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Big Trouble Ahead, Say Budget Monitors

by Glenn Pasanen, Aug 12, 2004
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The three budget monitors have weighed in on the recently adopted $47.8 billion city budget, and they agree on two things: First, Mayor Michael Bloomberg and the City Council get credit for crafting a balanced budget for the current 2005 fiscal year. Second, all three monitors see big trouble thereafter.

Among the latest reports from the State Financial Control Board (In PDF Format), the City Comptroller (In PDF Format), and the State Comptroller (In PDF Format), the state comptroller's is the most grim, foreseeing deficits considerably above the city's estimates from 2006 to 2008 ($5.1 billion instead of $3.7 billion in 2008, for example.) Worse yet, the state comptroller's report suggests a possible further $700 million deficit in 2007 (and $1.2 billion in 2008).

What to do? Well, that's not exactly the monitors' job. Rather, their job is to show how budget choices work out and to suggest some alternative choices that haven't been made.

They are unanimous, for instance, in questioning the use of about $3.5 billion in one-time, non-recurring resources to balance the 2005 budget. They also all point out that the city is not anticipating future education and labor costs in its four-year financial plan. And the Financial Control Board highlights the long-term fiscal risks of not fully funding capital maintenance needs.

Non-Recurring Budget Resources

The single largest reason for both the 2005 budget balance and the longer-term budget deficits is the use of one-time resources, primarily non-recurring revenues. The Financial Control Board lists over $3.5 billion of such resources in the 2005 budget:

Among these are more than $1.9 billion in surplus from fiscal year 2004.

Also, after years of wrangling over rental payments between the city, which owns the land under LaGuardia and Kennedy airports, and the Port Authority, which manages the airports, a new lease (which will be approved by the authority's board in September) promises the city nearly $700 million as a final settlement of past rents.

The state's picking up the costs of the remaining Municipal Assistance Corporation debt (incurred during the city's 1970s fiscal crisis) means the city will be reimbursed for $502 million in debt service it paid during the 2004 fiscal year.

The $204 million expected from the Battery Park City Authority is mostly ($150 million) from an anticipated, but as yet unexplained, sale of city land to the authority.

The city has argued that using the previous year's surplus should not be counted as using a nonrecurring resource, and the Financial Control Board seems to acknowledge that semantic point by distinguishing between "nonrecurring actions" and "use of the prior-year surplus." An alternative view, of course, is that the $1.7 billion surplus could have been used in any number of other ways (in either 2004 or 2005) so both are actions, or budget choices. And in both cases, the result is a very big hole in the next year's budget.

Underestimated Expenditures and Tax Cuts

A big reason for the higher estimates among the fiscal monitors of future budget deficits is the fact that many likely expenditures are simply left out of the mayor's four-year financial plan. Perhaps the most blatant example over the past 10 years is overtime estimates.

The City Comptroller's July report says, "Between FY 1993 and FY 2003, overtime expenditures have averaged 49 percent more than overtime projections at budget adoption." In FY 2003, the city spent $275 million more than projected in the adopted budget, and in 2004 "the city's current estimate of $857 million [in overtime] is $340 million higher than the budget adoption projection."

Another common instance of underestimated expenses is future labor costs. Here there are two problems. First, the financial plan funds near-term labor costs on the model of the recent District Council 37 contract, but the large teacher, police and fire unions still do not have contracts and may not accept that model. And second, the current financial plan has no money for the next round of labor contracts, beginning in fiscal year 2006. The State Comptroller's July report projects that a cost-of-inflation increase in labor costs would add $220 million in expenditures in 2006, $700 million in 2007, and $1.2 billion in 2008.

A new problem still unacknowledged in the financial plan is additional city education funding required in response to the state judge's mandate in the Campaign for Fiscal Equity case. All three monitors' July reports note that the proposals from Governor George Pataki, the State Senate, and the State Assembly all assume additional city spending over the next five years, ranging from a minimum of $554 million (Senate) to $1.2 billion (Assembly) to $1.5 billion (Pataki).

