Cash-strapped state welcomes return of big bonuses

A 40 per cent jump in Wall Street bonuses this year may bring relief to New York City and Albany as the state and its biggest metropolis struggle with a combined US$14 billion ($18.6 billion) in budget deficits this fiscal year and next.

New York investment houses will dole out US$26 billion in bonus cheques by the end of March, said Alan Johnson, president of compensation consultant Johnson Associates. The money will probably boost sales of multimillion-dollar co-op apartments and generate extra income-tax revenue for state and city governments.

"I don't think this is going to make everybody think, 'Oh, good times are here again,' but it may ease things a bit," said Lawrence White, professor of economics at New York University's Leonard N. Stern School of Business.

Before the financial meltdown slammed bank earnings and the Standard & Poor's 500 Index of US stocks dropped 38 per cent last year, Wall Street's compensation and corporate profits provided 20 per cent of New York state tax revenue and 9 per cent of the city's taxes.

New York banks lost US$42.6 billion in 2008 and shed 30,000 jobs, according to the city's Office of Management and Budget.

The city's unemployment rate is 10.3 per cent, the highest since 1993.

Bonuses in 2008 fell 44 per cent from the prior year, to US$18.4 billion, said New York state comptroller Thomas DiNapoli. The reduction cost the state US$1 billion in personal income tax revenue and New York City US$275 million, he said.

It's too soon to estimate the impact of bigger bonuses, said DiNapoli spokesman Olayinka Fadahunsi and Mark LaVorgna, a spokesman for New York Mayor Michael Bloomberg.

Wall Street's banks are set to pay near-record bonuses after the US injected US$700 billion into financial-services companies, guaranteed their debt and lowered the benchmark interest rate to almost zero.

Goldman Sachs said last week it had set aside US$16.7 billion for compensation in 2009's first three quarters, or US$527,192 per worker, up 46 per cent from the same period a year earlier and just under the record US$16.9 billion set in 2007's first nine months.

JPMorgan set aside $353,834 per investment-bank employee, up from $210,854 last year.

After Obama's Administration proposed capping executive pay at companies that accept rescue funds, Bloomberg described bonuses as important to New York's economy.

"They may be an enormous amount of money for one person, but they are how our people in the city in all industries get paid, whether you drive a cab, work in a restaurant, work in a store, whether you are a municipal employee," he said in February.

"Certainly, it's good news for the city if Wall Street salaries and bonuses continue to be high," said Doug Turetsky, a spokesman for New York City's Independent Budget Office.

Bonus increases will have a limited impact on revenue, said Matt Anderson, a spokesman for New York state's Division of Budget.

Many payments come in stock that isn't taxed immediately, and companies that disappeared in the crisis won't be paying any bonuses at all, he said.

"We continue to see substantial declines in tax collections across the entire budget. There is little prospect, if any, for a rebound in receipts by the end of the fiscal year that would remove the need for difficult deficit reduction actions."

Manhattan apartment sales increased 46 per cent in the third quarter from the previous period, the biggest gain since 1996, according to Miller Samuel, a New York appraiser. The median price of a luxury apartment in Manhattan was US$3.9 million, up from US$3.66 million.

Public anger over Wall Street bonuses may limit how much bankers and traders spend once they get their bonuses, said Charlie Attias, a senior vice-president at Corcoran Group, a New York real estate brokerage.

"In 2007, we really saw people who were very confident, who knew that they will make a certain amount of money and it will not stop," Attias said. "I think they are very cautious right now."

HEADING UP
* Goldman Sachs is paying US$527,192 per worker for the past nine months, up 46 per cent on a year earlier.
* JPMorgan set aside US$353,834 per investment-bank employee, up from US$210,854 last year.

- BLOOMBERG