New York City taxi drivers need debt relief, but not from taxpayers

On July 11, around 50 yellow taxi medallion owners and drivers rallied on the steps of New York City Hall to call for “loan relief now” with a sober reminder of the risk that comes with crushing debt: “no more suicides.” The driver-owners are right. They should not bear the full burden of the collapse in the medallion market from more than $1 million to barely $100,000, caused in large part by New York City and state’s continued failure to regulate ride-hailing companies like Uber and Lyft.

But city taxpayers should not bear this burden either. Lenders to the industry – sophisticated financial institutions that incurred risk in lending against a speculative asset marketed as a “sure thing” – should be the ones to take these losses. Similarities to the mortgage crisis of a decade ago abound. The difference, in this case, should be markdowns in what driver-owners owe.

The stakes here are high. Last year, three medallion owners took their own lives, among eight suicides in the industry. Of the 3,423 drivers, according to a new city estimate, that’s a suicide rate of about 88 per 100,000 people, 10 times New York City’s suicide rate of 8.5 per 100,000 men. (The overwhelming majority of taxi drivers are men.) Multiple factors go into a suicide, but one source for many is constant anxiety.

New York City and state have prolonged this anxiety by failing to act decisively. In 2015, New York City Mayor Bill de Blasio held out false hope when he flirted with capping Uber and Lyft vehicle permits and then, under pressure from the two powerful companies, backed down for three years as the supply of ride-hailing cars tripled. It’s still not clear how New York state’s new congestion pricing plan, enacted in April, will treat yellow taxis; bizarrely, the decision will be up to the Metropolitan Transportation Authority over the next year.

Meanwhile, taxi drivers continue to shoulder their debt. The city estimates that the average owner-driver owes nearly $500,000, with a monthly payment between $2,500 and $4,000 each month. Some owe upward of $1 million, borrowed on increasingly shaky terms and a new lender requirement that borrowers back their debt with personal guarantees, rather than just the medallion asset.

As New York City Councilman Mark Levine noted at the July rally, “This crisis was led by a city that pumped up the mortgage bubble. … New York City itself made approximately $1 billion on the bubble (by selling new medallions at high prices and encouraging medallion ownership as an investment). We have not met our obligation until we offer debt relief for the drivers.”

Levine, though, is preparing a bill that likely will include city taxpayer money to go toward such relief – which is not a good precedent. Even at the low end of estimates, debt relief could cost $1.8 billion to $2.7 billion, according to the New York Taxi Workers Alliance. To put that in perspective, consider that the city will spend about $10.4 billion on capital projects over the next year.

In determining how to spend these scarce, borrowed dollars (the city incurs debt to make long-term capital investments), the city must follow only public need, not the extraordinary circumstances of one industry. On transportation, the city would do far better to invest in completely remaking its streets, configuring them for more protected bus and bike lanes and record pedestrian crowds. It’s also poor policy, in general, for the city to offer financial compensation for its own regulatory screw-ups. The city does not compensate people for its own failures to adequately regulate the construction industry or the commercial trash industry – even though those failures can prove just as deadly.

Finally, introducing the city as the source of a direct subsidy for taxi debt write-offs introduces a fairness standard that the city can’t meet. Though medallion owners owe an average of nearly $500,000 on their loans, their average purchase price was $340,000. Nearly 80% of owners refinanced their loans to cash out equity to purchase houses or businesses, or pay for college tuition. Wiping away debt to an average of, say, $150,000 could leave one driver with lucrative rental housing bought via refinancing, while leaving another with a real loss – a disparity that taxpayers shouldn’t underwrite. Nor should the city have to make interest payments on debt incurred to help bail out medallion lenders.

The city does have a role, though, in helping to facilitate the credible collective private sector action that will get lenders to negotiate. In the business world, debt markdowns are common when the collateral behind a loan turns out to be worth less than all parties agreed it was worth. In the mortgage crisis, neither the administrations of George W. Bush nor Barack Obama pressured lenders to engage in home loan forgiveness. Their financial advisers saw a hazard for the economy in encouraging people to renege on their obligations. The real hazard is to encourage borrowers to keep throwing good money after bad, because of an unsophisticated borrower’s misplaced sense of shame over a mistake. Plus, tens of millions of homeowners dispersed over hard-hit states weren’t great candidates to become a single, formidable negotiator with global lenders and investors.

In the taxi medallion case, both the drivers and the lenders are a much smaller universe. The 50 or so drivers who showed up at City Hall likely owe, among them, $25 million. A concerted threat of default would get the attention of lenders – a handful of regional banks and already-bankrupt credit unions – as well as their regulators, and make debt negotiations far fairer. The lenders would no longer be the stronger party.

As Bhairavi Desai, executive director of the New York Taxi Workers Alliance, says, the financial institutions with whom her members interact are more willing to sell their medallion-backed debt to other financial institutions at lower and lower values rather than lower the underlying payments. The lenders are already taking losses – but the drivers don’t benefit from these markdowns. Desai is setting up a legal team, with the goal of getting 4,000 drivers to attend legal clinics (her estimate of drivers is slightly different from the city’s), as she considers other strategies.

The city, as the industry’s regulator, should make it much clearer whether it is giving up on the medallion system or not, guiding both lenders and borrowers on a medallion’s underlying value, and allowing lenders to keep an interest in potentially higher medallion values in exchange for debt relief. (If lenders cannot keep such a risky asset on their books, they could sell it to equity investors and use the proceeds to curtail their losses.)

The state, too, has a role. Earlier this year, the state started collecting a new $2.50 fee for every taxi ride below 96th Street in Manhattan, and a new $2.75 fee on Uber and Lyft rides. On 200 monthly rides, the fee can cost a taxi driver (and passengers) $500 a month. But in enacting the fee, the state Legislature and the governor ignored the reality of the medallions: the requirement to purchase a medallion in order to gain the right to do street pickups in the densest parts of the city was a crude form of market-based congestion pricing, one that taxi drivers had paid but ride-hailing drivers had not. Now, medallion owners are effectively paying twice for this right.

Scrapping this fee for yellow cabs would help ease the burden, both in attracting Manhattan customers and in cutting monthly costs. Likewise, the MTA’s broader congestion pricing regime should acknowledge the fact that yellow cabs have already paid a substantial congestion pricing fee, with the city, which reaped the benefit of that fee, making up the financial difference to the MTA.

Individual medallion owners and drivers are suffering from broad city and state failures, especially the de Blasio administration’s refusal to come to terms with how smartphone technology upended its regulatory model. But the underlying need for a regulatory model – too many cars vying for limited street space – remains in place. The city created this regulatory system, and encouraged banks to lend and drivers to borrow in trusting the stability of this model. The city must now deal with the chaos it has caused in effectively abandoning the adherence to the rule of law it had encouraged for so long – not by paying off debt, but by creating a new regulatory model for ride-hailing drivers, and showing where medallion cabs fit into it.