New York's Real Transit Crisis
Now that New York City's first transit strike in a quarter-century has been settled, a furious debate has begun over who actually won. This time the union leadership and the Metropolitan Transit Authority (MTA) are on the same side, insisting that their agreement is the greatest transit contract since the opening of the IRT subway in 1904, while the union's left opposition thunders that the contract--which has yet to be approved by the membership--is a huge and disastrous sellout.
But if the result of the strike is sharply disputed, no such disagreement surrounds its cause. Union president Roger Toussaint and MTA chair Peter Kalikow agreed: The epic tussle was caused by pension-fund problems. "Were it not for the pension piece," said Toussaint, "we would not be on strike." Kalikow, for his part, pointed a trembling finger at a coming "tidal wave" of pension costs. Commentators across the political spectrum are chanting in chorus that New York's labor pains grow out of soaring, uncontrolled pension obligations--a national problem. "The states can no longer deny the math," advised the New York Times editorially in a December 25 Christmas card to the transit workers. Something has to give, the paper argued. If union members are so touchy about the erosion of their pensions, better for them to give up some health benefits (as in fact they did, agreeing to pay 1.5 percent of their wages toward healthcare premiums). "The workers won't like that," the editorialists predicted, "but it's unlikely they will find much empathy from riders, most of whom...have been paying toward their own premiums for a long time." But before succumbing to holiday-season resentment, perhaps we should recheck the MTA's math.
Some Big Apple skeptics won't believe any numbers put out by either the MTA or by Kalikow. A couple of years ago, the MTA got caught by both the city and state comptrollers keeping two sets of books to justify a fare increase--one for the public, the other for those with a need to know. "It is impossible for people to be this incompetent," observed the city's comptroller. "This was clearly willful." Kalikow angrily denied there were two sets of books.
Fortunately, though, we don't have to take either Kalikow's word or the MTA's on the authority's actual financial condition. Independent budget analysts agree that while pension costs are going up, they're not the biggest problem. The real budget buster--twice as large as the pension shortfall and going up faster--are debt-service costs. And the reason they are out of control has more to do with dubious financial management and the MTA's all-embracing culture of inside self-dealing.
A Votre Service, Messieurs
For more than a decade now, under Governor George Pataki, who controls entry onto most board seats, the MTA has evolved into a five- star, tax-supported French restaurant for the city's FIRE elite (finance, insurance and real estate). A throng of hungry, elegantly tailored freeloaders can be regularly found at the MTA's Madison Avenue headquarters feasting at the public weal: investment bankers seeking no-bid bond business, developers angling for bargain properties, landlords who want the MTA as a generous tenant, mobbed-up contractors seeking construction business and fabulous fixers like Al "The Fonz" D'Amato--the former US senator who plucked Pataki from his Peekskill, New York, obscurity and who, in 1999, got paid $500,000 for one call to the MTA chief on behalf of an MTA landlord. They're all chowing down under the eyes of MTA maitre d' Pataki, who guides them to their customary tables while receiving generous tips.
Most generous indeed: The year of his appointment as MTA chief, Kalikow and his wife gave Pataki $80,000. Just last June Kalikow's wife, Mary, donated $15,000 to Pataki, although he wasn't running again for governor.
What's in it for Kalikow? Well, if you want to land a contract with the MTA it does seem to improve your odds if you rent space in one of his properties. D'Amato's lobbying outfit, Park Strategies, operates out of the twenty-fifth floor of Kalikow's flagship tower at 101 Park Avenue. One floor up is subway-car contractor Bombardier. Last summer Bombardier won a $425 million MTA contract. That brought the total MTA revenue for the Montreal-based vendor, which has been plagued by delivery and repair problems, to $2.5 billion. EA Technologies, another MTA earner, rents space at Kalikow's 195 Broadway tower. In 2000, when Kalikow was vice chairman of the MTA board, EA Technologies was part of a joint venture that was awarded a $141 million contract to install a fiber-optic communications network for the Transit Authority. But as an MTA spokesperson told the Daily News, Kalikow didn't vote on the contract.
