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After the ‘Financial Emergency’

by Glenn Pasanen, Dec 13, 2007
 

Why would the mayor of New York City welcome the extension of a state finance law that dictates a state takeover of city finances if the city has a year-end deficit of $100 million or more?

Generally mayors would not want to see state government usurp one of their most important powers. But at a panel discussion last month sponsored by the Center for New York City Affairs at the New School and the Independent Budget Office. Mayor Michael Bloomberg’s budget director, Mark Page, indicated the administration would be happy to see the existing law survive after its July 1, 2008 expiration date because it “had served a very useful function."

The Financial Emergency Act was enacted in 1975 to resolve the severe city budget crisis. It has permitted the mayor to roll over multi-billion-dollar budget surpluses into the next fiscal year. One speaker at the panel discussion, former state budget director Dall Forsythe, characterized this process as a “synthetic rainy day fund” controlled by the mayor.

The mayor apparently wants to protect his discretionary budget powers. If the law was amended rather than simply extended, it could limit mayoral fiscal discretion by requiring that City Council’s approval for any plan to roll over funds for the following year’s expenses.

It would thus create, as one panelist, former City Council staff member John Banks, said, a “more robust debate” between the mayor and the council on budget matters and likely give new fiscal power to the City Council. The council’s speaker, Christine Quinn, has proposed just such a “rain day fund.” So far there seems to be only weak political support for Quinn’s proposal.

WHAT IS AT STAKE

The Independent Budget Office, in a background paper, “July 1, 2008: An Opportunity for a New Framework,” set out several issues that could be addressed in a revision of the Financial Emergency Act.

Moving Surpluses from Year to Year

The city is legally obligated to have a balanced budget. But what does that mean exactly? Does that mean that this year’s revenues must cover this year’s expenses — without any operating deficit or surplus? That would preclude operating surpluses or deficits – or multiyear roll-overs.

The roll-over, or roll, employed by the Bloomberg administration lets the city pre-pay bills for the following fiscal year. This gets around the current state law that says the city can’t end the year with a surplus. Use of this budget tactic gives the mayor a tremendous leg up in balancing the next year’s budget. The down side is that the city is using one-time carryover revenues to balance its budget; there’s no guarantee a similar surplus will be available in another year.

The method also presents a transparency problem for budget analysts and the general public. The way in which one-time surplus revenues are reported in budget documents obscures the actual balance between revenues and expenditures during any single fiscal year. Although a fiscal year may be “balanced” because of the carryover, the city could be spending more that year than it is collecting in revenues.

The state deputy comptroller for New York City in his reports on the city budget has adjusted for the use of carry-overs. In his December 2007 report, he found that in four of the most recent eight fiscal years, including 2008, current-year expenditures exceeded current-year revenues. In 2008, he estimates current-year expenditures will exceed current-year revenues by $3.3 billion.

The transparency problem has grown as the mayor has expanded the carry-over tactic, rolling 2007 surplus dollars not only into the current2008 fiscal year, but into 2009 and 2010 as well. In October, faced with a new budget gap that created by lower tax revenues and higher labor costs, Bloomberg took, nearly $300 million of the 2007 surplus that had been scheduled to balance the 2009 budget and used it to re-balance the 2008 budget. (Simple as pie, right?)

Should the city make the roll-overs more understandable, by establishing a rainy day fund with explicit rules for using the surplus funds? Would this require changes in city law, state law or the City Charter.

The State’s Job

Another issue involves the role of the state Financial Control Board. Should it review only city finances? Retain its current power to take over the city budget should the city have a year-end deficit of $100 million or more? Should the takeover trigger be higher than $100 million to reflect inflation and increased city spending?

In addition, the IBO notes that Speaker Quinn has proposed new reporting requirements for so-called “covered organizations,” quasi-public agencies that administer city services but are not under direct city control, such as the Health and Hospitals Corporation, New York City Transit, the New York City Housing Authority and the Battery Park City Authority. The IBO suggests requiring more disclosure by other “off-budget” organizations created by the city, such as the Economic Development Corporation, the mayor’s quasi-independent economic development office that worked under a $1.2 billion city contract in 2007; the Water Authority and the Hudson Yards Development Corporation, which oversees the development of the West Side of midtown Manhattan.

The Council’s Responsibility

The opportunities for a greater City Council role in city budgeting are rare. Structurally, the council is hamstrung in many ways. Its budget staff, for example, is dwarfed by the mayor’s Office of Management and Budget. The mayor’s budget office has a 2008 budget of nearly $32 million. The council’s equivalent office, its finance division, has a personnel budget of $2.95 million. OMB has a staff of 325, the council finance division, has 38 (up six from 2007).

Then there is the problem of term limits. One of the unrecognized consequences of restricting City Council members to two consecutive terms is that it discourages continuity in council budgeting expertise. In practice, the speaker gets only one term (it’s unlikely a first-term council member will get elected speaker) and so any finance division director the speaker appoints is likely to serve a maximum of four years. Furthermore, in recent years a number of top council finance staff has moved to OMB or other mayoral offices, which apparently offer more opportunities.

LOOKING TO THE FUTURE

In many respects, this might be a good time to have a broader debate about the Financial Emergency Act. There may be some tough decisions ahead, so why not try to have more information available and more actors engaged?

The administration’s October budget modification, for instance, has some sobering numbers. It projects a $6.5 billion deficit for 2011 (up by $2.1 billion since June), which, according to the state deputy comptroller, represents nearly 15 percent of city fund revenues and the second-largest gap at this point in a fiscal year since 1981.

That 2011 gap is nearly as big as the one the city faced in November 2002. In that case the mayor acted quickly and unilaterally. The next time the city faces such fiscal hard times, though, it might be good to have more information and a broader consensus in decision-making. A new law could help accomplish that.

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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