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New York City's Economic and Fiscal Dependence on Wall Street

August 13, 1998


H. Carl McCall

State Comptroller

Office of the State Deputy Comptroller for the City of New York

Report 5-99


Executive Summary

I. Wall Street in the 1980s

II. Wall Street's Role in the City's Recovery and Expansion in the 1990s

A. Growth in Earnings

B. Wall Street Profits and Bonuses

C. Total Impact on Jobs and Output

D. Capital Gains and Stock Options

E. Wall Street Impact High Throughout 1990s

F. Importance to New York State

III. Wall Street's Fiscal Impact in the 1990s

A. Tax Collections

B. Budget Savings from High Pension Earnings

IV. The Changing Wall Street Environment

A. Weaker Corporate Profits

B. International Instability

C. Over-valued Stocks and the Federal Reserve's Balancing Act

V. The City's Economic and Fiscal Outlook

A. Economic Outlook

B. The City's Out-year Tax Revenue Forecast

C. New York State's Fiscal Outlook

VI. Concluding Thoughts

Executive Summary

As a monitor of New York City's fiscal condition, the Office of the State Deputy Comptroller closely follows developments on Wall Street for their impacts on the City's economic and fiscal fortunes. Our recent report on the Asian financial and economic crisis was prepared as part of our ongoing effort to better comprehend developments that shape New York City's fiscal outlook. (1) Continuing along those lines, this report examines the quantitative dimensions of the City's growing economic and fiscal dependence on Wall Street in the 1990s. We compare this with the experience of the 1980s, another period of major expansion in the financial industry, which culminated in a stock market crash that caused fiscal distress to the City.

To an unprecedented extent, the City has become dependent on Wall Street for economic and fiscal stimulus in the 1990s. After a wrenching recession in the early 1990s, the City's fortunes have rebounded with the surge in the Dow Jones Industrial average as it soared from 2300 to 9000. While the City has still not regained all of the jobs lost during the recession, the current pace of job growth is the fastest in four decades.

Wall Street has by no means been alone in accounting for direct job creation in this decade. Aided by strength in the national economy, the culture and media sector, and business and professional services have together added nearly 130,000 jobs since the November 1992 employment low point. Wall Street employment rose by 32,000 in that period. Tourism has also expanded significantly, as evidenced by the increased numbers of visitors and record hotel occupancy rates. The acceleration in the rate of job growth in the last two-and-a-half years has certainly been a welcome, and largely unanticipated, development.

The revitalized Times Square entertainment district, Downtown and Flatiron District "Silicon Alleys," and the proliferation of construction activity reflect considerable economic vitality beyond Wall Street. Together with the dramatic reduction in crime, the City's economic and fiscal rebound has heralded a tremendous comeback during the 1990s.

Nevertheless, while job growth has broadened beyond Wall Street, a review of various empirical measures underscores the overwhelming centrality of Wall Street in the City's resurgence. Among our findings the following points stand out:

Wall Street, which represents only 5 percent of City employment, accounted for 56 percent of the increase in aggregate real earnings in New York City between 1992 and 1997. In contrast, between 1983 and 1988 only 23 percent of the real earnings gain was derived from the securities industry.

With its lucrative compensation and high profitability, Wall Street has a large multiplier effect: between 1995 and 1997, Wall Street accounted for well over half of all job growth when effects in supplier industries and from higher consumption spending are factored in.

Wall Street activity directly accounted for 36 percent, or $900 million, of the growth in personal income, general corporation and unincorporated business taxes between fiscal years 1992 and 1998. When banking corporation tax payments are included, the finance sector accounted for half of the $2.7 billion growth in these four taxes.

The City's income growth was stronger and more diverse in the 1980s than it has been in the 1990s. Inflation-adjusted total earnings grew by $38 billion from 1983 to 1988, compared to a gain of $22 billion between 1992 and 1997. Eight of the sixteen major industry sectors accounted for at least 5 percent of real earnings growth in the 1980s, compared to only four sectors in the 1990s.

Wall Street's impact on the State's economy and tax receipts has been only slightly less concentrated than it is in the City. In New York State, nearly half of the real earnings gain between 1992 and 1997 was attributable directly to Wall Street.

Wall Street helped move the City from a position of chronic budget stress in the early 1990s, to record surpluses in fiscal years 1997 and 1998. In its FY 1999 budget, the City is spending $1.6 billion from last year's largely Wall Street-induced surplus as well as benefitting from several hundred million dollars in extraordinary earnings by the City employee pension funds. It is not surprising that recent years have seen the annual forecasts for Wall Street profits and bonuses become leading variables in the City's revenue outlook.

Although Wall Street profits continued at record levels for the first half of 1998, the market's recent drop reflects growing investor concern about the sustainability of market prices given the weakening outlook for overall corporate profits.

Among our conclusions is that the changing environment affecting financial markets and the growing likelihood of a national recession over the City's four-year Financial Plan period pose considerable risks to the City's fiscal stability. Should a downturn occur, securities firms will likely reduce costs by lowering compensation before resorting to layoffs. However, we would expect job losses in firms that support Wall Street's business activities as well as in industries driven by the consumption spending on the part of high earners and households. As a result, tax collections would fall in the City and State. Since the City has been spending the budget surpluses of the last two years, it does not have a cushion in the event economic conditions deteriorate. The State's fiscal outlook has been made more precarious by several rounds of tax cuts premised on a continued Wall Street boom.

While its dependence on Wall Street leaves the City vulnerable to a downturn, diversification of the City's economic base needs to continue and takes on added urgency. In the long-term, the City's economic outlook is very positive. New York City's financial firms will likely continue to be world leaders, and the City's reputation as a cosmopolitan and international city has helped it to attract other industries such as culture and media, entertainment, fashion and tourism.

