By the book

As New York faces its worst fiscal crisis since it nearly went bankrupt in 1975, new Comptroller Bill Thompson will try to keep the city on the straight and narrow. It won't be easy.

By Justin Dini
December 2001
Institutional Investor Magazine

Be careful what you run for. You just might win.

When William Thompson Jr. decided to run for New York City comptroller, the city was booming, jobs were being created at a record pace, unemployment had hit a post-World War II low, and the crime rate had plunged. Thanks to a soaring stock market, the city's coffers overflowed with billions in excess cash.

That was in 1999 - and in a very different world. Even before September 11 the city had begun to feel the strains of a slowing economy. But since the terrorist attacks, the city's financial prospects have deteriorated dramatically. Today New York confronts exploding budget deficits, a sobering $38 billion in total debt, rising unemployment and a devastated financial services industry - in short, New York's worst fiscal crisis since 1975, when the city nearly went bankrupt.

Elected without opposition on November 6, Thompson now finds himself at the center of the financial cauldron, facing one of the most daunting challenges of any public finance official in the country. Soft-spoken and unflappable, with a gift for forging consensus, the 48-year-old Thompson, a former president of New York City's Board of Education, will need to bring all of his talents to bear to be a forceful and effective advocate for fiscal sobriety and restraint. He takes office at a time when the city's beleaguered constituencies, from schoolteachers to police officers, will be clamoring for more aid, but he is not inclined to yield to importuning.

"I intend to hold the line on taxes and to hold the line on fiscal games the city might be tempted to play to plug budget gaps," Thompson told Institutional Investor in an interview shortly after his election. "That's what got us into trouble in the 1970s. Since then the ratings agencies have come to expect a level of professionalism in how New York accounts for its finances. We don't want to squander that."

His task won't be easy. The job of New York comptroller is an odd, complex one - part portfolio manager, part investment banker, part auditor and accountant. Thompson will oversee the city's vast $85 billion in pension funds, but the mayor controls fiscal policy and sets budgetary priorities. The comptroller audits city agencies, approves large city contracts and monitors the mayor's budgets; by statute he must certify the fiscal soundness of the mayor's numbers. And though they are independently elected, comptrollers must find ways to work with mayors - sometimes of different parties - with whom they may disagree on policy matters. Thompson is a Democrat; the newly elected mayor, billionaire media mogul Michael Bloomberg, is a liberal Republican who won office promising to balance the New York budget - a requirement since the 1970s' troubles - by cutting costs through workforce reductions, not by raising taxes.

"The problem with comptrollers is that they tend to see themselves as independent to the exclusion of all else," says Donna Shalala, secretary of Health and Human Services in the Clinton administration and a former treasurer of New York's Municipal Assistance Corp., which oversaw the city's recovery from the edge of bankruptcy in the 1970s. "It's very tricky politically. If Thompson does that, Bloomberg will cut him out."

By inclination a team player, Thompson has already sparred with Bloomberg, who has said that, even post-September 11, he does not favor tax breaks to keep Wall Street firms downtown or anywhere in the city. Thompson supports such measures, arguing that retaining financial services companies in lower Manhattan is crucial to New York's fiscal health.

"New Jersey isn't that far away, and I think you'll need incentives to keep some of those Wall Street firms from leaving. That's where the new mayor and I disagree," says Thompson. "We're not just rebuilding lower Manhattan. We're partially rebuilding an economy."

More potential conflicts loom. Thompson has pledged to be an activist comptroller, which means, at least, political visibility. And the job has served as a launching pad for higher office. The incumbent, Alan Hevesi, used his post to champion reparations for Holocaust survivors whose accounts had been confiscated by European banks during World War II. He ran for mayor this year, finishing a dismal fourth in the Democratic primary. Thompson, the lone African-American elected official holding citywide office, is already being touted as a future mayoral candidate.

But Thompson's biggest influence as chief fiscal officer may come from his involvement in the city's five pension funds, the 11th-biggest public plan in the country. As investment adviser to the boards of trustees overseeing the funds, Thompson wants to put some of their assets into the construction of low- and middle-income housing. Moreover, he would like to tilt the funds toward more active management - nearly all of the city's roughly $57 billion in equities are indexed - while increasing the role of minority-run firms.

"In a period of volatility, indexing is perhaps not where you want to be. One would have to at least look at possibly shifting some money to active managers," he says, adding, "I'd like to see more diversity among our money managers. I'm not looking to sacrifice quality. But let's spread the net a little wider."

On the fiscal front the critical part of Thompson's agenda is managing the city's relationships with the credit agencies that determine its borrowing costs, as well as with the state and federal governments, which supply critical funding. The rating agencies will be looking closely at the budget update the Bloomberg administration must produce by early February.

