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$50 Billion Budget -- A Shortsighted Use Of Surpluses

by Glenn Pasanen, Jul 11, 2005
 

The New York City Council and Mayor Michael Bloomberg agreed on a $50.2 billion budget for the 2006 budget a few hours before the fiscal year began on July 1, and, though it is an election year and Speaker Gifford Miller is running against Bloomberg for mayor, they were cordial to each other around the new budget -- some would say too cordial.

In the several weeks before the budget agreement, the good news had turned even better. The surplus for the 2005 fiscal year grew by yet another $300 million, for a total of $3.6 billion.

Such a large surplus offered an opportunity to the mayor and the council to tackle the city's long-term budget problems in a variety of ways:

They could have paid off a good hunk of the city’s capital debt, for example, which would have reduced the debt-service costs (the interest due each year on the money the city has borrowed); similarly, they could have paid in cash for capital projects, such as new affordable housing projects, which would have avoided long-term borrowing costs. Or they could have used some of the surplus to make major improvements, such as buying adequate textbooks for the city's public schools.

Instead, they were each content to take credit for a few minor new programs and some tax cuts. The adopted budget simply postpones any solution to the fiscal problems that the city is going to face very soon: The budget for fiscal year 2007 (which begins next July) is expected to show a deficit of $4.5 billion.

As this year's short-sighted budget was being settled, however, the mayor’s charter revision commission was thinking over the long term, with several proposals for the November ballot.

The Council’s Budget Contribution

Mayor Bloomberg has successfully followed the political and fiscal strategy of former Mayor Rudy Giuliani: putting the council on the defensive by refusing to make many of the council’s favorite programs part of the city’s four-year financial plan. Instead of being “base-lined” in the four-year plan, they become one-year programs, so that each year the council has to start from scratch to restore them. Thus much of the council’s time, energy,and political vision is trapped in this annual political ritual.

The council reportedly wound up adding about $230 million to the mayor’s May budget proposal, which is less than one-half of one percent of the total budget -- most of it to restore funding the mayor had cut from existing council-supported programs. A 65-page council “Adjustments Summary” lists the restorations, initiatives, and enhancements. In an election year when most council members are running for re-election it is no surprise that the new money begins with the council members themselves.

There was, for instance, a $13 million increase in council discretionary spending for youth and senior services in their districts. Each council member got nearly $109,000 for senior services, some 83 percent more than in 2005, and each got nearly $152,000 for youth services, up 48 percent over last year. Among the larger changes:

  • An infant mortality reduction program saw a $2.8 million restoration and a $2 million enhancement (the infant mortality rate went up for the first time since 2000).
  • An HIV/AIDS prevention and education program got a$2.4 million restoration and a $1 million enhancement.
  • A summer youth program received a $6.9 million enhancement.
  • An immigration initiative that provides English-language training and legal services got a $1 million restoration and $6.3 million in new money.
  • A workforce development program run through the City University saw a $10 million restoration and an $8 million enhancement.
  • The council’s tribute to its former speaker, the Peter Vallone scholarships at CUNY – eliminated by the mayor – received $4.4 million in new and $7 million in restored dollars.

The pattern here is clear. Council members identify specific problems in specific neighborhoods and support relatively low-cost programs to help solve them. That makes sense. But citywide, expensive council proposals – such as hiring 1,000 police officers and lowering business taxes – fell by the wayside, perhaps in part by concern about costs of future wage settlements with city workers.

City Revenue Base

As the council and mayor negotiated over hundreds of small programs, the city’s revenue future was ignored. The Independent Budget Office’s May analysis of the executive budget points out that over the next four years total city expenditures are expected to rise by two percent each year -- which seems modest, except that, by contrast, City Hall's total revenues will rise by only half of one percent per year. Thus we have ahead of us multi-billion dollar deficits.

The mayor’s most brilliant tactic in four years of budget-making remains the 18.5 percent property tax increase he pushed through the council in November 2002. (It does not even seem to have harmed him politically.) That rate increase, coupled with a hot real estate economy that has raised property assessments, has produced a surge in revenues. The Independent Budget Office predicts $12.4 billion in property tax revenue for fiscal year 2006, billions more than previously expected.

The budget office expects such revenue to continue to increase through 2009. However, revenue from other taxes -- with the exception of the small-revenue hotel tax -- will increase very little, or actually lose ground. The personal income tax -- the most progressive tax in the city’s control (higher income households pay a higher tax rate) -– averages only a 1.3 percent increase annually over the next four years, in large part because the two higher rates for wealthier households expire at the end of this calendar year.

The combined effect of the surging property tax revenues and flatness in the other taxes, particularly the personal income tax, means a shift in burden from higher-income taxpayers to the rest of the city’s taxpayers.

In spite of the bleak forecast for future revenue, the mayor and council have adopted a budget that in its homeowner tax cuts, sales tax exemptions for clothing under $110, and expiring income tax rates will cost the city well over a billion dollars a year from now on. This reality dwarfs the modest good news in the adopted budget.

Long-Term Thinking From Charter Revision Commission

If the adopted budget does not reflect much long-term rational planning, the mayor’s charter revision commission shows the mayor thinking way ahead. In a July 5 meeting, the commission voted unanimously to place on the November ballot a proposition that would add to the city charter certain budget reporting provisions required now by the state Financial Emergency Act (prompted by the city’s near-bankruptcy in the mid-1970s), requirements that expire in 2008.

The city’s record of more than 20 years of balanced budgets under state oversight is admirable, but some fiscal monitors worry that the absence of any formal state oversight will make city budgeting less open and therefore less accountable. Of particular concern is access to all essential budget information, access that is currently required through the state Financial Control Board.

In testimony before the commission on June 27, Independent Budget Office director Ronnie Lowenstein said that the commission proposal would make available “just a fraction of the routine flow of information IBO, [the state and city comptrollers and the general public] rely on to monitor the city’s fiscal condition.” The IBO stresses that “the city’s ability to manage its own fiscal affairs without state oversight would depend on continued strong local oversight.”

Lowenstein urged the commission to recommend a mechanism -– preferably in the charter –- that would maintain a “seamless flow of the information needed to monitor the city’s finances.” However, a few days later, after the July 5 vote, commission chair Ester Fuchs, a special adviser to the mayor, said, “We could not re-create [the Financial Control Board] in the city charter.”

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 


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