Why it costs so much to build anything in New York City

This winter, New York has had two major construction scandals. In March, Related, the giant real estate firm building out much of the Hudson Yards office and apartment site on Manhattan’s West Side, sued construction unions, alleging that they inflated costs by more than $100 million, including fooling Related into paying up to $70 an hour for someone who fetches coffee. Weeks before that, state and local law enforcement officers raided the offices of Bloomberg LP, looking for evidence that construction firms defrauded the former mayor’s financial firm and other victims by another $100 million.

Fraud, of course, is a deadly serious matter. But at least fraud is illegal, so it can be stopped once it is found. The bigger problem pushing up New York’s construction costs – not only at office buildings, but at government entities like the state-run Metropolitan Transportation Authority, as well – is what’s legal. It’s also part of the nation’s looming pension and health care retirement crisis, and it is much harder to fix.

Few New Yorkers care if Bloomberg or Related have to pay more for prime office and residential buildings. But high construction costs affect public infrastructure, too. MTA projects are vastly more expensive per mile of track than in comparable cities. The Second Avenue Subway cost about eight times as much as recent subway extensions in Berlin and Paris.

One reason for the high costs and extra time has become obvious in the past few years: inefficient work practices. As this author noted nearly three years ago, because of inefficient union work rules, New York transit projects often require 25 workers on a tunnel-boring machine, when as few as five are necessary in western Europe. When a tunnel worker in New York makes $118.85 per hour in wages and benefits, as required by New York’s state prevailing wage law, that’s a lot of wasted money.

There’s nothing wrong, of course, with paying a highly skilled construction worker a wage that’s sufficient to live on in an expensive city. There are just often too many such workers for a particular job.

So it would seem obvious that the answer is eliminating overstaffing. The industry is already gingerly moving toward having robots take over some construction jobs, particularly the less-skilled ones. A robot can already do some crude bricklaying work, and the MTA is experimenting with an automated mechanism to replace workers doing some of the simplest track work.

But construction unions resist any changes to work rules not because they are corrupt or irrational, but because they have a big problem. Their retirement funds, which they administer themselves, are in crisis. They need new, young workers to keep paying into these broke funds in order to support the benefits of older, retiring workers.

The average tunnel worker’s hourly pay is $65 an hour in wages, while the remaining nearly $44 an hour is in pension and health benefits. As the Empire Center for Public Policy’s E.J. McMahon’s recent report notes, 25 of New York’s top construction union pension funds have racked up a $12 billion collective deficit, endangering the benefits of 188,000 workers, retirees and spouses.

Project developers, from the MTA to private high-rise builders, must also pay ever-higher health premiums on behalf of union workers to keep pace with the constantly escalating cost of health care. Speaking of the state’s prevailing wage law, his report notes that the hourly benefits payments it requires, in particular, “effectively provide a bailout of underfunded union pension and retiree healthcare plans.”

Consider, for example, the New York division of the Iron Workers union, whose members do work on bridges and other major structures. It has a pension fund in “critical status,” according to the U.S. Department of Labor. The department said two years ago that the union’s pension fund would be insolvent by 2025, putting the retirement of nearly 1,000 people at risk. “For each active participant in this plan, there are approximately 35 inactive participants receiving benefits or entitled to future benefits,” the feds say. As the number of current workers shrinks, the pension bill, per current worker, grows.

Fiscal watchdogs have been warning for years that pension and health care funds in the public and private sectors would become unsustainable, causing upheaval and uncertainty for millions of retirees and older workers around the country.

Both government and the private sector must crack down on overstaffing, perhaps devoting a portion of the money saved from more efficient work to making an even higher payment into broke pension funds.

They can’t do much about pensions without causing pain; a dollar less in a pension is a dollar less in a pension. But they can tackle the rising cost of health care.

Large and rising health costs plague not just the private construction unions that the MTA and other government entities depend on to do much of their construction work; it’s a problem internally at the government authorities as well. The MTA’s health care costs will top $2 billion next year for the first time, nearly twice what they were in 2005 in inflation-adjusted dollars.

In January, Amazon, JPMorgan Chase, and Berkshire Hathaway got together to say they will use their own “extraordinary resources” to try to tamp down health care costs for their own employees. But such costs are even worse in the public sector. Government and union construction workers routinely retire, while retaining their health benefits, before the age of 65, when Medicare kicks in.

The New York state and city governments have the same “extraordinary” resources that these three companies have, in terms of the massive size of their workforces and the potential to experiment across a mass scale with better health care practices. New York City’s government alone has more workers than JPMorgan Chase.

On the national level, some proponents of cutting costs advocate for a single-payer system, like in the UK and most of Europe, which would give the government bargaining power with health care providers. New York state and city governments and the MTA are already single payers, on behalf of their massive workforces. They’ve just failed to use that existing bargaining power to lead the way in cutting costs.

As long as we continue to treat our infrastructure and other big construction projects, from subways to union-built office buildings, as a funnel for massive health care payments, we won’t get better, cheaper infrastructure.