I. Wall Street in the 1980s

After the back-to-back recessions of the early 1980s, the City's economy rebounded and added nearly 250,000 jobs during the expansion period of 1983 to 1988. As Figure 1 indicates, even though the City's gross product growth roughly matched that of the U.S. in both the 1980s and 1990s expansions, the City's job growth fell short of the nation's in both decades. Per capita real personal income grew slightly faster in the City than in the nation during both expansions.

Figure 1

Comparison of N.Y.C. and U.S. Indicators for Expansions in the 1980s and 1990s

Average Annual Changes



N.Y.C. U.S. N.Y.C. U.S.
Real Gross City Product and
Real Gross Domestic Product
Percent Change 3.8% 4.1% 2.9% 2.9%
Real Per Capita Personal Income

Percent Change 3.4% 3.0% 1.8% 1.6%
Total Employment
Percent Change 1.4% 3.1% 0.8% 2.4%
Difference (000s) 49.9 3,011.8 26.0 2,734.2
Private Employment
Percent Change 1.2% 3.4% 1.4% 2.7%
Difference (000s) 35.2 2,708.6 37.8 2,529.0

* The 1990s expansion continues into 1998.

Data Sources: U.S. Department of Commerce, U.S. Department of Labor, N.Y.S. Department of Labor, N.Y.C. Office of Management and Budget.

What is striking, however, is that for almost all of these measures for both the City and the nation, growth in the 1980s expansion was stronger than in this decade. Output, or gross product, growth was about one-third stronger in the 1980s. The one exception to this pattern is private job growth in New York City, which has been stronger in the 1990s than in the last decade, a very positive development. Government employment, which has declined steadily throughout the 1990s, grew by over 73,000 in the 1980s expansion period as the City added back jobs lost during the 1970s fiscal crisis.

Graph 1 In the 1970s, Wall Street's protracted bear market early in the decade was a factor, but probably not the main one compared to the out-migration of several corporate headquarters operations, in the worst economic slide for the City in the post-World War II era. In the 1980s, Wall Street(2) added jobs at a rapid clip -- employment doubled to almost 160,000 at its peak in 1987. Employment in securities fell after the 1987 stock market crash, and has only recently surpassed its 1987 peak level. Wall Street bonuses represented a smaller portion of total wages paid during the 1980s than the 1990s. During the 1983 to 1988 period, bonuses accounted for almost 21 percent of total wages paid in the securities industry compared to 33 percent for the 1992-1997 period. Until the 1987 stock market crash, bonuses rarely were half as much as securities industry profits(3) (see Figure 2).

Nonetheless, the securities sector was the single largest contributor to overall earnings growth, accounting for 23 percent of the real earnings gain in the City during the 1983 to 1988 period (see Figure 3).(4) However, the industry did not dominate the earnings picture the same way it did during the 1992 to 1997 period when it contributed more than half of the real earnings growth.

The City's growth was also fairly diverse in the 1980s, with eight of the sixteen sectors identified in Figure 3 each accounting for at least 5 percent of the earnings growth. In contrast, in the 1990s, only four sectors accounted for at least 5 percent of real earnings growth.

Figure 3

Share of Growth in Employment and Earnings in New York City

1983 - 1988




1988 Job Share

Job Change

Share of Job Change

Total Diff.
In Earnings*

of Real Earnings Change*

Export 41.0% 76,100 30.5% $24.2 63.7%
Securities 4.2 41,400 16.6 8.8 23.2
Business Services 7.3 47,500 19.0 3.6 9.4
Other Finance 5.7 9,600 3.8 0.9 2.0
Culture & Media** 4.4 14,300 5.7 3.0 7.8
Professional Services 4.8 27,300 10.9 7.0 18.4
Banking 5.1 (1,800) -0.7 2.3 5.9
Hotels 0.9 5,300 2.1 0.2 0.6
Manufacturing** 8.7 (67,500) -27.0 (1.4) -3.8
Local 42.4 100,100 40.1 9.1 23.8
Health Services 6.7 29,900 12.0 2.7 7.0
Retail Trade 11.2 31,200 12.5 1.1 3.0
Construction/Mining 3.3 3,800 12.3 2.3 6.0
Social Services 3.2 21,600 8.6 0.8 2.1
Other Services 6.2 9,500 3.8 1.8 4.7
Wholesale Trade 6.4 (7,400) -3.0 1.3 3.4
Transportation*** 5.4 (15,500) -6.2 (0.8) -2.0
Private 83.5 176,200 70.5 33.3 87.6
Government 16.5 73,600 29.5 4.7 12.5
Total, all 100.0% 249,800 100.0% $38.0 100.0%

*Earnings=wages, salaries, and proprietor's income. Totals and subtotals may not add due to rounding.

**Publishing is in Culture and Media, not Manufacturing.

***Transportation includes Telephone, but other Communications are included in Culture and Media.

Data Sources: U.S. Department of Commerce, N.Y.S. Department of Labor; O.S.D.C. analysis.

Reflecting the City's stronger output and income growth in the 1980s expansion, real earnings grew by $38 billion from 1983 to 1988 compared to a growth of $22 billion in the 1992-to-1997 period.

II. Wall Street's Role in the City's Recovery and Expansion in the 1990s

The 1990s national economic expansion, with a duration that rivals that of the expansions of the 1960s and the 1980s, has been led by business investment, consumer durables purchases, housing construction, and merchandise exports. New York City's expansion, on the other hand, largely has been dominated by Wall Street investment banking and securities trading activities, which led the City out of the early 1990s recession.

Figure 4 The impressive rise in the stock market, accompanied by a sizable growth in trading volume, has been a powerful force in the national economy in the 1990s (see Figure 4). More than in any decade since the 1920s, a sustained financial market boom has boosted the value of financial assets and provided a substantial lift to personal consumption expenditures. Largely as a result of the rise in stock prices, $12.5 trillion has been added to the value of household assets nationally since the end of 1994. As the home of the largest U.S. securities firms that account for the lion's share of Wall Street profits (see Figure 5), New York City has been one of the bull market's greatest beneficiaries.

