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Mixed News in a ‘Good News’ Budget

by Glenn Pasanen, Jul 13, 2007
 

The city’s $59 billion FY 2008 budget is a remarkable document: full of good news for city property owners, bad news for renters, discouraging news for those hoping for real tax reform and uncertain news for long-term budget stability. Given the nearly $6 billion in extra tax revenues and other resources that became available in fiscal 2007, there should have been more good news to spread around.

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Ironically, the huge city surplus may have served to further erode the City Council’s role in the budget process. Much of the extra revenues generated in 2007 went to pre-pay billions of dollars in debt service that are not due until 2008, 2009 or 2010. These one-time payments left little money for expanding social services and other government program.

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Much of the rest of the money went to a narrowly targeted property-tax cut. Because the 2007 surplus had grown since April’s executive budget, the mayor and City Council at the last minute decided cut the property tax rate more than originally planned – upping the reductions in the average property tax rate for residential and commercial property owners from 5 percent to 7 percent.

That will cost the city an additional $300 million, bringing the total expense of the cut to $1.05 billion in 2008 -- and more in subsequent years. In addition, the mayor and council extended the $400 rebate for homeowners, costing more than $250 million. They also eliminated the city sales tax on all clothing – not just items priced at less than $110 as had previously been the case – at a cost of $110 million.

WHAT THE BUDGET DIDN’T DO

The mayor rejected the council’s proposal for a modest $300 tax rebate for the two thirds of New Yorkers who are renters, a cut that would have cost $261 million. The plan would have been a small step toward reversing the burden that the last 25 years of property tax politics have placed on renters. For instance, according to an Independent Budget Office report, the median household income of renters in 2005 was $33,904 – just over half the median income of $66,000 for people who own their homes.

Ironically, even for homeowners the property tax relief may not be everything its supporters would have liked. Press coverage showed that most, if not all, residential owners will still pay more in property taxes in 2008 than in 2007. The confusion stems from the bizarre assessment structure of the city’s property tax system, detailed in the Independent Budget Office report.

The budget also missed an opportunity to help low-income New Yorkers, either with substantial new services or a break in their income taxes. The budget does include a modest child-care credit. But the Independent Budget Office points out that some 167,000 low-income New Yorkers will still pay the city income tax, although they pay no state or federal income taxes. Some 94 percent of these taxpayers have household incomes between $20,000 and $50,000, with most in the $20,000 to $30,000 range.

And, for all the cooperation between the City Council and the mayor the past year, the council seems to have gained little more than in previous years. It again had to focus on “restorations” of council programs cut by the mayor in the executive budget ($266 million this year). Yes, a few programs were “base-lined” into the mayor’s four-year plan, but the great bulk of this year’s restorations remain subject to mayoral discretion another year.

FUTURE DEFICITS

Much like former Mayor Rudy Giuliani and City Councils in the late 1990s, Bloomberg and the current council continue to ignore long-term budget stability. The pre-payments and property tax cuts in the 2008 budget help create an estimated $3.4 billion deficit in 2010 and a $4.3 billion deficit in 2011.

But, with the term-limited mayor and council leadership leaving office in December 2009, any 2011 deficit will be the responsibility of others.

As the state Financial Control Board has noted in its May 31 report on the executive budget, this year’s big surplus is largely the result of a phenomenal year on Wall Street. In calendar year 2006:

· Security industry profits were $20.9 billion; · Wall Street bonuses were $25.5 billion; and · Capital gains realizations reached $38.9 billion.

These big profits, bonuses and gains brought in an unanticipated $1.9 billion in business income taxes and over $700 million in personal income taxes. In addition, in the booming real estate market, taxes on property transfers and the recording of new mortgages were over $1.4 billion more than projected in June 2006. At the moment, no one thinks these numbers will be repeated next year.

