PERB: Day 12 – January 11, 2008
Michael Dardia
The City’s first witness of the day was Michael Dardia, who had testified previously, and was being called to rebut the testimony of PBA witness John Dunham. Dardia intended to demonstrate that Dunham had not as he had testified, replicated the City’s revenue forecasting methodology. Dardia argued that you cannot simply run equations in a computer model to forecast revenues, but that you have to “adjust” the outputs of the model, and those adjustments change depending on shifting economic circumstances.
According to Dardia, Dunham did not use the methods and data that the City uses in its forecasting model, and therefore was unable to replicate the City’s model. According to Dardia, Dunham should not have relied on the Economy.com data since the financial sector and the real estate market, unlike other economic activity, differ significantly from national activity forecasts. Additionally, by using the raw data regarding “Gross City Product” from Economy.com, which is a state product weighted by region, Dunham had not included the different impacts of certain market factors that weigh heavily on the New York City economy relative to other regions in the state, such as the financial sector. Economy.com does not create a gross city product for New York City, although Dardia claims the City has approached them to propose such an analysis. Additionally, since the Economy.com data was only current through 2005, the high impact of the recent economic downturn on New York City was not accounted for. And while the real estate market remains relatively strong in New York City, there is reason to believe that there will be increased volatility in that sector as well. Also, Dardia said, the Economy.com data used by Dunham, since it is not fine tuned for New York City, is not adjusted to reflect the fact that many home owners in the City own condos or co-ops rather than homes, and the affect that this has on home values.
Dardia then went on to argue that Dunham not only did not use the City’s data, but also did not follow the City’s methodology. According to Dardia, the City looks at forecasting results from other entities such as the Wall Street Journal and the Blue Chip Survey and adjusts its economic model based on those forecasts from other entities. These are not included in Dunham’s analysis, nor are changes in the tax laws. Additionally, a recent drop in Wall Street member firm profits was also not included by Dunham.
Dardia then addressed Dunham’s statement that the City had forecasted a recession. Dardia admitted that the City has stated that the economy in total may be entering a recession, but when you separate out the securities sector this is not the case. Dardia also pointed out a difference of opinion with Dunham over the appropriate definition of recession. Dardia also testified that the City does not let a computer program choose what equations are used in the forecasting model and criticized Dunham’s use of data mining to determine the appropriate equations.
Dardia then addressed explicitly Dunham’s forecasting of the general corporations tax (“GCT”). He claimed that he could not follow how Dunham had calculated the GCT. He stated that when the City forecasts the GCT it divides it into the finance liability, the tax liability and the non finance liability and uses different variables for each. Dunham also did not look at member firm profits, which the City uses to determine finance liability. Moreover, if Dunham used a random walk equation for GCT, it would not differ substantially from that used in prior years. According to Dardia, regardless of whether he had refused to give relevant information to Dunham that would have allowed him to replicate the City’s forecasting, Dunham was aware that the City did not use the random walk method. Dardia testified that Dunham had also not followed the City’s method of calculating the real property transfer tax or the commercial rent tax. Dardia disagreed with Dunham on whether the City had provided data that would explain its forecasting of the unincorporated business tax. In total, Dardia argued that despite Dunham’s demonstrations of accuracy that his model was not an academic exercise, and that his forecasting for the City is consistent with accepted methods and is accepted when reviewed by independent monitors. Furthermore, Dardia claimed that Dunham’s testimony that his revenue projections could ultimately vary by up to 10.3% was unacceptable when forecasting a budget. Upon questioning from a City attorney, Dardia added that the fact that the City had refused to give the appropriate coefficients used in its forecasting equations to the PBA was immaterial since the coefficients are merely baseline data and don’t take into account unforeseen changes in the economy.
Dardia was then cross examined by PBA attorneys. Addressing Dardia’s testimony concerning the supposed unacceptability of Dunham’s statement that his revenue projections had a margin of error of 10.3%, the PBA attorney asked whether he was aware of how inaccurate the City’s own revenue projections had been in the past. Dardia testified that he had not reviewed that information, at which point the PBA attorney showed a PBA exhibit presented earlier by a PBA witness showing that the City had under forecast revenues by 18 and a half percent. In response to repeated questions regarding the City’s frequent inaccuracy in its own forecasting, Dardia testified that the City will often go back after a year or two to examine where and how their forecasting was inaccurate. Dardia admitted that the City cannot use a margin of error since he cannot go to the mayor and say that his revenues could be off by $5 billion. Dardia also admitted after questioning that he had not reviewed any of the methods used by so-called independent budget analysts such as the IBO. The PBA attorney asked whether New York City had been placed on any “watch list” by any credit rating agencies, to which Dardia testified that it had not. When asked whether he was aware that if the GCT was removed from Dunham’s analysis (Dunham admitted that due to lack of information, this was the hardest tax revenue to replicate) his result would change by a miniscule amount, Dardia testified that he would not be surprised given the random walk method used by Dunham. At this point there was some argument between the attorneys about a hypothetical question posed by the PBA attorney, which the Chair resolved by noting that there was considerable evidence in the record that the City had in the past under forecast its tax revenues. After a few additional questions of Mr. Dardia, the PBA ceased its cross examination.
Darrell Cira
The City then presented its next rebuttal witness, Darrell Cira, a principal in the Human Capital Business of Mercer Human Resource Consulting where he focuses on Global Compensation issues. Cira testified that the cost of living indices created and sold by Mercer are not used by knowledgeable employers to set wage rates across geographic regions, and are not intended for this use. Instead, employer’s use them to determine the proper compensation for employees that have been temporarily relocated. According to Cira, the magnitude of pay differentials is not as great as the magnitude of cost of living differentials across areas. Cira stated that Mercer publishes a separate wage differential index for this purpose.
Cira was then cross-examined by a PBA attorney. He was asked whether US cities had large cost of living differences amongst them, to which he responded in the affirmative. When asked questions regarding the cost of living index used by the PBA, Cira responded that he did not “pretend to be an expert on cost of living indices.” He was then asked about a report from Mercer (his own firm) that placed New York City as having the highest cost of living in the nation, and which was pointed out to draw similar conclusions regarding cost of living in New York vis a vis other national cities. Cira noted that they were similar. Cira confirmed after questioning that the Mercer indices were intended to measure the cost of goods from City to City, and that these did in fact differ. In response to questioning, Cira denied that the Mercer Index was used by employer’s to determine salaries in cities with varying costs of living, at which point the PBA attorney presented Cira with a Mercer publication describing Mercer’s cost of living reports and how they are used to calculate expatriate compensation. Cira answered that the Indices were used to determine equitable compensation for employees when moving between geographic locations. Cira was then presented by the PBA attorney several public statements that he made to the effect that there were regional differences in the compensation value of jobs. Cira admitted to making these statements. The cross examination was then concluded.