It will not be pleasant reading. Hevesi's office published a report in early October that estimated the September 11 attacks would cost the city's economy between $90 billion and $105 billion by the middle of 2004. New York already faces a $1.3 billion gap in this year's $40 billion budget. For the next fiscal year, beginning July 1, the budget deficit could be closer to $4.5 billion.

At the moment, at least, deficit spending simply isn't an option for New York. Under the rules imposed on the city by MAC in 1975, the state's Financial Control Board - composed of the governor, the mayor, the city and state comptrollers and three private citizens - takes over the city's finances if its budget deficit swells beyond $100 million. Such an outcome would humiliate both the mayor and the comptroller. After September 11 Bloomberg suggested an increase in the anachronistic $100 million threshold, which was set when the city's budget was ten times smaller.

"Your window of leeway is much, much narrower now than it was then," says Rosemary Scanlon, a former deputy state comptroller for New York City. Adds former mayor David Dinkins, "A hundred million dollars is a rounding error in today's budget."

But Thompson insists he won't push to change the deficit limit. "That's not the message we want to send. I don't think you want to play with fiscal gimmicks," he says.

Though comptroller is the first elected office he has held, Thompson has spent a lifetime in and around politics. Born in 1953, he grew up in the Bedford-Stuyvesant section of Brooklyn. His father, William Thompson Sr., was a mainstay of the powerful Brooklyn Democratic Party who later served as a justice in the Appellate Division of the New York State Supreme Court. Billy Thompson, as the comptroller is still called, began his political activities in 1970 as a 16-year-old volunteer for Kenneth Gibson, who became the first black mayor of Newark, New Jersey, and served four terms.

In 1974 Thompson graduated from Tufts University with a degree in political science. Several months later he took a job as a legislative assistant in the office of Brooklyn congressman Frederick Richmond. Thompson rose through the ranks to become Richmond's chief of staff, a position he held until 1982, when the congressman pled guilty to income tax evasion and possession of marijuana.

Richmond wound up in prison, but Thompson landed on his feet. In 1983 Howard Golden, the Brooklyn borough president and a longtime friend of Thompson's father, was looking for a new deputy. He hired Thompson, who at 29 became the youngest deputy borough president in Brooklyn's history. "Billy became like a son to me," Golden says.

Thompson's biggest test came during the August 1991 riots in Crown Heights, which were sparked when a 7-year-old black boy, Gavin Cato, was fatally injured when he was hit by a car driven by a Hasidic Jew. Hours later a black man stabbed to death a visiting Hasidic scholar, Yankel Rosenbaum, in apparent retribution for Cato's death. Protests ravaged Brooklyn for the next four nights; Jews came under attack and property was destroyed. Dinkins, New York City's first black mayor, was harshly criticized by Jewish groups for failing to do enough to stop the disturbances - criticism that helped sink his 1993 reelection bid.

With Thompson's help, Golden avoided a similar fate. The two assembled a coalition of black, Jewish and Hispanic community leaders to help propose solutions to heal the racial divide that the riots had exposed. "Billy played a big part" in helping Brooklyn recover from the Crown Heights riots, Golden says. "Billy always knew where he was going. And he's not prone, as many of the youngsters are in politics, to run for the headlines rather than for the meat and potatoes that are the issues."

Says David Paterson, a New York state senator who has known Thompson for the past decade, "The word I'd use to describe Billy is 'balanced.'"

Such qualities led Golden to tap Thompson to serve as Brooklyn's representative on the city's Board of Education in 1994. Two years later the board elected him president. Thompson clashed repeatedly with Giuliani, who spent much of his two terms in office trying to gain more control over the city's sprawling public education system.

By the late 1990s Brooklyn Democrats were asking Thompson to mount a 2001 campaign to succeed Golden as borough president. Thompson had other ideas: In 1999 he decided to run for city comptroller, a job for which he felt he was ideally suited. "I'd rather lose for comptroller than win for borough president," he told friends.

Thompson knew the numbers. Not only had he served as Golden's representative on New York City's now-defunct Board of Estimate, which oversaw the city's finances, but he had also been a trustee for two New York City pension plans. After leaving Brooklyn's borough hall in 1993, Thompson also spent two years as a vice president at municipal bond underwriting firm George K. Baum & Co.

Deciding to run for office after years of serving in appointed positions marked a personal transition for Thompson. "When Billy was helping me run my first campaign, I asked him if he would ever run for office himself," says Ada Smith, a seven-term state senator whose district includes parts of Brooklyn and Queens. "He said, 'No way. I'd rather be the guy behind the guy.'" Thompson says that his experiences in politics, especially at the Board of Education, gradually gave him the confidence that he could handle the very public duties of a politician.

