Wall Street revenues are recovering more quickly than expected but compensation reform could reduce the positive effect on New York’s bottom line,
The news came as lawmakers negotiated measures to close the estimated $3.2 billion current fiscal year budget deficit and the state readied a $351.3 million general obligation refunding.
A sharp reduction in interest expenses pushed net quarterly revenues at securities firms in the second quarter to $57.7 billion, a historic high, according to the report. By comparison, revenues in the fourth quarter of 2008, following the collapse of Lehman Brothers, were less than $15 billion.
“Wall Street remains the engine that drives New York’s economy,” DiNapoli said in a press release. “It’s encouraging that the industry is recovering faster than forecast. However, no one can predict the impact of compensation reform, which could restrict cash bonuses. Because of that uncertainty, New York can’t rely on tax revenues from Wall Street to save the day.”
Profits at four major firms headquartered in New York City have risen to $22.6 billion in the first three quarters of 2009, compared to a net $40.34 billion loss in 2008. Among those four firms, Goldman, Sachs & Co., JPMorgan, and Merrill Lynch & Co. have seen profits increase in the first nine months of the year, while Morgan Stanley remains profitable, though so far it has not exceeded 2008 profits.
Most of the net drop in 2008 profits was attributable to Merrill Lynch, which lost $41.34 billion last year. Merril’s profits were reported separately from Bank of America, which bought the investment bank last year.
New York is heavily reliant on Wall Street for tax revenue. Two years ago Wall Street accounted for 20% of state tax collections, but that revenue is projected to drop to 15% of the state’s total in the current fiscal year, according to the report.
The securities industry had lost 28,300 jobs as of September 2009, compared to its peak of 189,200 in November 2007, a 15% decline. However, the industry has begun to add jobs, gaining 3,600 in September. A year ago, DiNapoli projected the securities industry could lose 48,000 jobs, but yesterday’s report said losses are not likely to exceed 35,000.
That’s good news for the city and state because each job in the securities industry leads to the creation of two jobs in other industries, and the converse is also true, according to the comptroller’s office.
Efforts to reform executive compensation, which some have blamed for contributing to the global financial crisis by rewarding short-term risk-taking, could reduce cash bonuses at Wall Street firms even as profits return.
Bonuses in 2008 to securities industries professionals in New York City declined $18.4 billion last year, a 44% drop from 2007. Though they are projected to rise this year, it’s unclear what impact compensation reform could have on state revenue because it will restrict the amount of cash paid out and increase the amount deferred to future years.
The comptroller’s office projects that tax collections from Wall Street will fall by up to 20% in New York City’s fiscal 2010, which ends June 30.
Meanwhile, budget talks continued as the state prepared to competitively sell $351.3 million of tax-exempt fixed-rate GOs to refund variable-rate debt sold between 1997 and 2000. The comptroller’s office plans to market the bonds, which will have maturities ranging from one to 21 years, on Monday. The state attorney general’s office is bond counsel on New York GO issues.
Fitch Ratings rates the bonds AA-minus with stable outlook. Despite the state’s deficit troubles, the rating anticipates that the state will be able to close its budget gap in a way that is consistent with its rating, said Fitch analyst, Laura Porter. The long-term impact of compensation reform represents a “key uncertainty” Porter said.
“If there’s a fundamental change, the state will have to manage that fundamental change, she said.
Moody’s Investors Service rates the state’s GOs Aa3. Standard & Poor’s rates them AA.
