August 20, 2003
Corruption Cost New York State's Economy $2.9 Billion,
The rise of corporate scandals over the past two years, which caused a significant drop in stock prices, also cost New York State's economy $2.9 billion, cut State tax revenues by $1 billion and decreased the State pension fund value by $9 billion according to a report issued today by State Comptroller Alan G. Hevesi. The report noted that corporate scandals cost New York City approximately $260 million in tax revenues, and cost the New York City pension fund almost $7 billion in value.
"The wave of corporate corruption scandals didn't just hurt the companies involved and their employees. The scandals imposed a huge cost on every American. As investors, they lost hard-earned savings. As honest business people, they faced unfair competition and higher costs of capital. As workers, they confronted increased job losses. As taxpayers, they have to pay higher taxes and face cuts in services," Hevesi said.
"New York was hurt particularly hard. When the stock market declines, that hurts the financial markets, a key industry. And every unit of government, the State and every single county, town and village, faced reduced revenues and higher costs," Hevesi noted. "It is vital to understand the full cost of these scandals so that we take strong enough measures to ensure this never happens again."
Over the last few years, an unprecedented number of cases of corporate corruption have been revealed, which grew into a broad scandal that involved not only the individual companies and their corporate officers, but also accounting firms and investment and commercial banks.
In August 2002, the Brookings Institution issued a report entitled "Cooking the Books: The Cost to the Economy", which estimated that corporate corruption cost the U.S. economy $35 billion in the first year. The estimate was based on the analysis that the scandals caused about 60 percent of the 28 percent decline in the market from March 19, 2002 until July 19, 2002.
The Comptroller's Office applied the Brookings Institution findings to New York State. The State's economy is about 8.4 percent of the national economy. That would mean that New York State's economy would lose about $2.9 billion of the total $35 billion national loss. This estimate may be conservative because the scandals and the stock market decline hit the investment banking industry harder than other sectors of the economy and investment banking is New York's most important industry.
The stock market decline meant a substantial reduction in capital gains and other investment income and thus substantially lower tax revenues from those gains. Also, the reduced economic activity meant lower revenues from business and sales taxes. In total, the State revenues declined by $8.7 billion in the two-year period of 2001-02 through 2002-03. Using the Brookings methodology, about $1 billion of this decline can be attributed to the corporate scandals.
The State pension fund, the Common Retirement Fund, which covers both state and local government employees, is heavily invested in stocks. During State fiscal year 2002-2003, the Fund's equity investments lost $15 billion in value. Using the Brookings analysis, we estimate about $9 billion of the Common Retirement Fund's overall equity losses in the last fiscal year are directly attributable to the corporate accounting scandals. Assuming no other gains or losses in prior or following years, State and local governments would have to increase their contributions by $900 million a year for 10 years.
Corporate scandals also impacted individuals' private portfolios. According to the report, scandals cost individuals in their 50's who had a 401(k) almost $11,000 on average from their 401(k) portfolios based on a $92,000 portfolio savings or almost a 12 percent loss. The report said that individuals in their 40's lost an average of $8,000 based on a $63,000 portfolio, a loss of 13 percent.
The Comptroller's Office has responded to the scandals by:
"Since this March, the market has been showing welcome signs of improvement. But much of the damage from the scandals remain. The loss to state and local budgets is irretrievable. Individual investors, particularly those who are 50 years and older, are unlikely to fully recoup their losses to their retirement. This outrage can never be repeated," Hevesi said.