A. Growth in Earnings

Figure 6 shows that Wall Street's 156,000 jobs represented 4.6 percent of City employment in 1997 and an estimated 17.2 percent of earnings -- wages plus proprietors' income. However, between 1992 and 1997, the industry accounted for 20.5 percent of the growth in average annual employment and an analysis of the latest data on earnings indicates that, in inflation-adjusted or real terms, Wall Street has accounted for over half, or 56 percent, of the increase in aggregate earnings in New York City.

Figure 5

Figure 6

Figure 7

The Dominance of Finance in New York City's 1990s

Recovery and Expansion



Sector 1997 Job Share

Job Change

Share of Job Change

Total Diff. In Earnings* ($billions)

Share of Real Earnings Change*

Export 39.0% 65,700 53.3%



Securities 4.6 25,200




Business Services 7.8 56,000 45.5 3.5 15.8
Other Finance 5.9 (3,300) -2.7 3.2 14.7

Culture & Media** 5.2 27,500 22.3 1.8 8.5
Professional Services 5.0 12,000 9.8 0.9 4.2
Banking 3.4 (24,000) -19.5 0.8 3.6
Hotels 1.0 3,200 2.6 0.3 1.2
Manufacturing** 6.2





Local 45.6 116,600




Health Services 9.1 31,500




Retail Trade 11.4 39,000 31.7 0.5 2.2
Construction/Mining 2.7





Social Services 4.6 21,100 17.1 0.3 1.5
Other Services 7.0 25,300 20.5 0.1 0.4
Wholesale Trade 5.6





Transportation*** 5.2





Private 84.6 182,300 148.0 22.6 103.3
Government 15.4 (59,100)




Total, all industries 100.0% 123,200




*Earnings=wages, salaries, and proprietor's income. Totals and subtotals may not add due to rounding.

**Publishing is in Culture and Media, not Manufacturing.

***Transportation includes Telephone, but other Communications included in Culture and Media.

Data Sources: U.S. Department of Commerce, N.Y.S. Department of Labor; O.S.D.C. analysis.

Figure 7 shows New York City employment and earnings growth shares for the 1990s expansion through 1997. Sectors, such as business services, culture and media, or retail trade, that have accounted for more job growth than securities, have contributed far less to the real earnings growth in the 1990s. For example, while business services added 56,000 jobs, or 45 percent of job growth during the 1992 - 1997 expansion, it accounts for 16 percent of the growth in real earnings. Retail employment has grown by 39,000, providing nearly one-third of the City's job growth this decade, but has accounted for only 2.2 percent of real earnings growth.

Wall Street's growth in real salary per worker averaged 4 percent annually between 1992 and 1997, helping to drive its average salary to over $181,900 by the end of that period (see Figure 8). Since real total wages for New York City declined early in the decade when Wall Street had already started to rebound, Wall Street's share of real wage growth over the 1990 to 1997 period is an astounding 97 percent.

Figure 8

Wall Street Has Highest Salaries in New York City

Sector 1997 Average Salary 1992-97 Real Average Annual Salary Growth
Export $70,000 3.1%
Securities 181,900 4.0
Business Services 42,500 1.6
Other Finance 60,400 3.8
Culture & Media* 57,400 1.0
Professional Services 65,100 0.8
Banking 89,000 4.9
Hotels 32,900 2.1
Manufacturing* 39,400 1.0
Local Market $32,800 -1.0
Health Services 38,100 -0.9
Retail Trade 20,800 -0.8
Construction/Mining 44,200 -0.7
Social Services 21,300 -0.8
Other Services 26,000 -5.9
Wholesale Trade 54,100 0.5
Transportation** 41,900 -0.9
Government $42,400 1.7
Total, All Industries $48,800 1.5
Nonfinancial Industries $39,200 0.2

*Publishing is in Culture and Media, not Manufacturing.

**Transportation includes Telephone, but other Communications is included in Culture and Media.

Data Sources: U.S. Department of Commerce, N.Y.S. Department of Labor; O.S.D.C. analysis.

Wall Street average salaries are over 4.5 times greater than the average non-financial salary of $39,200. Besides Wall Street, only three sectors -- hotels, banking, and other finance -- had average annual real wage growth of over 2 percent in the 1992-through-1997 period. Outside of the financial sector, real average wages have grown by only 0.2 percent per year in New York City during this expansion. In the local market sector, where real average wages have actually fallen by slightly over 1 percent a year, annual wages average less than half that in the export sector. While job growth during these years may have been concentrated in the local market sector, much of it has been occurring in industries such as retail trade and social services that pay much less than the Citywide average, and have not kept pace with inflation. Still, it is noteworthy that non-financial workers in New York City have fared slightly better than their counterparts nationally over the 1992-to-1996 period, the latest for which comparable data are available at the national level. Nationally, the average real wage for non-financial workers has declined by 0.2 percent a year, while in New York City there has been an average increase of 0.2 percent.

New York City's job growth has accelerated and is now very strong -- the number of private jobs averaged 75,000 greater in the first half of this year compared to the first half of 1997 -- but real wage growth will also have to accelerate if the 1990s expansion is to match the 1980s. It should be kept in mind that real earnings growth was $38 billion between 1983 and 1988, much higher than the $21.8 billion increase from 1992 to 1997.

