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Coming Soon: Deeper City Deficits

by Glenn Pasanen, Jun 25, 2009
original photo (c) Spencer T Tucker, nyc.gov

As Mayor Michael Bloomberg and the New York City Council await state legislative approval of their tax package to complete adoption of the city's $59.4 billion 2010 budget, three new fiscal reports help show how the mayor rather easily sold a budget during tough times and facing a November election. Given the national recession, the state's severe budget problems, and the city's own economic and fiscal troubles -- not to mention extensive budget cuts and big tax increases -- the mayor's success is rather remarkable.

It stems from several sources, including the mayor's 18-month fiscal strategy, some help from Washington and a lack of any strong opposition. But the fiscal reports make it clear that the 2010 budget, which takes effect July 1, holds the seeds of major fiscal troubles, with budget deficits from 2011 to 2013 that the mayor himself says will average over $5 billion a year. City Comptroller William Thompson, in his June analysis of the executive budget said those deficits could be much bigger, calling them "unprecedented."

Planning for an Election Year

Worse yet, the budget options available in the next three fiscal years likely will be more limited and more painful than this year's. Most obviously, the surpluses that eased budget balancing over the past several years are now all but gone.

The 2009 budget, for example, took advantage of $5.3 billion in surpluses from previous years, noted the State Financial Control Board's June review of that budget. That rollover contributed to the little noted fact that the city will end fiscal 2009 on June 30 with a projected $3 billion surplus. About $2.5 billion of that will be used to balance the 2010 budget, leaving only a little over $500 million to be rolled over for 2011.

Also, it is likely that the budget cutting that the mayor began 18 months ago will have increasingly harsh impacts. Those budget cuts began because the mayor and his budget staff long ago recognized the need to make 2010, a city election year, as non-controversial as possible. So, beyond the use of surpluses, the mayor in January 2008 began cutting expenses at various city agencies. Further cuts were made in four subsequent budget modifications, most recently in May 2009.

This series of actions adds up to $3.4 billion in agency cuts in the 2010 budget, according to the Financial Control Board report. The Independent Budget Office in its May analysis of the executive budget pointed out that $2.3 billion of those cuts have been introduced in just the past seven months. The office also pointed out that in May some $376 million dollars of cuts to school budgets for 2010 had yet to be identified.

On the revenue side for 2010, the mayor increased property taxes on city homeowners -- but attracted as little attention doing it as possible. He restored the city's property tax rate to its 2003 level, but he made that tax increase in the June 2008 adopted budget, a year before it was slated to take effect. Then, with City Council's approval, he accelerated that increase, making it effective in January 2009. That added $576 million in additional property tax revenues in fiscal 2009, helping build the surplus for 2010.

Further, the mayor's popular $400 rebate to homeowners, which Bloomberg said in November 2008 he wanted to eliminate immediately, was retained for 2009 at the council's insistence. The mayor and the council did agree to do away with it for fiscal years 2010 to 2013, providing the city with $256 million more in revenues for those years.

The mayor's other big tax proposal for 2010 to 2013 called for raising the city sales tax from 4.0 to 4.5 percent. With the state sales tax and the metropolitan transportation sales tax of 0.375 percent, this makes the full sales tax in the city 8.875 percent -- the highest in the metropolitan area. Despite initial opposition, the council approved the hike, along with a provision to reinstate a sales tax on clothing costing more than $110.

As the Independent Budget Office's May analysis points out, sales tax increases are common "when revenues are falling because they can be implemented quickly and usually generate less outrage from taxpayers because they pay in small amounts with each purchase rather than a lump sum such as with property taxes."

The City Council made the mayor's initial sales tax proposal less regressive by exempting clothing costing less than $110 from the tax. That will, however, reduce new sales tax revenue to $518 million, much less than the mayor had wanted.

The property tax and sales tax increases for 2010 to 2013 mean that further increases in the near future are unlikely, further limiting gap-filling options.

Election Year Luck

Also contributing to the mayor's budget success was the fact that the mayor had some good fortune in this election year. As the Financial Control Board has pointed out, the effects of the recession o the city lagged behind the impact on the rest of the nation by 10 months. This, the board said, gave the city "nearly one extra year to prepare for the brunt of this downturn." For example, although the city projects its job losses will reach 328,000 through the third quarter of calendar 2010, the actual job loss through April 2009 was 93,000.

More good fortune -- although only for a limited amount of time -- came with President Barack Obama's economic stimulus plan. The city will reap the greatest benefits from Medicaid subsidies and education aid. New Medicaid subsidies will provide the city with a total $1.6 billion over three years. New federal aid to public education in the stimulus plan will average nearly $1 billion in each of the next two years, 2010 and 2011. This eliminates the need to eliminate some 14,000 teaching positions next year, as the mayor feared he would need to do in his January 2009 preliminary budget.

The downside here, as the Independent Budget Office notes, is that the mayor has moved the possible loss of those 14,000 teachers to 2013 when the federal funds will run out.

Another piece of good luck in 2009 was what the Financial Control Board calls a $312 million "uptick" in bank tax revenues, an unanticipated, perhaps one-shot, increase that the board could not yet explain.

Hurdles Ahead

Two other, more esoteric, problems loom in the future. One is, as the Financial Control Board notes, the mayor's planned withdrawal of over $1.1 billion from the Retiree Health

Benefits Trust Fund during the next three fiscal years. This fund was created in 2006 with budget surplus funds -- and quickly reached $2.5 billion -- specifically in order to begin to meet future costs of retiree health benefits.

The fund was controversial at its inception because it looked like a "rainy day fund" that could be tapped during tough budget years. It did not come with legislative standards that would dictate its revenue and expenditure operations. Rather, it looked like a discretionary budget tool for the mayor, prompting criticism from Thompson, the City Council Speaker Christine Quinn and the Financial Control Board.

Now much as they feared, the mayor has used the fund for a new purpose, in this case to offset pension losses that the city has incurred in the economic slump. The Financial Control Board calls this use of the fund, an "unfortunate step back from starting to deal with this growing unfunded liability."

One other big question is how the city will pay for required pollution control measures. The city currently has a Financial Control Board waiver, which permits it to pay for mandated pollution remediation through the capital budget rather than the expense budget. That waiver, expires in 2011, and could end up costing the city an additional $500 million a year, starting in 2011. The mayor's four-year financial plan does not address this.

After November

Bloomberg, with some help from the City Council, has had remarkable success in crafting a balanced budget for 2010. Budget surpluses, budget cutting, clever timing of tax increases, and some good fortune have all contributed to a relatively uncontroversial election year budget. However, with job losses accelerating, surpluses gone, budget cuts already hurting, future federal help uncertain and new taxes increasingly unwelcome, it is clear the mayor and council have deferred the really tough decisions ahead.

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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