Once Thompson gets a closer look at New York's books, he may wish he had run for borough president. The city's current $1 billion-plus budget gap will require severe cuts in services by next July; after that the news will only get worse.

Before September 11 the state comptroller's office forecast a $4 billion shortfall in the city's fiscal 2003 budget. Hevesi's October report concluded that the city would lose an additional $567 million in revenues next year as a result of the terrorist attacks. Thompson says his first order of business will be to update these figures.

One pressing set of numbers involves the city's pension funds. As comptroller, Thompson serves as investment adviser to the boards of trustees of each of the five public funds. Between 1993 and 2000 those funds returned an average annual 16 percent.

As a result, two years ago the state legislature approved a series of pension sweeteners for municipal workers, who were demanding greater benefits. To fund this, the state and city resorted to some fancy accounting, substituting current market values of the pension funds' securities in place of a five-year moving average of their assets (a move Hevesi opposed). Marking the assets to market produced a surplus of some $9 billion in the City Employees Retirement System, the biggest of the five funds, and reduced the city's annual pension contribution to $593 million in 2000 - freeing up money for other uses.

Since then, of course, the market has swooned. An 8.3 percent drop in the pension funds' assets, to about $85 billion, in the fiscal year ended June 30 forced the city to contribute nearly $1.2 billion to the funds for the current fiscal year. The state comptroller says that number will go up to $1.3 billion in the next fiscal year and will increase by $100 million annually for several years after that. Nonetheless, Thompson says the dip won't threaten one of his campaign promises: to invest 1 percent of the funds, about $1 billion, in the construction of low- and middle-income housing.

Thompson will also feel pressure to invest in other, even more pressing needs. A number of prominent civic and financial leaders, including Felix Rohatyn, the Lazard Fr,res banking legend and former MAC director, have argued that the city and state pension funds should help in the city's recovery by investing in reconstruction projects in lower Manhattan. H. Carl McCall, the state comptroller who is the sole trustee of the state's $112 billion retirement fund (and a candidate for governor in 2002), endorses that approach as well.

Thompson says he is open to such a scenario, but he would require a guaranteed minimum return on the investment to commit pension fund money. "I may take a little less return," he says, "but as a fiduciary, I've got to make sure those investments are protected at some level."

Even before September 11 New York faced massive infrastructure needs. Trouble is, the city will be hard-pressed to come up with funds during a recession. Shortly after the attacks President George Bush promised the city $20 billion in federal aid, but Congress plans to appropriate just $11 billion by the end of the year.

Borrowing isn't an easy option, either. New York's debt burden is already onerous. The state comptroller's office estimates that in the past fiscal year the city spent nearly 15 cents of every dollar in its budget on debt service; by fiscal 2005 that will rise to 18 cents on the dollar. "You simply can't carry that kind of debt," says Thompson.

The state constitution limits borrowing based on property values: New York can borrow only up to 10 percent, or about $30 billion, of the total value of all property in the city.

In 1997, with the city nearly maxed out on its credit, Giuliani and Hevesi successfully lobbied the state legislature to create the New York City Transitional Finance Authority, through which the city could issue more debt for big expenditures like school construction. Fiscal watchdogs decried the move as a gimmick.

"We had absolutely no borrowing capacity without it," argues Hevesi. "It's a good thing we did, because now we have an institution that's there and functioning."

Bloomberg has said he would seek to reduce debt servicing costs by refinancing outstanding loans. But he also has ambitious plans to build more schools and housing, which will likely lead to more debt. In his campaign manifesto he said he would use the TFA to issue up to $12 billion of debt, the maximum allowed.

In the face of billion-dollar budget deficits, Thompson will have to make some difficult choices. For example, should he support a pay hike for teachers, whose union endorsed him? Such politically charged issues will challenge his ability to serve as the city's impartial chief accountant.

After all, comptroller is an elected office, and that political reality will probably prevent Thompson from focusing on cutting the city's debt load anytime soon. He acknowledges that the need to build schools and fix bridges outweighs his desire to reduce the debt burden in the near term. "The city needs the ability to grow, and that costs money," he says.

As he helps to manage the city's fiscal crisis, Thompson may find it tough to balance the roles of financial watchdog and ambitious politician. In certain respects Hevesi's experience might be instructive. "Alan got it both ways," Dinkins says. "At one point he was seen as in bed with Rudy because he wasn't critical enough. Later, when he criticized Rudy, Rudy complained he was being political."

The solution, says Dinkins: "Thompson needs to remember that he didn't get his job by taking a civil service test. He needed votes to get there."