B. Wall Street Profits and Bonuses

The strong growth in Wall Street's earnings reflects the sizable growth in profits and bonuses over the last few years (see Figure 9). The industry has set new profits records in three of the last five years as the market indices have continued to move higher, buoyed by strong corporate profits, low interest rates, and subdued inflation. During 1997, Wall Street firms reported $12.2 billion in profits, more than twice their average for the start of the 1990s. These higher corporate earnings have also brought a considerable increase in year-end bonuses, which rose from $4.7 billion in 1992 to an estimated $12 billion in 1997. On an inflation-adjusted basis, this represents a gain of over 17 percent annually. Wall Street bonuses account for 60 percent of all bonuses paid in the City, and are substantial enough to make up nearly 7 percent of total citywide annual wages. This large stimulus is injected into the local economy in late December and early January of every year. Figure 9

By every indicator, the securities industry has become substantially more lucrative in recent years. One of the main reasons for this is that the securities industry has benefitted from a dramatic shift in financial activity away from the commercial banking sector. Financial deregulation has shifted deposits away from banks and there has been a phenomenal rise in mutual funds and public pension fund equity holdings. Moreover, as noted in Chapter IV, record merger-and-acquisition activity in the 1990s has also contributed handsomely to the earnings of New York's Wall Street firms.

C. Total Impact on Jobs and Output

Employing a well-established economic model,(5) OSDC has estimated the extent to which Wall Street has acted as a driver of other sectors of the local economy. Between 1995 and 1997, when securities industry revenues increased by 50 percent, employee compensation and profits soared on Wall Street. The total economic output accounted for by Wall Street rose from $50 billion in 1995 to $75 billion in 1997. Consequently, during this two-year period, Wall Street had a disproportionately large impact on total job creation in New York City.

Between 1995 and 1997, Wall Street firms themselves added about 9,800 jobs while Citywide employment expanded by about 80,000. The model estimates that, through the indirect economic impacts of additional purchases of goods and services by Wall Street firms from other New York City companies during this period, Wall Street activity resulted in $1 billion in additional sales for suppliers and led to the creation of some 7,800 new jobs in industries such as legal services, accounting, computer processing, temporary help agencies, and real estate.

On top of these business-to-business transactions, the model estimates that the induced consumption spending by City residents stemming from these new jobs and from rising employment and employee compensation on Wall Street added almost $4.2 billion to sales across a range of industries, and led to the creation of about 38,000 jobs. These jobs were created largely in the local market sector, including restaurants, retail stores, and personal services. Thus, Wall Street's full economic impact -- its direct, indirect and induced effects -- may have accounted for over 55,000 new jobs, representing well over half of all job growth in New York City over this two-year period.

D. Capital Gains and Stock Options

Figure 10 In addition to direct wage and proprietors' income flows, Wall Street is largely responsible for taxable capital gains realizations received by City residents that have averaged $8 billion annually for the 1995-1997 period (see Figure 10), an amount nearly as great as the $9.2 billion average of bonus payments made to Wall Street employees. These realiza-tions are for taxpayers who file returns and have a tax liability, hence they are directly responsible for a sizable tax revenue flow into the City. Capital gains realizations of this magnitude have added considerably to local consumption and real estate spending. Moreover, the unrealized appreciation in financial assets, or "wealth effect," has also been substantial in recent years and is widely considered by economists to have further boosted consumption spending, in New York City as well as at the national level.

In the securities' industry, as in most industries, there has been an increased tendency to provide stock options as part of employees' compensation packages. As stock prices have increased, more of these options are being exercised. Research by the State Comptroller's Office on nine major companies located in New York State showed that between 1994 and 1996 the number of options exercised at those companies more than doubled to 68.2 million.(6) Sales of the underlying securities would potentially increase personal income tax withholding and may be contributing to the surge in bonus payments that we have estimated for firms in New York City.

E. Wall Street Impact High Throughout 1990s

Figure 11 Even though job growth in other sectors has accelerated as the decade has progressed, the securities industry continues to have a major impact on the local economy. Figure 11 shows Wall Street's direct contribution to yearly real earnings growth in the City. Although Wall Street's share of the annual earnings change has declined slightly, it still contributes over half the annual earnings growth. The $5.6 billion in earnings from the securities industry in 1997 was greater than that of all years except 1992.

In the real estate area, financial service firms were responsible for 13 percent of all leasing activity in the City during 1996. In 1997, they leased 3.8 million square feet of space, a 46 percent increase over 1996, raising their share of citywide leasing to 16 percent. For the first four months of 1998, they have accounted for almost 11 percent of all leasing. Overall, commercial vacancy rates have fallen and rental rates have risen as the City's economy has expanded. Manhattan's Downtown market, home to several securities firms, the stock exchanges, and many of their supporting businesses, has enjoyed a strong resurgence, and several buildings that had planned to utilize a City program to convert to residential space have instead found it more profitable to remain as commercial space. The large increases in Wall Street salaries have also helped push up demand for Manhattan residential real estate, where prices are rising at double-digit rates in many segments of the market.

F. Importance to New York State

Wall Street has also been very important to the State's economy and tax receipts, with the impact only slightly less concentrated than it is in the City. Although the securities industry in New York State, which outside of New York City is largely comprised of retail brokers, represents only 2 percent of statewide employment, it accounted for nearly half of the $27 billion increase in State real nonfarm earnings between 1992 and 1997. The overall State economy, as measured by the Gross State Product, grew by 1.7 percent annually between 1992 and 1996, the latest period for which data are available, with Wall Street accounting for 49 percent of that increase, a similar share as in earnings (see Figure 12). In contrast, during the 1980s expansion, total output in the State's economy grew by an average of 4.4 percent a year with the securities industry accounting for only 7.7 percent of the total growth in real State output in that period.

Figure 12

Wall Street Also Dominates N.Y.S. Earnings and Gross State Product

Growth in the 1990s

Real N.Y.S. Earnings
1992 to 1997

Gross State Product
1992 to 1996

Difference ($ billions)

Share of

Share of Growth

Agricultural Services, Mining, Construction $ 0.9 3.4% -0.3%
Manufacturing (3.4) -12.6% 12.0%
Transportation 0.3 1.1% 9.8%
Trade 1.3 4.9% 20.1%
Securities 13.2 49.2% 49.0%
Other Finance 3.4 15.4% -0.9%
Services 11.1 41.2% 10.2%
Government $(0.7) -2.6%


All Industries $26.8



Data Source: U.S. Department of Commerce.

