcy, President Gerald Ford turned down Governor Hugh Carey’s request for federal aid.

Carey convened all the major business leaders and union presidents at his office and told them that if Washington wasn’t going to help, the city would have no alternative but to file bankruptcy.

That got the attention of the city’s business leaders, who went to Washington and vigorously pleaded the city’s case with the president’s cabinet and members of Congress.

Rationality prevailed. A month later, I was part of the governor’s team working out the details of the close to $2.3 billion loan to the City of New York.

Today New York is but one of many cities in trouble — not because of overspending, as Republicans imagine, but because of a badly managed pandemic. If Congress can push through help for important industries, it can also surely aid states and cities.

There is no alternative other than federal assistance. President-elect Biden must address this crisis now, and act as soon after Jan. 20 as possible.

Richard Ravitch is a former chairman of the Metropolitan Transportation Authority and a former lieutenant governor of New York.

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