Just below Kalikow in the MTA hierarchy is one of the two vice chairs, David Mack. He's the brother of Earle Mack, who in winter 2003 flew Pataki in a jet he co-owned to a St. Bart's retreat in the Caribbean. (Pataki said he paid for the flight and the hospitality, but he denied FOIA requests to provide canceled checks.) More recently Pataki spent several days as Earle Mack's guest in Helsinki, when Earle was serving as George W. Bush's Ambassador to Finland.
The Macks--who own some 25 million square feet of office and retail space in the New York metropolitan region--have reason to be generous hosts. In 2003 the Port Authority agreed to build a $150 million spur to the family's latest project: Xanadu Meadowlands, a 1.3-million-square-foot shopping mall and sports complex that includes an indoor skiing dome. Perhaps not coincidentally, David Mack has sat as a Pataki-appointed commissioner of the Port Authority since 1997. David Mack and his wife gave Pataki $54,800 for his 2002 gubernatorial race.
The other MTA vice chair, Ted Dunn, has been a loyal contributor, as have members of his family; they gave Pataki $34,000 for his 2002 race. Ted Dunn is the former managing director of Morgan Stanley, world's biggest investment banker. Although as recently as 2003 this whitest of white-shoe Wall Street firms was in turmoil because of federal conflict-of-interest charges, it serves as senior manager for hundreds of millions of dollars' worth of MTA bonds. This past February Morgan Stanley shared the senior manager's role with JP Morgan and Merrill Lynch. At customary commission rates, the syndicate members would share anywhere from $20 million to $60 million for a few days' work. The MTA's financial managers make more or less depending on how fast they sell the bonds. Naturally, it's in the interest of the managers to sell at a higher rate--and against the interests of the MTA, which benefits from a lower rate. But no one seems to be monitoring the MTA's bond syndicates to check for profiteering.
In 2000 the MTA did hire a financial adviser. He was Robert Foran, managing director of Bear Stearns. Foran advised, Dick Cheney-style, that Bear Stearns be the lead underwriter for the authority's $17 billion capital plan for 2000-04. So Bear Stearns, another Pataki campaign contributor, got the top-of-the-food-chain spot to eat the $100 million in commissions generated by the bond sales.
They pay thousands in order that we pay billions. Together the fabulous freeloaders threaten to bring back that old 1970s show: financial crisis, layoffs, service reductions. After all, the silver-haired Kalikow has bankrupted the last two institutions he headed, the New York Post and his family real estate business. He could be headed for the hat trick.
The MTA owes more than $20 billion in debt-service costs. And it's planning a huge new $27.8 billion capital plan that heavily depends on more borrowing. By 2015 debt service will eat up nearly a quarter of all MTA revenue. Just to keep the debt service at its current level, MTA revenues will have to increase nearly 10 percent a year.
No one wants to go back to the bad old days of the 1970s and early 1980s, when subway rides were fourteen times more likely to break down than today. But MTA money is not going for needed maintenance. To quote David Gunn, the former MTA official credited with being most responsible for bringing the subway back from the brink, MTA funds aren't going for "nuts and bolts" but for "big sexy projects."
Of course, eros here is in the eye of the beholder. No doubt spending $481 million to build a platform over its West Side yards is hot stuff for the MTA directors. It would enable them to build another headquarters and sell off more midtown properties. But it's an amount equal to the increase in pension-fund costs until 2008. And it's unnecessary. As New York State Comptroller Alan Hevesi points out, there are developers who've offered to build the platform for free.
The Bada-Bing Boys
Perhaps the hottest real estate project in recent MTA history is the authority's new 2 Broadway headquarters. The 2 Broadway tale could be one of those immigrant rags-to-Armani sagas New Yorkers so savor. But in a contemporary twist, a competing story line implicates the mob and MTA crony culture, with hundreds of millions in cost overruns-- and huge, long-term debt nearly equaling the cost of building the project.
