Brooklyn's Progress
April/May 2008

BY MARIA FIORINI RAMIREZ

In recent months the financial markets have been riddled by turmoil, as what began last summer as a crisis in the sub-prime mortgage market has spread throughout the credit markets and the banking system.

The effect of Wall Street’s woes and substantially tighter credit conditions promises to be quite dramatic on the local economy, with tax revenues hit hard and many construction and development projects unable to be financed as was believed possible only a few short months ago.

There have been two recent events that point this out quite strikingly. The likely acquisition of Bear Stearns by JPMorgan Chase will probably have an impact on both of their presences in Brooklyn. JPMorgan Chase has about 5000 back office employees in Brooklyn and Bear Stearns has about 1500. Overall the financial services industry, which is a very significant contributor to the economy of the City and revenues for the City and States, has yet to see the full repercussions of the credit crisis we have been in for several months already.

The other local impact of evolving economic conditions will be felt in the progress of the Forest City Ratner Atlantic Yards project. Because of the credit crisis, it has been very challenging to raise money to finance projects that looked like sure things only a short while ago. As a result of the very poor environment in the bond markets, it appears that there will be substantial delays in the construction of parts of this mega-development east of Flatbush Avenue in Downtown Brooklyn. In past economic recessions, similar delays have lasted many years, though the Nets basketball arena, the first phase of the development, appears to be proceeding. That schedule, however, has already been delayed by the same factors that affect most big projects, particularly in New York City, where political posturing by all the different factions, lawsuits and other delays costs billions of dollars more than projected in the long run. With the cost of money and raw material prices rocketing, the eventual price of this project will only go up in the future.

As for local government finances, on October 30, 2007, New York State Division of Budget released its mid-fiscal year update to the state financial plan, which reflects the anticipated impact on the budget of weakness experienced in the financial services and real estate sectors. Given that the economy has deteriorated since late October, and in particular the growing troubles facing Wall Street and the real estate sector, underlying fundamentals are even weaker than reflected in these updated numbers.

The Division of the Budget has lowered its tax revenue forecasts substantially, particularly for personal income tax collections. $500 million for 2007-08 and $650 million for 2008-09, due in large part to a projected decline in the growth rate for bonuses paid by financial services firms have revised these downward. While the budget is projected to be in balance for the current fiscal year, the General Fund budget gap for 2008-2009 has been revised upward by roughly $651 million to $4.3 billion from the $3.6 billion gap projected in July.

The New York City budget will be affected in a similar manner, particularly on the tax revenue side of the ledger. Estimates of revenue garnered from real estate transactions and income taxes have been cut by $350 million for the current fiscal year (which ends on June 30, 2008) and by about twice that for the next fiscal year.
Turmoil in the nation’s housing and mortgage markets has reverberated through the financial sector, threatening to produce a marked slowdown in local economic activity.

Across the country, states and municipalities have been addressing the economic setbacks by implementing belt-tightening measures in order to balance their budgets for this year and next year. The problem is that as State budgets have to be cut, the shrinking revenues also get pushed back to every aspect of the local economy and the ripple effect is very broad.

In New York City, Mayor Bloomberg has already directed agencies to develop initiatives to achieve budgetary savings of 2.5% this fiscal year and 5% in FY 2009.

The impact on Wall Street profits has already been significant, and the earnings of the City’s financial firms will be down significantly from 2006 levels, as are the associated bonuses which last year reached a record $34 billion. The NY State Budget Director recently estimated that total wages on a state-wide basis would grow by a little over 3% in the fiscal year ending March 31, 2009, down from just over 7% in the current fiscal year, with a huge swing in Wall Street bonuses the primary reason.

On the bright side, the weak dollar is continuing to provide a boost to foreign tourism in New York City, and this will help to somewhat soften the blow from the financial sector. Hopefully, with the help of the Federal Reserve Bank’s intervention to provide liquidity to the financial system, the current crisis will prove to be manageable and by 2009 things will be looking brighter. With that said, we are in uncharted waters in many respects, and forecasting in such an environment is a perilous task.

Maria Fiorini Ramirez is President of Maria Fiorini Ramirez, Inc., an independent global economic and financial consulting firm. She was a featured speaker at the Brooklyn Chamber’s 2008 Economic Outlook forum in January.  A member of the Board of Directors of Sovereign Bank, Independence Community Foundation and Pace University. The accuracy of Ms. Ramirez’ economic forecasts has been hailed by Wall St. Journal, Bloomberg Markets and USA Today.