In the spirit of the season - real estate keeps giving

As we welcome in 2011, New York City faces a $2.36 billion budget deficit in the upcoming fiscal year, with $12.7 billion gap over the next three years. NYS faces a staggering $9.5 billion budget deficit next year, with a daunting $32.2 billion shortfall over the next three years. The Great Recession which commenced in December 2007 and officially ended in June 2009 has been a key factor in these budget shortfalls. For instance, N.Y.C.'s economically sensitive taxes—personal income and corporate—have declined more than $3 billion combined from their peak; NYS has seen comparable declines in their share of these taxes. The decline in real estate activity has led to a decline in transaction—mortgage recording and transfer—taxes. At the height of the market, these transaction taxes combined generated $2.6 billion. The slowdown in commercial and residential sales reduced these taxes to $1 billion fiscal year 2010. However, the fundamental reason for the surging deficits in the city and the state has been spending growth. Between 2000 and 2009 the city's annual pension costs have increased more than 900% from $703.1 million to $6.5 billion and growing. Personal service costs (wages and benefits) are now 60% of the city's budget. The state is facing a similar rise in operating expenses. Between fiscal years 2001 and 2011 total state expenditures increased 75% for an annual average of 7.5%. Between fiscal years 2006 and 2011, total state expenditures for personal services grew 76% for an annual average of 15.9%. Also, NYS is at the top of the list of states in Medicaid spending, with 69% more than the national average. It also ranks first in the nation in education spending without commensurate results. Furthermore, despite the troubled economy, the 365,000 city workers and the 200,000 state employees received raises while private sector employers were freezing wages to address revenue declines. This rate of spending growth is unsustainable, even during the robust period of economic activity a few years ago. Government spending must be brought under control if we expect to return to a period of prosperity and growth for all New Yorkers. Throughout this dramatic economic slowdown, however, the real property tax was a reliable and rising source of revenue for N.Y.C. The five year phase-in of market value increases for income producing property and the cap on annual assessment growth in the single family home market, both mandated by state law, produced a lag in the rise of taxable assessed values on real estate property. As a result, the rising values of a few years ago are now being reflected in the recent property assessments. Between 2008 and 2010, when actual market values were declining, real property taxes based on assessments that relied on market information from 2007 increased 23.6% for a $3.1 billion rise in revenue. This real property tax increase was also bolstered by a 7% tax rate increase. As the market shows signs of a recovery from the nadir of the recession, the city anticipates that the real property tax will continue to rise through fiscal year 2014 to $18.038 billion, an 11% increase over three years. However, the burden of these taxes is becoming a drag on the industry's recovery. To offset this burden we have urged the extension and modest enhancement of the city's major economic development programs: 421a, J-51, ICAP. Throughout the darkest days of The Great Recession, the real estate industry has been the foundation upon which N.Y.C. balances its budget. Over the last three years real estate related taxes—real property, transfer, mortgage recording, commercial rent, and hotel occupancy—have accounted for nearly 50%, and the income producing properties for nearly a third, of the city's locally generated taxes. In this fiscal year alone these real estate related taxes will generate more than $19 billion, a total greater than personal income, sales, and corporation taxes combined. As the market and the economy improve, real estate activity will continue to be the bedrock of the city's budget and the major source of funding for police, fire, sanitation, and schools. The city has begun to take steps to balance its budget for the upcoming fiscal year. It will need the help of the business community and the state legislature to address the pension issues that could create havoc in the government's attempts to achieve a structurally balanced budget. Governor-elect Cuomo faces a more difficult challenge. He will have four months to close a $9.5 billion deficit with an array of well-funded and organized interests groups opposed to any cuts in their constituents' wages and benefits. REBNY will continue to work toward a structurally balanced budget for the city and the state without new tax increases. Our success will require the full public and financial support of the real estate industry and the entire business community. In this holiday season, we are hopeful that our collective efforts will be successful. We wish you a joyous holiday and a Happy New Year. Steven Spinola is the president of REBNY, New York, N.Y.