New York City's budget problems may worsen over the next year as Wall Street layoffs begin to siphon additional tax revenues from the city's budget.
Speaking at a budget hearing yesterday at City Hall, several economists said that rising interest rates have depressed underwriting volume and reduced trading activity.
These factors could have a significant impact on the city's budget, as firms reduce their workforce and rob city coffers of tax revenue in fiscal 1995, which began July 1. The layoffs also add to the already large budget gaps in the city's multiyear financial plan.
"The process of rising interest rates unfolds over time," said Hugh Johnson, chief investment officer at First Albany Corp. "Devastating is too strong a word. But when rates go up, Wall Street must adjust."
So far this year, many firms have announced layoffs of bankers, traders, underwriters, and back-office staff to meet the reduction in business activity. In addition to scores of regional firms, many of the municipal market's largest players, such as Goldman, Sachs & Co., Lehman Brothers, and CS First Boston, have announced cutbacks.
The economists said further spikes in interest rates will probably occur. As a result, Wall Street firms will remain under pressure to reduce personnel in order to cut costs, they said.
Depending on their magnitude, the layoffs could have a disastrous effect on the city's fiscal 1995 budget, because Wall Street economic activity produces 14% of all city revenues, city officials say.
Mayor Rudolph Giuliani recently announced a plan to cover a $1.1 billion gap in the city's fiscal 1995 budget. On Wednesday, state Comptroller H. Carl McCall joined city Comptroller Alan Hevesi in projecting that the gap could be $500 million higher than Giuliani believes.
Giuliani, in his gap-closing plan, reduced his projection for tax revenues in fiscal 1995 by $170 million, due largely to the problems on Wall Street.
If layoffs continue, the city's budget will remain under pressure, and further revisions will be in order, city officials say.
"I think the jury is out" on future layoffs on Wall Street, said one city budget official. "But there is a risk of significant reduction."