III. Wall Street's Fiscal Impact in the 1990s

New York City's fiscal position has benefitted from the extraordinary performance of Wall Street. During the early years of the 1990s, the City experienced its worst period of fiscal distress since the 1975 fiscal crisis. The City responded to the pressures that were driving up expenditures with several tax increases. In subsequent years, layoffs, early retirement and severance buyouts, and budget cuts were used to close budget gaps.

As Wall Street helped lift the economy out of recession, tax revenues began to rise. In the mid-1990s, the City embarked on a series of tax reductions, and fiscal year 1997 ended with a budget surplus of approximately $1.4 billion, while the surplus at the end of FY 1998 reached more than $2 billion. It is widely expected that FY 1999 will also end with a substantial surplus. This extra money has been rolled to successive years and has allowed the City to increase its rate of spending compared to earlier years, although the budget gaps in the out-years of the City's Financial Plan still remain sizable. Most of these surpluses resulted from greater-than-expected tax receipts, which have grown rapidly in the last few years.

A. Tax Collections

Wall Street has been the major contributor during the 1990s to the growth in the City's income tax collections. The personal and business income taxes have grown by 56 percent between fiscal years 1992 and 1998, while FY 1998 property tax revenues, which have been dampened by weakness in the commercial real estate market, were still 8 percent below their FY 1992 level. The income taxes have accounted for $2.7 billion, or 82 percent, of the $3.3 billion increase in New York City tax collections over this period.

Figure 13 summarizes the direct contribution of Wall Street to the City's tax collections. Securities firms accounted for an estimated 36 percent of the growth in the personal income tax and the two business income taxes typical securities firms pay, the general corporation tax and the unincorporated business tax. We estimate that the securities industries' share of these three taxes grew by nearly $900 million since FY 1992, to over $1.5 billion in FY 1998. These results generally are consistent with an analysis performed by the New York City Department of Finance which found that the securities and commodities sector accounted for a total of $1.6 billion in City taxes in tax year 1996.(7)

Many of the largest commercial banks also have significant securities operations. When banking corporation tax payments are added to those of the securities industry, the finance sector directly accounts for half of the $2.7 billion growth in personal and business income taxes over the fiscal years 1992 through

Figure 13

The Contribution of Wall Street to City Income Tax Collections

FY92 FY93 FY94 FY95 FY96 FY97 Expected FY98 Difference FY92-98
Securities Firms
Payments in GCT, UBT, PIT (millions) $616 707 851 702 947 1,211 1,513 897
Share of payments 14%








Finance (Banking and Securities) Firms
Payments in GCT, BCT, UBT, PIT (millions) $1,162 1,311 1,635 1,201 1,621 1,913 2,551 1,389
Share of payments 24% 25% 29% 23% 27% 28% 34% 51%

Note: GCT=General Corporation Tax, BCT=Bank Corporation Tax, UBT=Unincorporated Business Tax, PIT=Personal Income Tax. All taxes exclude audits.

Data Source: N.Y.C. Office of Management and Budget; O.S.D.C. analysis.

1998 period. As Figure 13 shows, since the securities industry and the overall finance industry's shares of the income taxes have been rising, their contribution to tax growth has been considerably greater than annual shares would suggest.

In addition to the direct impact, the tax implications of Wall Street's incremental indirect and induced effects that were estimated for the 1995-1997 period amount to about $100 million. For example, the City's Department of Finance calculates that each legal services worker represents $6,550 in tax collections annually. The 1,000 incremental indirect jobs in legal services that Wall Street generated between 1995 and 1997 would imply an additional $6.6 million in taxes.

In attempting to gauge the effect of Wall Street on City tax collections, we can examine what happened in FY 1995 when, as a result of interest rate hikes by the Federal Reserve, the bond market lost 10 percent of its value in calendar 1994 and the stock market finished the year only slightly ahead. Securities profits plunged from $8.6 billion in 1993 to $1.2 billion in 1994, and bonus payouts fell by 15 percent. City income tax collections from financial services fell by an estimated $220 million in FY 1995 compared with the year before. Since the City had not foreseen a market setback, total tax collections ended the year about $500 million below what had been anticipated at the time the budget was adopted in June of 1994.

B. Budget Savings from High Pension Earnings

The City's fiscal position in recent years also has been aided considerably through the effect of strong financial market returns on the City's public employee pension funds. For example, the City's pension funds have averaged nearly 15 percent annual returns since FY 1991, about 6 percent above the assumed rates of return as shown in Figure 14. In FY 1994, the market's poor performance meant that the City pension funds achieved returns that were 7.7 percent below the assumed rate. Investment returns that vary from the assumed rate of return normally are phased in over a five-year period to reduce volatility. Excess returns have reduced the City's annual pension contributions, and the budget savings have been used for other purposes, including offsetting the cost of supplementing retiree pension benefits or for other employee compensation-related purposes. Figure 14 also shows an estimate of the annual potential City budget savings resulting from the superior performance of the financial markets in the 1990s. Such savings have grown from about $10 million in FY 1992 to about $1.1 billion in FY 1999. Figure 14

IV. The Changing Wall Street Environment

Figure 15 With the exception of 1994, the Standard & Poor's 500 stock market index has risen an average of 18 percent annually between 1991 and 1997. Several factors help account for the fortuitous environment shaping Wall Street's performance in the 1990s. Among these, three stand out: subdued inflation, strong corporate profits, and heightened merger-and-acquisition (M&A) activity. Record-breaking M&A activity has been the driving force behind the growth in securities profits (see Figure 15). Moreover, since many such transactions have been carried out in a manner that reduces the supply of outstanding equities, M&As have helped drive equity prices higher generally.

