NYC'S JOBS EXODUS By STEPHEN BERGER

December 12, 2002 -- WITH the recent increase in the property tax and the promise of more tax hikes to come, are businesses likely to stay in New York City?

Actually, they're already leaving - or parts of them are, anyway.

For the past decade, New York City firms - particularly in the financial-services industry - have been decentralizing their operations.

This industry is a great revenue-engine for the Big Apple, but it is also well-suited to take advantage of technological developments - like e-mail and other data-transmission methods - that allow companies to locate some parts of their operations far from other parts, a process known as "disaggregation."

Back-office activity, processing and customer contact, for example, can be located in India, Des Moines or New Jersey just as easily as in Manhattan - and at a much lower cost than in the city's central business districts.

But there's another motivation for companies to move jobs out of the city besides saving money: The SEC, the Federal Reserve Board and the Office of the Controller of the Currency are getting set to require financial institutions to "disaggregate" following the events of Sept. 11.

The goal is to prevent a terrorist attack from crippling the industry, or even a key financial firm, by decimating it at just one location.

Just as Japan was able to deliver a major setback to U.S. naval forces by attacking Pearl Harbor when much of the fleet was stationed there, terrorists theoretically could inflict major damage on America's financial sector - and, thus, its economy - if key firms don't maintain back-up operations at other sites.

New federal rules on disaggregation are expected this spring.

So Gotham already has that going against it.

And it is in that context that the fallout from the city's tax hikes must be viewed. Economists often argue that businesses don't make relocation decisions solely on the basis of increases in marginal tax rates. Work force availability, quality of life, transportation, etc., all play more significant roles in the decision process - at least, when a company decides whether or not to uproot itself and find a new location.

(On the other hand, higher taxes do play a role in decisions about whether to move to a new location - and Gotham's tax hikes surely will discourage businesses from coming here.)

But the requirements that firms break up their key operations and establish back-up centers far away from their current locations will only aggravate the damage to New York City from increased tax levies. Again, a greater tax burden in and of itself might not drive corporate relocation decisions in normal times.

But New York's situation is far from normal.

While many of the companies dislocated by the terrorist attacks and the bulk of the New York business community have reaffirmed their commitment to New York, there is the quiet shadow of concern that forces business leaders to weigh how they can best secure their enterprises for the long term.

It becomes a matter of straws and camels' backs.

And routine economic analyses of the impact of tax increases may no longer be valid.

Of course, one can't ignore the city's financial needs.

But the incompleteness of the budget-balance package, the lack of spending cuts to provide stability going forward, the fact that more taxes could be on the way - that, in fact, there's no end in sight to the potential "revenue-raising" - could well send the fateful message to the business community, particularly those that have operated in the precise location hit on 9/11: Downtown.

In this sense, the current budget could prove highly destabilizing to the city's economy.

The city's budget "fix," in fact, would be no fix at all.

-- Anonymous, December 13, 2002