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Juggling the Budget Surplus

by Glenn Pasanen, Jun 17, 2008
 

The big fiscal news this spring is not any change in the forthcoming adopted budget for fiscal year 2009, beginning July 1. Nor is it the continuing investigations of the City Council's secret and perhaps illegal use of $4.7 million of its discretionary funds. The big news is how the mayor has already distributed the projected $6.5 billion surplus in the current fiscal year.

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The use of that huge surplus shows off the genius of Mayor Michael Bloomberg's budgeting. The mayor has placated conservative fiscal monitors, he has pleased important constituencies with selective tax cuts, and he has kept the City Council out of important decisions.

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One important tool for the mayor in all this has been his tight control of the budget surplus, which has precluded serious discussion about the short-term and long-term consequences of its uses. For instance, there's been little note of the fact that nearly $2 billion in reduced expenditures and services from January 2008 through June 2009 will pay for a large portion of over $2.5 billion in selective property tax rate cuts and rebates in 2008 and 2009 -- assuming the mayor does not abandon the proposed cut in the property tax rate for 2009. These cuts benefit commercial and residential property owners. Renters and the schools are among the biggest losers.

The picture of economic and fiscal gloom-and-doom laid out in the executive budget set out the rationale for the expense cuts - if not the tax cuts. But surpluses have become the norm in recent years, and with them, the mayor's discretion over the city budget has increased dramatically.

Last year's surplus, for instance, was nearly $6 billion. The two previous years' surpluses averaged over $3.6 billion. These surpluses represent significant shares of city-funded expenditures - this year more than 14 percent.

The Anatomy of Surpluses

Under state law, the city cannot end the fiscal year with a surplus. Instead, it must spend any extra monies before July 1.

This is where the mayor's discretionary power lies. As the city comptroller's May report on the executive budget points out, Bloomberg has already spread this year's $6.5 billion surplus over the next three years: $3.2 billion to pre-pay 2009 expenses, $3.0 billion to pre-pay 2010 expenses and $350 million to pre-pay 2011 expenses. The council must approve the pre-payments through a budget modification vote, but it has been reluctant to challenge these mayoral decisions.

Fiscal monitors admire Bloomberg's focus on balancing future budgets, at least in the short run. They particularly like the "conservative" revenue projections that have repeatedly under-estimated actual revenues in recent years.

On the other hand, the surpluses are mostly one-shot revenues each year - not guaranteed for the next year -- so using them dodges the problem of the city spending more than it brings in. The executive budget itself anticipates budget gaps in 2011 and 2012 that average $4.5 billion. The state comptroller in his June review of the mayor's financial plan for 2009 to 2012 estimates that the 2011 and 2012 gaps could average as much as $6.3 billion.

Creating the 2008 Surplus

How did we get to this point? The city comptroller's May report spells out where the projected $6.5 billion surplus in 2008 comes from:

  • $2.6 billion from last year's (2007) surplus, set aside in what is called a Budget Stabilization Account (i.e., a reserve fund for surplus dollars);
  • $2.5 billion more in revenues than the city projected last June;
  • $1.4 billion in lower expenses than projected last June.

The mayor has already made an early payment of $2 billion to bring down debt service, which otherwise would have been due in 2010. So, by his figures, the current 2008 Budget Stabilization Account has $4.5 billion ($6.5 billion minus $2.0 billion). The city and state comptrollers include the $2.0 billion pre-payment and say the surplus is $6.5 billion.

Using the 2008 Surplus

The city comptroller also lists the uses of the 2008 surplus:

  • $2.0 billion to pre-pay 2010 debt service;
  • $3.1 billion to pre-pay 2009, 2010, and 2011 debt service;
  • $500 million to pre-pay subsidies to city libraries and the Metropolitan Transportation Authority/Transit Authority;
  • $400 million to pre-pay retiree health insurance;
  • $546 million to the city Finance Authority for debt service.

This totals $6.5 billion.

The state comptroller's June report notes that without all the mayor's recent decisions -- rolling over the surpluses future tax increases and expense reductions -- the deficits for fiscal years 2009 to 2012 budget deficits would be, respectively, $4.9 billion, $6.6 billion, $7.6 billion, and $7.1 billion -- hardly a testament to "conservative" budgeting.

The Surplus Effects

One consequence of these pre-payments and grants -- as well as tax cuts -- is that the 2009 budget projects a $1.3 billion surplus for that year, much smaller than in recent years. 2010 has a tiny projected surplus of $350 million. The narrow focus of last-minute budget negotiations -- usually only $200 million to $300 million in changes - obscures the most important consequences of current surplus policy. The most stunning is the disconnect between the huge extra resources actually available in 2008 and the big cuts imposed during the same period.

The city comptroller's May report make this clear: Education funds, for instance (a mayoral priority), will be cut by $608 million from January 2008 to July 2009 and then by $753 million over the next two years, 2010 and 2011. That adds up to a $1.4 billion cut over three and a half years.

Compare education cuts with tax cuts. In Bloomberg's executive budget, the property tax rate cut averaging over $1 billion each year remains in place for the 2008 and 2009 fiscal years, along with the $400 rebate to house, co-op, and condo owners, at a cost of about $250 million in lost revenues each year. That adds up to over $2.5 billion in tax breaks over two years.

Last week the mayor indicated he might abandon the cut in the property tax rate in 2009, apparently because of the economic downturn and the cost of the city's recent contract settlement with police officers. However, the mayor has not committed himself to such a change, and some City Council members have indicated they would oppose any effort to eliminate the cut.

Neither the rate reduction nor the rebates have benefited renters, who represent two thirds of city households (and a substantial proportion of public school students).

Thus the $12 billion in surpluses recorded over the past two years have not so much encouraged a long-term conservative fiscal plan as created a political exercise in selective tax changes and, more recently, in service reductions.

Reforming Surplus Politics

The creation of rainy day fund would open more of these decisions to political debate. Under this plan, any surplus would go to a fund and be spent only under circumstances set by state legislation. That would limit late-year mayoral budget decisions to which the council seems to be only a rubber stamp. The council

made such a fund a priority in its response to the mayor's January preliminary budget. The city comptroller added his voice to that argument in his May report.

"Establishing a statutory rainy day fund would enable the city to manage its finances in a more transparent and straightforward fashion. The present method of applying surplus resources to future years is complicated, difficult for the public to understand and in some instances lacks flexibility that would allow resources to be applied where they are truly needed. ... The comptroller continues to urge the city to explore establishing such a fund," his report said.

Prospects for such a fund are dim in the short run. State legislation would be required, and the mayor would presumably try to block it. One way to move toward legislative action would be to make the creation of a rainy day fund a priority for any Charter Revision Commission the mayor might name in the near future. However, here again, the mayor controls the appointments and agenda of such a commission. Thus any reform may have to await debate among mayoral -- and City Council -- candidates in the 2009 election campaigns.

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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