The growth of mutual funds, increased individual retirement investments, shrinking Federal budget deficits, and the attractiveness of the U.S. markets to foreign investors have also characterized an extremely favorable liquidity environment. The Wall Street environment for the past six years has benefitted from the fact that, until the Asian economic crisis emerged in late 1997, there have been few serious international shocks or economic imbalances such as the overheated real estate market that characterized the 1980s.

A. Weaker Corporate Profits

For three of the past four quarters -- the first quarter of 1998 was the exception -- the major stock market indices have not risen appreciably (see Figure 16). Recently, the stock market declined by nearly 10 percent from its mid-July peak to the first week in August. In addition, stock prices for many small and medium-sized companies have experienced significantly greater reductions from their recent peaks than the prices for major blue-chip corporations. This reflects growing concern about limits to the Figure 16further rise in the market. The major vulnerability in financial markets at this point is continued weakness in corporate profitability. Corporate profits, after growing at an average annual rate of 12 percent for the last five years, declined by 2 percent in both the fourth quarter of last year and the first quarter of this year (see Figure 17).

B. International Instability

The Asian economic crisis has contributed to weaker corporate profits and fears of further international economic instability.(8) As several Asian economies have contracted, weak demand in Asia for U.S. manufactured goods and farm products has widened the trade deficit for the first five months of 1998 by 40 percent. This deterioration in the balance of trade has exerted a powerful drag on the U.S. economy. Despite that drag, Gross Domestic Product expanded 5.5 percent in the first quarter of this year, but stalled in the second quarter, with a gain of only 1.4 percent. Figure 17

Japan, whose recovery is critical to the recovery of the region, has not managed to re-start its sagging economy or bolster its failing currency. Japan's banking system has been paralyzed by the overhang of an estimated $1 trillion in bad debts left over from the country's "bubble economy" of the late 1980s. A further depreciation of the Japanese yen against the dollar, or the devaluation of China's currency, could trigger another devastating round of devaluations across Asia, prolonging economic misery there and forcing U.S. firms to slow production and shed workers in response to falling international sales.

C. Over-valued Stocks and the Federal Reserve's Balancing Act

Even as corporate profits decline, many traditional measures suggest the stock market is already overvalued. For example, the price-earnings ratio on the S&P 500 is at an all-time-high. That stock prices continue to climb despite a growing consensus that corporate earnings growth is slowing is partially explained by the exceptional economic conditions experienced by the U.S. in the last several years. Federal Reserve Chairman Alan Greenspan calls this condition "the virtuous cycle": low inflation, low interest rates, low unemployment, and rising wage gains. These conditions have compensated for slowing profits, and therefore, according to Greenspan, fueled rising expectations about earnings that have driven stock prices to levels that may be hard to sustain.(9)

Maintaining the cycle's virtue will require balancing the Asia-induced slowing of the national economy and the inflationary pressures from growth leading to falling unemployment and rising wages. The Federal Reserve's Open Market Committee has made its primary concern inflationary pressure, rather than deflationary effects from Asia. However, on the premise that employment growth outpacing labor force growth inevitably generates wage inflation, Chairman Greenspan has strongly signaled the Federal Reserve's intention to slow growth through interest rate policy should it not slow sufficiently on its own.

The U.S. economy is at a precarious point in its seven-year expansion. Global or domestic forces, or some combination of the two, could tip the scales toward one set of unfavorable conditions or another, in either case stalling growth in the economy and stock market, and possibly precipitating a recession or significant market retreat or both.

V. The City's Economic and Fiscal Outlook

Wisely, the City does not forecast a continuation of Wall Street boom conditions beyond this year. Rather, the City forecasts a moderate slowing on Wall Street and in the economy. However, the City does not anticipate a national recession or sustained weakness in the financial sector over the four-year Financial Plan period. While the City's forecast provides a somewhat conservative basis for projecting tax revenues for FY 1999 -- nearly half of the liability year has already passed -- given the changing environment affecting the Wall Street outlook, there is a considerable downside risk to the City's forecast for economically sensitive taxes for the out years of the Plan period.

A. Economic Outlook

In the City's budget forecast, economic growth will slow in 1999 and 2000, then pick up slightly in the next two years. On average for the four years, 1999-2002, the key economic variables are lower than the average levels prevailing in the previous four-year period, 1995-1998. Figure 18 also shows these variables for the 1989-1991 recession and the early recovery period of 1992-1994. Growth in real total wages, for example, averages 1.8 percent over the next four years compared with 4.7 percent annually during the 1995-1998 period. Securities profits are forecast to average about half the average for the previous four-year period.

This is a forecast for moderate slowing on Wall Street and in the local and national economies. It does not reflect a national or local recession or sustained Wall Street weakness over the course of the Financial Plan period. The City's out-year forecast is plausible, but it is not the only such scenario given the risks facing the national and local economies. While one cannot rule out a continuation of the Wall Street boom conditions of the past three years, there could also be a Wall Street "correction" -- more severe than the 10 percent declines that occurred in the spring and the fall of 1997 -- from which there is not an immediate rebound. It is also conceivable that a national recession coupled with a significant Wall Street downturn could flatten the City's economy for several quarters.

Retrenchment on Wall Street in the wake of the 1987 stock market crash had a lot to do with the depth and duration of the ensuing recession that was far more severe locally than what was experienced nationally. As we have noted before, the City is significantly more dependent on Wall Street today than it was in 1987. Even without a downturn of the magnitude of the last recession, there is considerable risk for the City.

Figure 18

N.Y.C. Economic Indicators Over the Business Cycle

1989 - 2002

Average Annual Growth Rates


Total Real Wages

Real Personal Income

Real Securities Profits
(Billions, 1997$)

Real Growth in Non-Property Taxes*







Early Recovery












Out Years**






* Tax data on fiscal year basis that most closely corresponds to calendar year, e.g., tax collections for FY 1999 most closely track economic activity occurring in calendar year 1998. Growth rates for major nonproperty taxes have been adjusted for rate and base changes.