Since the state failed to respond to the court's July 30 deadline for a plan, and since the court has named a commission to report in November on next steps, the city is off the hook for the near future.

Another reason for long-term deficits, of course, is tax cuts. The monitors remind us that the adopted budget tax cuts -- the mayor's property tax rebate to residential owners and the council's new city earned income tax credit -- reduce revenues by about $300 million a year for three years. And, they point out, the phasing out of recent sales tax and personal income tax increases on higher-income New Yorkers will cost the city an additional $1 billion a year in lost revenues beginning in 2007.

Capital Budget Priorities

In recent years the Financial Control Board has often argued that the city's rising debt service costs are a major cause of structural budget imbalance. The board is certainly unhappy with the new financial plan: "Past efforts to contain the growth in debt service seem to have been abandoned." The board urges the city to "refrain from increasing the total size of its debt-financed capital program."

Their report shows that debt service rises from $4.2 billion in 2004 to $5.3 billion in 2008. The board's favorite measuring rod -- debt service as a percentage of city tax revenues -- rises from 15.3 percent in 2004 to 17.0 percent in 2008. Their conclusion is that "debt service levels for the outyears could be affordable only if revenues increase substantially or spending for competing operating needs is scaled back."

What irritates the board is a new surge of capital commitments, after a January 2003 financial plan that cut back a total of approximately $4 billion in capital commitments across all areas with the exception of environmental protection contracts. Since then, the city has increased commitments in fiscal years 2004-2007 for schools by $5.5 billion, the emergency response communication system by $1.2 billion, economic development by $320 million, and hospitals by $313 million.

It is unclear how much weight the board's report will have on the mayor and council's priorities. But there is one area where the board and the city's priorities ought to be shared: maintaining the city's infrastructure.

The city publishes an annual maintenance report. The latest one identifies $4.4 billion in capital maintenance needs - that is, bringing roads, bridges, schools, police stations, etc. - up to states of good repair. If that's not done, the city can be forced to pay much higher fix-up costs in the future (as happened with city bridges that were not maintained adequately after the city's 1970s fiscal crisis). The control board's report shows that the city is funding only $2.1 billion of those needs, or 49 percent. The maintenance needs of streets and highways used to be funded at least 90 percent. Now they are less than 50 percent.

Who Pays for West Side Development, and How Much?

The three monitors' reports have useful sections on the fiscal implications of Mayor Bloomberg and Governor Pataki's Manhattan West Side development plans. Rather than one clear, comprehensive plan for the area, there are three scenarios at play, each with its own - often sketchy -- financing plan: expansion of the Javits convention center, the Jets Stadium, and the commercial and residential development of the adjoining West Side. Much of the financing depends on actions by public authorities, which means outside normal democratic budgeting processes.

Here is how the Financial Control Board describes the current plans in terms of future city financial obligations:

- Extension of the #7 Subway line and residential/commercial infrastructure: Paid for through $4 billion of bonds issued by a local public authority, with debt service to total $7.6 billion through 2035. The effect on the city budget is not clear, although short-term financing, the likely use of payments-in-lieu-of-taxes (PILOTS), and the designated use of new West Side property taxes could drain money from other city uses.

- $350 million of city support for the expansion of the Javits Center: Paid for through bonds whose debt service would come from Battery Park City Authority revenues, and requiring the agreement of the authority, the city, and the city comptroller. (The comptroller has not announced his position on this proposal.) Others have argued that such funds are really city funds that should be used for affordable housing.

- $300 million from the city to help pay for the platform for the stadium: No final financing plan has yet been provided by the city.

The control board's reservation about the third scenario -- "the use of city funds to finance a sports facility may ultimately crowd out spending for competing capital projects" - is a useful warning about all the West Side development scenarios.

Glenn Pasanen, former associate director of City Project, teaches political science at Lehman College of the City University.

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