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How to Plug the Growing Budget Gap

by Glenn Pasanen, Mar 23, 2009
 

Less than four months before Mayor Michael Bloomberg and the City Council must sign off on next year's budget, billion-dollar questions multiply. New reports from the Independent Budget Office and City Comptroller William Thompson suggest the city's budget gap in fiscal year 2010, which begins July 1, 2009, is much bigger than the January preliminary budget indicated and that the mayor's gap-filling plan has its own billion-dollar holes.

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At the same time, Council Speaker Christine Quinn, has proposed a big alternative to the mayor's fiscal plan. With his focus on across-the-board service cuts and a large increase in the sales tax, the mayor has placed the biggest new burdens on lower- and middle-income New Yorkers. The speaker would shift at least a billion dollars of that sacrifice to higher-income New Yorkers by restoring the personal income tax structure to more progressive levels.

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Billion Dollar Questions

Testifying before the City Council on March 9, www.ibo.nyc.ny.us Independent Budget Office director Ronnie Lowenstein estimated that the 2010 gap is now $1.2 billion greater than estimated in the mayor's January plan. Most of that new gap comes from the IBO's projection that tax revenues will decline by $1.3 billion more next year than the mayor projected. Assuming that's true, that means, of course, that the mayor and council would need to come up with yet another billion-dollar plus package of new revenues and/or service cuts.

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The primary reason for the increased gap, according to Lowenstein, is the rapid increase in job losses in the city, particularly in the financial world. The IBO projects the loss of 270,000 jobs from peak employment in the first quarter of calendar 2008 through the second quarter of calendar 2010. That's 30,000 more jobs lost than the office estimated in January. The city has already lost 59,900 jobs since January 2008 -- but, according to the budget office, the worst is yet to come.

In particular, the securities industry - the highest paying sector within the financial industry - is projected to lose 48,800 jobs by mid-2010, a decline of over 25 percent from its peak in 2008. Wall Street firms which, as recently as 2006, had profits of $21 billion, had net losses of $11.3 billion in 2007, and the IBO projects net losses of $45.1 billion in 2008.

City Comptroller William Thompson Jr.'s March report, Comments on the Preliminary Budget for FY 2010 and the Financial Plan for FYs 2009-2013, accepts most of the mayor's 2010 tax revenue estimates, but worries about nearly $1.9 billion of shaky assumptions in the mayor's plan for closing the 2010 gap. He identifies two potential problems: increasing revenues from the city sales tax by nearly a billion dollars, which requires state approval, and the $757 million in labor concessions, which would require the approval of municipal employee unions.

The city comptroller sees much bigger problems for the 2011 to 2013 period than the mayor. He sees risks in the administration's financial plan of about $3 billion in each of those three years, so his projections of future deficits are much higher than the mayor's. Gaps could be as high as $6.9 billion in 2011, $7.0 billion in 2012 and $6.9 billion in 2013. These projections dramatize the difficulty the mayor and council continue to have catching up with escalating gaps.

The End of the Rollover

Adding to the problem is the disappearance of the surpluses the administration has come to rely upon. At the end of each of the previous four years, the city had surpluses averaging over $4.1 billion and used those surpluses to pre-pay an equal amount of the next year's expenditures. That meant, of course, that in those years the city did not have to find an average of $4.1 billion in new taxes or expenditure cuts.

The current fiscal year, 2009, benefits from last year's $4.6 billion surplus, which helped offset the escalating problems this year. In fact, the IBO estimates this fiscal year will see a $1.6 billion surplus, which will be part of the gap-filling program for 2010. But the comptroller points out that, surplus pre-payments aside, actual operating expenses in 2009 will exceed current-year revenues by $3.8 billion.

Well aware of the forthcoming surplus depletion -- if not of the more severe economic and fiscal downturn in recent months -- the mayor has been cutting agency spending more or less across-the-board since the January 2008 preliminary budget and financial plan, as explained in the February 2009 finance column. One worrisome example of the impact of these cuts (made in January 2008, November 2008 and again in January 2009) is, as the city comptroller notes, the aggregate cut of $944 million in city education funding in 2010.

The comptroller notes that the federal economic stimulus plan could provide the city with about $1 billion in education funding in each of the next two years. That money would "alleviate many of the proposed reductions in state funding, allowing the city to avert the proposed layoffs," but would provide "no additional gap closing relief."

Billion Dollar Answers

Only two of the mayor's four roughly billion-dollar answers to budget deficit in his January plan look solid in mid-March: the on-going agency cuts, saving another $1 billion in 2010, and the anticipated $1 billion Medicaid relief money in the new federal economic stimulus plan. The other two noted by the city comptroller - nearly a billion dollars from increases in the sales tax -- and three quarters of a billion dollars in labor concessions on employees health and pension benefits - are highly uncertain.

