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State Debt + Federal Debt = City Budget Trouble

by Glenn Pasanen, Feb 08, 2005
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Mayor Michael Bloomberg's preliminary budget for fiscal year 2006 should, as promised, translate into a balanced adopted budget in June with a minimum of fuss. The details of that election-year budget will likely change in several ways, but with the surplus for this year already at $1.4 billion - and likely to rise - there is plenty of room for last-minute adjustments to get the mayor and city council through their skirmishes over the mayor's annual cuts in health, social, cultural, youth, senior, and other human services.

What's not promised is longer-term budget balance. The mayor's proposed actions for 2006 - detailed in Gotham Gazette's recent report -- do next to nothing about future deficits. For instance, the city deficit for fiscal 2008, as of last June, was projected to be $3.7 billion; now it is projected to be $3.6 billion - not counting many risks, such as unrealistic labor-cost projections.

The biggest change likely to take place before June's budget adoption is a reduction in the mayor's wish list for $750 million in new federal and state aid. One reason why is illustrated in two new reports on federal and New York state budgeting. They show how federal deficit spending - borrowing money to pay current expenses - and state borrowing increase budget gaps and diminish prospects for new intergovernmental aid.

According to a January report from Citizens for Tax Justice (In PDF format), extraordinary levels of federal deficit spending will dramatically increase federal debt service payments and likely force cutbacks in discretionary spending. At the state level, State Comptroller Alan Hevesi's new report on state debt underscores how Governor George Pataki's borrowings in the past four years have added billions of dollars of new state debt.

Federal Deficit Spending

Citizens for Tax Justice's report is entitled, "Bush's $10 Trillion Borrowing Binge: An Update." It is a blow to prospects for any new federal aid to New York in the near future. Using "frightening statistics" from the respected Congressional Budget Office's January report on the federal budget and economy, Citizens for Tax Justice shows how projected annual deficits under Bush policies "skyrocket" from $572 billion in 2005 to $1.164 trillion by 2015.

These new projections for 2015 are seven times what the president projects, because the current Bush numbers assume, among other things, that current tax cuts "sunset,' that Iraq and Afghanistan expenditures will suddenly end, and that federal appropriations will "plummet" as a share of the economy. The Congressional Budget Office report uses more realistic assumptions and suggests that by 2013, "the government is likely to be spending more on interest on the debt than on all domestic appropriations put together - from education, to the environment, to law enforcement, to science, to transportation, to veterans."

Under the Congressional Budget Office assumptions, the national debt, including what's owed to Social Security (excess Social Security revenues are lent to the federal budget), will triple by 2015, to $14.8 trillion, some $10 trillion more than the debt when President Bill Clinton left office.

State Debt, Public Authorities, and Budget Gaps

Governor George Pataki has his own method of avoiding structural budget balance. According to the Hevesi report, since 2000 the state has borrowed $7.7 billion to pay for state, city, and school district operating expenses. That includes $4.6 billion borrowed from a tobacco-settlement fund. Such debt generally is paid off over a 30-year period, at least doubling the total cost of the debt. In addition, the state authorized $2.8 billion in debt for legislators' program initiatives and local economic development for fiscal years from 1997 through 2005.

State-funded debt now is approximately $47 billion. That represents $2,420 per New Yorker statewide, more than two and one-half times the national average of $944. (New York City's own $50 billion debt, as noted in last month's Finance topic page article, is over $6,200 per city resident. So, total governmental debt burden for city residents now stands at more than $8,600 per person.)

Another problem with the state debt is that some 92 percent of the $47 billion was authorized through public authorities. Essentially controlled by the governor, these authority debt decisions bypass any democratic approval process. Hevesi calls this "backdoor borrowing." A Newsday article suggests that such off-budget techniques remain alive and well: the governor is now considering selling such state resources as the New York State Thruway and the Tappan Zee Bridge for cash to help balance the state budget.

Hevesi's report recounts the state's most outrageous example of shuffling state resources to fill an operating budget deficit at great long-term cost. In 1990 the state, under Governor Mario Cuomo, "sold" Attica prison to the state's Urban Development Corporation (now the Empire State Development Corporation).

The state, in other words, sold the prison to itself. That raised $200 million of cash to help one year's budget deficit, but since 1990 the state has paid $242 million in debt service on that deal. And because of refinancing the "appalling" debt, the state still owes $323 million in principal and interest. So the total cost for the $200 million one-shot revenue will be at least $565 million.

Hevesi notes the link between state debt and the state budget: "The State's practice of paying for recurring operating expenses with one-time funding sources exacerbates structural instability and feeds annual budget gaps along with the State's chronically poor credit rating."

Structural Balance Ignored Again

A common theme in these accounts is that president, governor and mayor all refuse to use their revenue powers to stabilize their financial plans. For both President Bush and Governor Pataki, tax cuts are long-term ideological positions. For Mayor Bloomberg, tax cuts are an election-year strategy, in spite of huge revenue losses: $250 million in property tax rebates and over $600 million in the phasing out of personal income taxes paid by the city's highest-income residents.

The mayor complains about his lack of discretion in budget decisions. Rapidly increasing Medicaid, pension, and debt service costs, indeed, are mostly beyond his control. But the mayor is disingenuous; he has huge discretion on the revenue side. (The mayor's most stabilizing budget move, after all, was his bold $3.7 billion tax-package back in 2002/2003).

The problem is that mayors like Bloomberg and his predecessor, Rudy Giuliani, have little or no interest in "structurally balanced budgets" - that is, budgets that at any moment are balanced over several years. They essentially say: Let's take it a year at a time. Trust us.

For more than a dozen years, fiscal monitors have set a goal of "structural balance" for the city. Every year they get the fiscal back of the hand. Most recently, the December 2004 Financial Control Board report on the mayor's October 2004 budget modification (In PDF format) says, "The budget gaps projected for FY 2006 and beyond are illustrations that the city's finances remain structurally unbalanced."

This year's adopted budget was mostly balanced by using the (one-shot) $1.9 billion surplus - a kind of sunny-day fund -- from the previous year's budget. With this year's surplus at $1.4 billion and counting, next year's adopted budget will apparently go the same route. That may work well enough for an election year, but it will leave next year's mayor with the same old problem, a structurally unbalanced financial plan at the mercy of the economy.

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

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