The story begins with a former cab driver from Soviet Georgia, Tamir Sapir. In the mid-1990s Sapir bought a distressed 1.6-million-square-foot clunker from the bankrupt Olympia & York empire for what amounted to pennies in mogul money--$20 million. Then Sapir offered to lease it to the MTA. But the building wasn't exactly in move-in condition. The MTA insisted it be fixed up, which the cash-strapped Sapir couldn't afford. He couldn't start remodeling without a loan, and he couldn't get a loan until reluctant MTA staff professionals approved the project. To smooth out the hitch, Sapir turned to The Fonz. Former Senator D'Amato called the head of the MTA--Kalikow's predecessor, who was also a Pataki appointee and who also rents space in Kalikow's 101 Park Avenue Tower--and got the approval. This is the famous half-million-dollar phone call D'Amato made in 1999. For just having the guts to make a cold call, D'Amato earned $100,000. Because the deal went down, he got an extra $400,000. Eventually Sapir was able to shift the cost of the call to the riding public.
But Sapir's 2 Broadway problems were just beginning. He was a deal guy, not a hands-on construction supervisor, so he turned over control of the remodeling to Fred Contini, who used to work for him. But sadly, as it turned out, Contini really worked for the Gambino crime family. Specifically, Eddie Garafola, brother-in-law of Gambino underboss and multiple murderer Sammy "the Bull" Gravano. Companies controlled by the Gambinos got ten separate subcontracts on the 2 Broadway job.
Under Garafola's construction site management, there ensued the classic labor peace racket: Three unions on which the mob has leverage agreed to go along with the requests of mob-controlled companies, pretending to hire union labor at the union rate but instead hiring nonunion workers, while billing at the higher rate, keeping the difference as a kickback or distributing it to the mob-controlled subcontractors. Payments to nonexistent workers were collegially laundered by fellow wiseguys in the Genovese crime family.
Meanwhile, project costs went up and up. There was an early estimate of $135 million, but now State Comptroller Hevesi says the real number will be closer to $450 million; with interest, it balloons to $850 million. Here was a building that cost about $8 a square foot but will wind up costing more than $700 a square foot. And all for a building MTA is leasing, not owning.
Investigators have ruled that none of this was either Sapir's or the MTA's fault. Both were victims. Sapir did admit he hadn't carefully supervised Contini and was frequently away on business trips. "When the cat's away, the mice will play," explained Sapir to a New York real estate magazine interviewer. One fact not yet nailed down by investigators, though, is how the former cab driver from the former Soviet Union, with little capital and less experience in highrise rehab jobs, got a mammoth nine-figure, no-bid MTA lease. It's "a secret government," observes Democratic State Assemblyman Richard Brodsky, who's been probing the MTA in Albany.
Unfortunately, the MTA is no anomaly. It's just one fairly big province in a much larger governmental empire--the New York "authorities," which tend to operate under permissive governance and financial principles. In 2004, when last audited, New York's 734 authorities owed altogether nearly $120 billion. Unlike the state, the authorities don't need voter approval to issue bonds. Unlike the city, they aren't limited by the value of real estate. All they need to reach the financial markets are bond dealers who want a payday. That's why authorities were invented.
But although the city and state are able to finance projects by using the authorities, they're approaching crunch time too. In December the New York City Comptroller issued a report saying the city had $69 billion in debt. And the state--separate from the authorities--is indebted to the tune of another $48 billion. So the three New Yorks combined owe $237 billion.
If New York were a sovereign country, it would rank eighth in external debt, edging out China. With that kind of obligation, no wonder one financial expert quoted on the strike's first day by The Bond Buyer, a Wall Street daily specializing in public finance, estimated that the city could not take much more than one week of the walkout before its own securities came under pressure.
It's also no wonder that as far as the city's FIRE elite are concerned, that middle-aged black woman who cleans subway platforms is no Rosa Parks. Selfishly, she wants to escape the scurrying rats and suffocating metal dust by retiring at age 50; an Albany bill sponsored by the transit union to accomplish just that failed when Pataki vetoed it. Is there a political lesson here? After transit workers struck, Pataki ordered the state to impose heavy Taylor Law fines. Brian McLaughlin, head of New York City's Central Labor Council, proposed that each of the city's 1.5 million union members contribute a dollar as a principle of solidarity to each striking transit worker. A more practical strategy, though, might have been for each of the transit union's 33,700 members to have given a dollar to Pataki.