PAST SURPLUSES

But huge budget surpluses are hardly new. Although Rudolph Giuliani had fiscal problems in his first years in office, he later enjoyed successive budget surpluses. For the four fiscal years 1998 through 2001, Giuliani budget surpluses totaled nearly $11 billion, or about $2.7 billion a year:

· FY 1998: $2.1 billion
· FY 1999: $2.6 billion
· FY 2000: $3.2 billion
· FY 2001: $2.95 billion

Each year Giuliani and the council used the one-time surpluses to pre-pay a large part of the following year’s debt service. A 1999 cut in the personal income tax (reversed by Bloomberg in response to the 2002-2003 budget crisis) cost the tax base over $500 million a year.

But the surpluses did not go on indefinitely. Recently Bloomberg has suggested that Giuliani left him with, as the New York Times put it, “a huge budget deficit” when Bloomberg became mayor in January 2002.

Indeed, Giuliani did contribute to Bloomberg’s fiscal problems through his use of one-time surpluses and tax cuts. Giuliani’s last budget used a nearly $3 billion surplus for 2001 to balance 2002’s budget. That left Bloomberg vulnerable to the terrible human, economic and fiscal impact of events in the next year: a growing national recession and, of course, the effects of the September 11, 2001, attacks.

For the last four Bloomberg fiscal years, budget surpluses – using Bloomberg’s definition of “surplus” -- have totaled about $14 billion, or $3.5 billion a year, according to the office of the city comptroller and the city Office of Management and Budget.

· FY 2004: $1.9 billion
· FY 2005: $3.5 billion
· FY 2006: $3.8 billion
· FY 2007: $4.7 billion

Bloomberg, like Giuliani, has used each year’s surplus to pre-pay large parts of future debt service. Unlike his predecessor, Bloomberg has spread the pre-payments over two future years (and, as noted above, a third year in the 2008-2011 financial plan). Another difference is that Bloomberg’s tax cuts are considerably larger than Giuliani’s, reducing the city tax base by $1.3 billion dollars in 2008 alone.

By some calculations, Bloomberg’s surpluses are actually even higher than he says they are. He does not count the $1 billion used to fund a new retiree health benefits trust and the $1.25 billion used late in 2007 to retire debt early as “surpluses.”

If those two actions are included, the Bloomberg surpluses are $4.75 billion in 2006 and $5.9 billion in 2007 – or 12.5 percent and 14 percent of city funds.

‘MODIFYING’ THE BUDGET

This means that a substantial chunk of the budget-- as much as 14 percent – is not subject to the May-June budget process. The mayor decides to spend these surpluses throughout the fiscal year. Although the City Council technically must approve his decisions, the councils in both the Giuliani and Bloomberg eras have been reluctant to challenge the mayors’ decisions.

By state law the city must spend any surplus before the next budget begins. In an effort to do that and still safeguard the city against further fiscal crises, Bloomberg put aside, or saved, $2 billion through the retiree health benefit fund in 2006 and 2007. Another $500 million will go there in 2008. Fiscal monitors applaud those moves, but the mayor rejected the City Council’s effort this year to create a real rainy day fund, which would give the legislative body some say in how surplus funds are spent.

Bloomberg’s surplus strategy is essentially quite conservative – at least politically -- in two senses. First, using the surplus to prepay debt service means the money will not be available for human services of equivalent value. Second, the mayor’s tax cutting strategy benefits big firms and higher-income New Yorkers much more than low- or middle-income New Yorkers. At the same time, the failure to solve long-term budget deficits means the strategy ignores a conservative fiscal goal of setting the structure for balanced budgets in years to come.

A structurally balanced budget requires a long-term, consistent, and adequate tax base that matches long-term projected expenses. A progressive budget ensures that the tax burden is fairly distributed and that expenses provide comprehensive public services. The 2008 adopted budget is neither structurally balanced nor progressive.

The huge surpluses – and the inability of a Democratic council to play a countervailing role in the political and fiscal decisions about how to use the money -- suggest that both term-limited mayors found and used a structural weakness in the city’s budget process. Giuliani’s decisions contributed to a monster fiscal crisis within a year of his leaving office. The city can only hope that Bloomberg’s successor has better luck.

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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