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The City Modifies Its Budget and Searches for Cash

by Glenn Pasanen, Dec 17, 2003
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Every year around this time, the city charter requires the mayor to update the budget, called a budget modification. It was during last year’s modification that Mayor Michael Bloomberg unveiled an 18.5 percent increase in property taxes. This year, there is nothing so dramatic.

The good news is that the modification suggests at least a slight improvement in the city’s economy; it includes nearly $500 million more in projected non-property tax revenues. This news is supported by the City Comptroller’s December economic report that says, “The city is showing clear signs of economic recovery.” The city still lags behind the national recovery, and job losses continue, but the gross city product grew in the third quarter of calendar 2003 by 0.3 percent, after 10 quarters of decline.

The sobering news is that even after a $3.4 billion increase in tax revenues this year, revenues will be nearly $1.9 billion short as early as next year, and there is a projected budget deficit for 2007 of nearly $3.9 billion.

And so, there is a new search for new revenue once again.

THE 2004 MODIFICATION

This year’s budget, only five months old, jumps to $45 billion, some $1.3 billion more than projected in late June. In addition to the $500 million increase in non-property tax revenue projections, the modification recognizes federal and state categorical grants of another $600 million. Since they are given for specific purposes, these grants generally do not help in reducing budget deficits.

The city will use most of its new revenues in two ways: The budget stabilization account – a reserve fund where the city can park dollars – gets over $400 million (which at least in the current long-term plan will be used to reduce the budget deficits in the next two years). This is in addition to $300 million already in the general reserve fund, for a projected year-end surplus of over $700 million. Another $200 million will be used this year as pay-as-you-go capital expenditures. This has the advantage of reducing capital borrowing and thus reducing interest payments. The mayor plans to repeat this annual expenditure in the three subsequent years.

Total salary, wage, pension, and fringe-benefit costs of the city workforce are up a little over $200 million, to $24 billion, while other-than-personal service projected costs (including Medicaid, public assistance, and contractual human services) are up about $500 million since June, to nearly $19 billion. These modest changes seem again, at least in broad terms, to support the mayor’s claim that he has been able to keep services stable.

BEYOND THE 2004 BUDGET

The mayor and the City Council created a good part of future budget shortfalls by making this year’s increases in personal income and sales tax only temporary.

The mayor’s tax revenue strategy last year was bold but sudden, effective but undemocratic. Both the property tax increase in November 2002 and the personal income and sales tax increases in June 2003 were last-minute proposals that made public (and city council) engagement impossible. Thus it is no surprise that this November modification contains no information about future strategies.

Tolls On Bridges

The mayor’s first ambitious revenue idea – the introduction of tolls on the city’s bridges – was floated in the early months of his administration. Strong opposition to that idea and his current reluctance to follow-up perhaps help explain the secret revenue planning since. But the Independent Budget Office’s October 2003 report, “Bridge Tolls: Who Would Pay? And How Much?” is a good reminder of how important those revenues could be to attaining structural balance in the city’s long-term financial plan. The IBO estimates that the city could raise nearly $700 million a year by tolling the East River and Harlem River bridges.

One big objection to tolling bridges, of course, is that a majority of the drivers (55 percent) are New York City residents. The report speaks to that worry by noting (in an admittedly rough estimate, based on a household survey), “Exempting city residents from tolls would reduce the annual revenues to a combined $308 million.”

In terms of numbers of users, the report shows that fewer than 300,000 New Yorkers (out of 8 million) drive across these bridges, about 3.7 trips per 100 residents. In terms of income, about 42 percent of all users of the bridges are either low to moderate-income city residents (under $50,000 household) or middle-income city residents ($50,000 to $100,000). The report points out that although the number of New Yorkers affected would be few (and some would take alternative mass transit), the impact would be much more concentrated than in the case of personal income and sales taxes.

Stock Transfer Tax

Another IBO study, “Reviving the New York Stock Transfer Tax: Revenues and Risks,” speaks to another big revenue option that has been proposed by some advocacy organizations, including the Working Families Party and the Fiscal Policy Institute. The city first imposed a stock transfer tax in 1966. It was phased out by 1981. If still in place, it would have produced $9.3 billion in 2003 for the city. The study traces the impact of reviving the tax, at half its 1970s’ rate. That would produce nearly $5 billion, if there were no “adverse reactions.”

In a best-case scenario, the study finds that the new tax would increase transaction costs by 23 percent, reducing trading volume on the New York and American stock exchanges by 18 percent. That would eliminate nearly 60,000 private-sector jobs. Since the increased revenue would fund almost 38,000 public-sector jobs, the net job loss would be 22,000. That translates into a net revenue gain of $2.9 billion for the city. The study concludes with another scenario with “significant downside risks” – where one-third of trading activity moves out of the city – and job losses in the city “could climb to 150,000 and net city revenue gains would fall to zero.”

One-Shot Deals – 1. Airport Lease Agreement

Given the imminent reduction in basic tax rates and a reluctance to tackle controversial revenue sources like the city bridges and Wall Street, the mayor has become more dependent on one-shot deal-making. The apparent long-delayed agreement on a new airport lease agreement between the Port Authority -- announced by Governor Pataki and Mayor Bloomberg in October -- is the prime example. It is worth $700 million in up-front money over the next two years, and nearly $100 million a year thereafter.

While there seems to be general acceptance among fiscal monitors of this deal (former Mayor Rudy Giuliani failed during his two terms to settle disagreement over Port Authority payments to the city under the old agreement), a deal that ties the city until 2050 has received surprisingly little public attention or review. The deal is nevertheless a key to the current four-year financial plan.

One-Shot Deals – 2. Borrowing-for-Cash With Battery Park City Authority

Another quiet deal built into the current fiscal year budget is the city’s agreement with the Battery Park City Authority, controlled by the governor, to borrow $150 million through the authority, primarily to provide cash to the city. This requires state legislative approval and mimics a similar borrowing-for-cash that former Mayor David Dinkins employed through the authority in the early 1990s when in a fiscal bind. In both cases, the city in effect pays the debt service, through reductions in excess Battery Park City revenues that would otherwise come to the city. (A related if forgotten story is that excess authority revenues were supposed to be used for affordable housing.)

One-Shot Deals – 3. Snapple

The mayor has now moved from behind-the-scenes, public-authority deal-making for cash to corporate/city deals. The mayor’s agreement with Snapple to provide certain beverages to the public schools and other city facilities has roused the opposition of both the City Comptroller and the City Council, which held a long hearing on the deal on December 4. The Comptroller, who testified at the hearing, objects to the process, and several Council members objected both to the process and the substance of the Snapple agreements described by Deputy Mayor Dan Doctoroff.

The Comptroller, in his remarks, said that the city “can’t cut corners” and “must be above reproach” in the procurement process. Doctoroff later contended that the deal was not subject to city procurement rules, that it was a unique opportunity for the city to develop a profitable relationship with a brand-friendly company. Several representatives from other beverage companies charged that the competitive process was flawed and at least two said had they known the full potential of the deal, they would have bid more than Snapple.

The $166 million in anticipated revenues over five years is not insignificant, but as council member Bill Perkins pointed out, there are potential problems with “monopolistic opportunities” and using “kids as captives.” No one at the hearing asked how many water fountains there are in schools. After all, the deal, among other products, promotes bottled water for the students; thirty percent of the student cost for each bottle goes to the city. (Well, not quite. Actually, fifteen percent of the city’s share of that payment goes to Octagon, the private marketing firm that negotiated the Snapple deal for the city.)

It’s good to know that our children will be making their contribution to the city’s balanced budget.

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

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