So that leaves room for at least $2 billion in alternative revenue/expenditure packages - over $3 billion if the worst-case IBO scenario is acknowledged. It's in this context that the council speaker, Christine Quinn introduced on Feb. 12 a major tax revenue proposal that would, as she says, "balance the city's income tax structure and avoid sales tax increases." (For Quinn's explanation of her proposal go here.)

There are two essential parts to the Quinn plan: The first would eliminate the city personal income tax for all those - currently 224,000 families - who pay no state or federal income taxes but do pay the city personal income tax. The savings for those families (earning up to $46,000) would average $321 per family.

Quinn would pay for the revenues lost in reducing lower-income tax burdens (about $72 million) and abandoning the mayor's sales tax increase by creating three new tax brackets for those taxpayers with annual taxable income over $297,000. The current top rate - 3.65 percent - would increase to 4.25 percent for those filing jointly and making $297,000 to $532,000; to 4.45 percent for those making $532,000 to $1.2 million; and to 4.65 percent for those with incomes over $1.2 million.

A few days after introducing her tax proposal, Speaker Quinn, along with State Sen. Liz Krueger and the Drum Major Institute announced a proposal for state legislation that would eliminate the income tax on low-income people. The partners emphasized the economic benefits of putting $321 in the hands of lower-income New Yorkers.

That, of course, is only a first step. The state also would have to pass legislation to implement the higher tax rates on more affluent New Yorkers proposed by Quinn. Bloomberg has been reluctant to take that step, even though he introduced -- and the council immediately passed -- a similar, but temporary, proposal during the fiscal crisis in November 2002.

The larger Quinn plan is hardly radical. In fact, the city's top income tax rate was 4.45 percent from 1991 through 1998, under Mayors David Dinkins and Rudolph Giuliani and then, under Bloomberg, from 2003 through 2005. What's most surprising here, then, historically, is that such higher rates have not been re-introduced in earlier gap-filling plans.

There is no lack of other big, and more progressive, revenue alternatives to the mayor's sales tax proposal. For instance, the IBO's February www.ibo.nyc.ny.us Budget Options includes two that the mayor himself has proposed at one time or another, but no longer advocates: restoring the city's commuter tax to bring in $715 million in 2010 and instituting a more progressive commuter tax would bring in $1.4 billion.

Lessons from Reports

In the midst of this fiscal crisis and initial mayoral/council skirmishing, two reports mandated by the City Charter were released in February, the Preliminary Mayor's Management Report for Fiscal Year 2009 and the Annual Report on Tax Expenditures, Fiscal Year 2009. Although little known, they include some useful lessons as tax plans are debated.

Take the preliminary management report, which the mayor tried to eliminate a few years ago through his Charter Revision Commission. It is supposed to provide early data for the current fiscal year, data that might prompt budget changes for the following fiscal year.

Slim as the up-to-date data are in education, one indicator stands out. Class sizes in the elementary and middle schools, after some small decreases between fiscal 2006 and 2008, have gone up in this school year in all grades except fourth. In grade three, class size now averages 21.9, up from 21.0 just a year ago. In fact, class size in all grades kindergarten through the third are now higher than they were in 2006, one early result of those nearly $1 billion of cuts in 2010.

Then there is the report on tax expenditures, which records the impacts of selective tax cuts that have been established over many years. Some of these are questionable million-dollar and billion-dollar programs that can starve revenue needs at times like these. One of the biggest, the Industrial & Commercial Incentive Program, whose economic development assumptions have long been challenged by Good Jobs New York, costs the city $500 million in lost revenues in 2009. (For a related commentary, go here.)

City insurance companies, unlike all other companies, pay no city business income tax, at a cost to the city (in 2005) of $256 million. Co-op and condo owners gain from an allegedly temporary property tax abatement, introduced in 1996, but which continues today, at an annual cost of $337 million. Battery Park City, whose residential and commercial property is exempt from city property taxes, costs the city over $150 million annually. Then there is Madison Square Garden, which since 1984 has paid no property tax, costing the city $12.2 million in 2009.

Baseball, however, trumps basketball and hockey for outrageous public subsidies. The Independent Budget Office pointed out in January that the city's exemptions and subsidies for the new Yankee Stadium will cost the city $362 million over 40 years. Including federal and state exemptions and subsidies as well, the total public cost will be $855 million. In fact, as the mayor proposes a billion dollar increase in the sales tax for New Yorkers, the Yankees are enjoying a city sales tax exemption he granted them on construction materials, which costs the city over $20 million.

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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