**N.Y.C. Office of Management and Budget forecasts for 1998-2002 for all indicators and for 1997 wages and personal income growth.

Data Sources: N.Y.S. Department of Labor, U.S. Department of Commerce, U.S. Department of Labor, New York Stock Exchange, Inc., N.Y.C., Office of Management and Budget; O.S.D.C. analysis.

Many major national forecasters consider the likelihood of a national recession to be rising. In the latest Blue Chip consensus survey of 50 macroeconomic forecasters, 65 percent expect a national recession to begin in either 1999 or 2000, while at least 92 percent anticipate that a recession will begin before the end of the four-year Financial Plan period. However, such expectations should be kept in perspective. Four years ago, a similar Blue Chip survey found that 78 percent of the forecasters expected a recession to begin before 1998.

B. The City's Out-year Tax Revenue Forecast

Figure 19 For fiscal years 2000 through 2002, the City expects total tax collections to rise, before proposed tax cuts, by an annual average of 3.5 percent. Reflecting its forecast for a moderation in economic activity, growth in the economically sensitive nonproperty taxes is expected to average only 2.7 percent, barely above the projected inflation rate of 2.5 percent. On the other hand, after declining for four of the past five years, property tax revenues are forecast to rise by 4.9 percent annually between FY 2000 and FY 2002 (see Figure 19). The property tax's resurgence stems largely from the recovery in the Manhattan office market, a recovery that only starts to show up in a significant way in FY 2000 because of the delay caused by the State requirement to phase in over five years higher assessments for income-producing property.

While property tax revenues would eventually be affected if the City's economy does slow significantly in the out years, during the Plan period itself the phase-in of assessment increases for office properties would help offset, up to a point, weakness in the more economically sensitive nonproperty taxes.

After factoring out base and rate changes, as the last column in Figure 18 indicates, the City is forecasting that the real growth in nonproperty taxes will average only 1.3 percent for the out years. This is well below the 5.3 percent average for the previous four years. However, during the last recession nonproperty taxes declined by nearly 7 percent a year on a real common rate and base. More recently, in FY 1995, when Wall Street faltered, the decline exceeded 4 percent.

Although the City is prudently reducing its out-year forecasts for the more economically sensitive taxes in anticipation of a softening on Wall Street, the City does not have a cushion in the event economic conditions deteriorate beyond that envisioned in its economic outlook. The City has been spending the surpluses of the past two years rather than putting them in reserve for an eventual "rainy day" period. While this is not to suggest that the City plan for the worst-case scenario, we feel it would be imprudent to budget for higher nonproperty tax revenues than the City's estimates for the out years.

Even though the City's recovery has broadened beyond Wall Street, the substantial income-generating capacity of Wall Street means that it will continue to largely determine the City's economic and fiscal fortunes for the foreseeable future. The changing environment affecting Wall Street and the growing likelihood of a national recession over the Plan period pose considerable risks to the City's forecast for economically sensitive taxes.

C. New York State's Fiscal Outlook

Wall Street's record performance in recent years has helped the State to not only close projected budget gaps but also to generate surpluses. However, budget policies for the years ahead have been set based on the assumption of a continuation of propitious financial market conditions. Sizable tax cut and spending commitments have been made which rise steadily in their recurring impacts, creating the prospect for substantial budget gaps that reach $5.5 billion in 2000-2001.(10) Despite surging tax collections, the State has increased its reliance on borrowing to finance capital expenditures rather than finance such expenditures on a pay-as-you-go basis. In its latest five year capital plan, the State projects that debt service will increase further by almost 40 percent. The State's tax reduction and spending commitments may prove difficult to fulfill should the economy slow or Wall Street activity falter.

VI. Concluding Thoughts

In rebounding from the early 1990s recession, the City's economy has demonstrated a resiliency few could have anticipated five or six years ago. With job growth having recently attained its fastest pace in years, and with an abundance of outward signs of prosperity, it is tempting to yield to a complacency regarding the City's economic course. Similarly, with rising City budget surpluses it is not surprising that many have become sanguine on the fiscal front as well.

This report finds that, in accounting for over half of earnings growth between 1992 and 1997 and over half of total job growth during a two-year period, the Wall Street securities industry has been the overwhelming driving force behind the City's economic and fiscal success in the 1990s. Despite the considerable stimulus provided by Wall Street, the pace of economic growth in the City trails not only most of the largest U.S. cities(11) but also the City's own growth record in the 1980s. Moreover, more sectors of the City's economy shared in the 1980s income growth whereas in this decade the benefits have been highly concentrated. One bright spot for the 1990s has been private job growth, which has exceeded the pace for the 1980s, and continues strong in 1998.

Several questions arise from this study of the City's growing economic and fiscal dependence on Wall Street. Is the City's dependence a serious problem? The City is certainly vulnerable should the dominant sector turn down. However, the obvious benefits for the City in having such a concentration of the world's leading investment banks and securities brokers arguably far outweigh the risks of dependency. What is needed are other sources of stimulus to help provide diversification as well as appropriate long-term fiscal planning measures to enable the City to better weather the cyclical ebbs and flows of economically sensitive tax revenues.

There have been some positive developments in diversifying the City's economic base in the 1990s. Tourism, culture and media production, computer software, and management consulting firms have all prospered in recent years, and in many cases the City has increased its national share of activity. It is important that these trends continue if the City is to better manage the risks associated with its heavy reliance on Wall Street. On the other hand, despite its apparent potential for greater synergies with local design and marketing strengths, the City's light manufacturing sector has continued to contract, taking with it much needed blue collar jobs critical to providing a range of employment opportunities. The City also appears to have untapped potential in the biotechnology area given the extent of local biomedical research efforts.

