Mike's Toughest Sell

If you want to see how New York City can deal with fiscal problems that seem insoluble, forget conventional solutions. Instead, consult Matt Helm, the star of a series of cold-war paperback novels by Donald Hamilton. "If the world is ever saved," the ultracynical Matt says with a world-weary sigh in "The Wrecking Crew," "it'll have to be by somebody young enough not to know it can't be done."

Which brings us to Michael Bloomberg. At 59, New York's mayor-elect obviously isn't young in the conventional sense. But he's a total novice at dealing with the Big Apple's finances, such as they are. And if you've ever dealt with Bloomberg, as some of us business-writing types have, you know the "can't be done" concept is alien to his volatile and intemperate nature. That is a useful quality here. Because, you see, Bloomberg doesn't know what most politicos "know"--that New York City's fiscal problems are so dire that its budget can't be balanced absent humongous checks from Washington or service cuts so severe that you might as well close much of the place down and salt the earth.

The city's finances were going downhill before September 11 because of the slowing national economy and falling tax collections from New York-based financial firms and highly paid financial professionals. That's a byproduct of the stock-market bubble's bursting last year. Since the terrorist attack, the city's finances have been in free fall: revenues are way down, expenses are way up. Under laws passed in the 1970s, when the city's finances were out of control, New York has either to balance its budget or have many of its operations taken over by New York state. Barring a miracle, Washington isn't going to bail the city out. New York will do well to be fully reimbursed its huge cleanup and security expenses, let alone fill the gap in the budget created by the falloff in the city economy.

But if you think outside the political box, the solution to the near-term problem is obvious. It's the B word. No, I don't mean billionaire Bloomberg's writing a personal check to the city. I mean "borrowing." If you're a business person with a short-term problem but good long-term prospects, you borrow to get past today's problem. Assuming, of course, that someone will lend you the money.

Borrowing to fill budget deficits became verboten for the city after the 1970s, when New York flirted with bankruptcy because it couldn't refinance the large short-term loans it took out to cover its cash shortfalls. But that was then, and this is now. Whatever Bloomberg's flaws, the man does know how to count. So you solve New York's short-term problem by waiving or changing the balanced-budget and antiborrowing rules, and you borrow. Having bought time, you deal with the big problem.

And make no mistake--the big problem isn't the current fiscal shortfall. It's keeping businesses in New York City for the long term. A major reason the city was flush during the latter Rudy Giuliani years is that the stock-market boom produced a surge of tax collections from companies and people who made far more than anyone had ever expected. The securities industry accounts for about 5 percent of New York City's jobs, but 20 percent of total wages. And according to state statistics, the industry accounted for almost 40 percent of the growth in personal-income taxes and corporate- business taxes from 1992 through last year. So even though the city's economy consists of lots more than the stock market--it has 3.2 million private-industry jobs, 3.8 million total jobs, a gross city product (a GDP equivalent) of more than $400 billion--the stock market can make a huge short-term difference in the city's finances.

The market windfall was the icing on the cake. The cake itself is that for the first time in decades, the city has been increasing private-industry jobs faster than the country. "The city has been on a roll," says Stephen Kagann, Gov. George Pataki's chief economist. "For the last three years, the city has been gaining market share [in private-industry jobs]. For the 47 years before that, the city lost share."

Keeping that private-industry boom going is Bloomberg's biggest problem. Many of the jobs in the World Trade Center and in the adjacent area have left New York City for quarters across the Hudson River in New Jersey. Others have scattered outside the New York metropolitan area. About 300 stories' worth of office space have been destroyed--the twin 110-story towers and other buildings in the Trade Center complex--and the displaced tenants need someplace to go. Many now homeless companies can't find the space they need in New York City. And many of the jobs the city is now losing temporarily are unlikely to come back.

Worse, the Trade Center attack damaged not just property, but the economy, too. It's generally accepted, even by us optimists, that the psychic and financial fallout from September 11 pushed the national economy into a recession. That recession, in turn, has caused gaping drop-offs in advertising spending and in ad-dependent media, two of New York City's largest industries. Tourism, another important New York City industry, has suffered, too, for the obvious reasons.

So, much as we hate to admit it, a lot of New York's fiscal future hangs on the stock market. And especially on the New York Stock Exchange and huge firms like Merrill Lynch's and Salomon Smith Barney's keeping their physical facilities close together in Manhattan. The reason the NYSE stayed closed for four days after the attack is the damage done to the communications network near its offices, and that it was unseemly and unsafe to bring tens of thousands of people into lower Manhattan to trade securities while workers were hauling bodies out of the rubble.

For all of the NYSE's success--its opening and closing bells are the Greenwich Mean Time of the world's financial system--it can't afford to be closed for another four days in another terrorist attack. The benefit of having everyone close together is that, for some reason, the market seems to work better that way, even though about half the NYSE's trading is done computer to computer, the same way Nasdaq trades. A while back, the NYSE extracted generous subsidies to build a 90-story facility near its current headquarters at 11 Wall Street. When the Twin Towers were standing, that seemed like the thing to do. With the Twin Towers gone, the exchange's building would be the tallest building in lower Manhattan. You might as well paint a bull's-eye on it. Or as NYSE chairman Dick Grasso says, you have to rethink the project so that "we meet the city's and tate's economic expectations, and our safety expectations."

Which brings us back to where we started: Matt Helm. Being a (fictional) federal agent with approval to kill people in the national interest, Matt doesn't mess around. "I'm not here to do research," as he says in "The Betrayers," "I'm here to do a job." So, of course, is Mike Bloomberg. Bet against either of these hard-edged guys, and you do so at your peril.