If there is a downturn, will the City fare as poorly as it did during the 1989- to-1992 recession? While this cannot be answered without knowing the nature and magnitude of the economic setback, several factors should be noted. Wall Street responded to the 1987 crash by cutting jobs in order to cut costs. With compensation levels having soared in recent years, securities firms have much more latitude to reduce costs by lowering compensation before resorting to layoffs. Since the local real estate market has only recently recovered, the City is less vulnerable to a repeat of the severe real estate investment and construction contraction that took place in the aftermath of the 1987 crash. Also on the plus side is the fact that the wave of corporate downsizing that coincided with the City's last recession is not as likely to be repeated in the near future.

On the other side of the equation, there are such things as the changed nature of the City's health care industry. During the last recession, the national trend of double-digit growth in health care expenditures meant that health care employment in the City continued to rise by about 10,000 annually, helping to cushion against recession-induced job losses. The likelihood of continued cost-cutting pressures in the new era of managed care considerably dampens the health sector's job growth potential over the next few years. Also, the substantial gains made in retail employment in the City in the 1990s, much of it driven by consumption spending on the part of high earners and households benefitting from the rise in equity values, could recede with cutbacks in discretionary spending. During the last recession, the retail sector shed 62,000 jobs.

Given its Wall Street dependence, what is the City's longer-term economic outlook? Several factors suggest that it is, on the whole, very positive. The City's financial businesses are likely to continue as world leaders in the coming decade, even with the emergence of more competitive European financial firms under monetary union. However, while technological changes in telecommunications have not adversely affected the location of financial firms in New York City so far, it is unclear whether future technological changes will have a decentralizing effect. The City has made important headway in this decade in reducing crime, enhancing the quality of life, and in lowering its relative cost position vis-a-vis other large cities. The local tax burden has declined steadily, and by breaking up the commercial carting cartel, the City helped improve the operating climate for both large and small businesses.

In the long run, New York City is well served in that it is a truly cosmopolitan and international city. In several areas in addition to finance -- culture and the arts, entertainment, fashion, media and tourism among them -- the City stands out on the global scene. Besides acting as a magnet drawing in ambitious young people from all over the nation, New York City is as or more ethnically diverse and hospitable to immigrants than any other global city. In attracting thousands of immigrants each year, the City taps a rich source of entrepreneurial energy.

Among the challenges the City faces, one of the most daunting is a still-high unemployment rate and the prospect of absorbing large numbers of new labor force entrants under welfare reform. This task is complicated by the pressures welfare reform places on the working poor. For the City to ensure that it has an educated and productive labor force as it enters a new century, in addition to upgrading public education, the City needs to address the rising demand for quality, affordable child care and the growing number of residents without health insurance.(12) An adequate supply of affordable housing and a modernized infrastructure are also key ingredients for the City's economic future.

The City's fiscal planning must accommodate these long-term investments as well as address its high debt burden and persistent structural budget imbalance. Temporary Wall Street-driven surpluses alone cannot solve the City's long-term fiscal problems.

H. Carl McCall

New York State Comptroller

Office of the State Deputy Comptroller

Kathleen Grimm

Assistant Deputy Comptroller

Report Prepared By

James Parrott, Chief Economist and Director, Bureau of Fiscal and Economic Analysis

Marcia Van Wagner, Assistant Director, Bureau of Fiscal and Economic Analysis

Michael Brisson, Chief Analyst

Diane Diamond, Analyst

Peter Hatch, Analyst

Michele Holder, Analyst

Maureen Ryan, Analyst

Sandy Stevenson, Analyst

Report Production and Distribution

Gail Bessoir

JoAnne Corsi

Francine Cox

Merlene Richardson

Ann M. Shea

Jesse Simmons

Additional copies of this report may be obtained from:

Office of the State Comptroller

Office of the State Deputy Comptroller

270 Broadway, 23rd Floor

New York, NY 10007

Telephone: (212) 417-5442

FAX: (212) 417-2144


1. See our Report TM-1-99, " The East Asian Economic Crisis: A Background Report on the Implications for New York City," issued April 27, 1998. Return

2. Wall Street is defined as the securities industry, which includes investment banks and securities brokerage firms. Return

3. Securities, or Wall Street, profits cited in this report are pre-tax profits for all New York Stock Exchange member firms. Return

4. Earnings account for about 62 percent of total personal income in New York City. Return

5. The IMPLAN model, developed for the Federal government, utilizes detailed data on national and local interindustry economic transactions to model the effects of regional economic changes. Return

6. See Office of the State Comptroller, Office of Fiscal Research & Policy Analysis, "1998-99 Budget Analysis Review of Economic and Revenue Forecasts," issued March 24, 1998. Return

7. See the New York City Department of Finance, Office of Tax Policy, " Annual Report on Tax Expenditures, Fiscal Year 1998," issued June 1998. In addition to the income taxes included in our analysis, the Finance Department's estimates included property and commercial rent taxes paid by securities firms, utility taxes paid by businesses, and sales taxes. Our estimate attributed a portion of capital gains realizations to the securities industry. Return

8. See our Report TM-1-99, "The East Asian Economic Crisis: A Background Report on the Implications for New York City," issued April 27, 1998. Return

9. In a recent survey, three-fourths of financial forecasters believed that stock analysts' expectations of corporate profits for the remainder of 1998 and 1999 are either " too optimistic" or " far too optimistic." Blue Chip Financial Forecasts, August 1, 1998. Return

10. See Office of the State Comptroller, Office of Fiscal Research & Policy Analysis, "1998-99 Budget Analysis: Review of the Enacted Budget," issued July 23, 1998. Return

11. See our Report TM-2-98, " The New York City Region in the 1990s: A Look at Economic Performance Compared to the Nation's Largest Cities," issued October 1, 1997. Return

12. See our recent Report 4-98, " Child Care Services in New York City," issued December 18, 1997 and our Report 4-99, " Challenges Facing New York City's Public Hospital System," issued August 5, 1998. Return