April 15 2003

We are here once again talking about the city's budget. It seems like we've had a lot of these meetings since January of '02 and, in fact, we have. There is a national recession that has impacted this city's ability to pay its expenses, and we are trying to act responsibly given the situation. The budget, however, is not really about money. It is about our city, and it is about the people that we are here to serve, the eight million people that live in this city. We also have to make sure that we do everything we possibly can to take care of those who work for the city, whose livelihoods are dependent on city government, because by and large they provide a great service. They are what makes the city the world's second home and the place where you want to live, where you want to raise your family, where you want to get an education and medical care, where you want to hitch your star.

It is a serious responsibility, a daunting task to make the kinds of decisions that we have to make when we just don't have enough revenue or when it comes time to raise revenue. There are no good answers; there are only choices. And we were elected to make those choices. And we will try to do that as responsibly as we possibly can.

I wish that I was standing in front of you saying that we had lots of revenue and that the city could do more. The fact of the matter is the city cannot do more; the city is having a tough time even maintaining its services. We have cut, let me remind you, $2.6 billion out of the expense budget. And I will argue with anybody that the people that work for the city have done a spectacular job. They have improved services over the last 15 months while having to live with less money.

Crime is down dramatically. Welfare rolls are down. You will not find a city agency where most of the numbers aren't all to the good. And the great challenge that we have is to find a way to continue to do what the city needs, provide a safe environment, provide housing, provide a better school system, take care of those people who really are dependent on the rest of us. We will not walk away from that responsibility.

Having said that, we get down to the cold reality that we have to balance the budget. There is a state law that requires New York City to balance its budget. And the city can do that only to a certain extent. There is a point at which further cuts are just so intolerable that we really have to get some help from Albany. We have to get some help from the unions. We have to get some help from the eight million people that work here. We have done a lot already. The people of the City of New York have started to pay 18.5 percent more in property taxes. That hurts people. Make no mistake about it. But without that money, we would not be anywhere near in as good a position as we are today. And as I said, today is not that good.

We have cut the $2.6 billion out of the expenses of the city. Nobody's happy about that. But had we not done that, this city would be in a control period. And let me remind you what happened back in the 70's when this city lost control of its streets, when this city lost control of its own destiny. During the control period, 20 percent of the police officers were laid off. Commissioner Kelly was a lieutenant, and one of his jobs in those days was to stand there as officers came in one by one turning in their guns.

Commissioner Scoppetta and I went to visit some firehouses the other day, and there were some men who had been laid off, firefighters were laid off, 20 percent of the firefighters out of work for 18 months. It was not pleasant. It was not good for the city. It was not good for the municipal work force. But that's what happens when you have a control period. They laid off 20 percent of the teachers. They closed a bunch of hospitals. They closed 20 or 30 firehouses. There was not one program that wasn't dramatically hurt. And this city suffered for that. We lost control of the streets. The school system got worse. Those most vulnerable literally fell through whatever safety net the city had in those times. We cannot let that happen again, and we will not. We will take whatever prospective actions we have to to keep the city in compliance with the law. And we'll do it where we'll still be in control rather than a control board being in control.

We cannot do it alone. This city is very dependent on the federal government. We get five billion odd dollars from the federal government. We hope to be able to get some money of the homeland security funds that will pay for part of Operation Atlas. We hope to get aid from the federal government for a variety of social programs.

We are very dependent on Albany. Albany gives us roughly $10 billion a year, and, in fact, has the legal control over an awful lot of the things that we would like to be able to do. We can only raise one tax ourselves. That's the property tax. Virtually everything else that we want to do that brings in revenue we are dependent on Albany. And let me say this about Albany. I have said before and I will repeat it, in the end my prayers, my hopes and my expectations are that Governor Pataki, Majority Leader Bruno and Assembly Speaker Silver will come together and help this city when it needs it. My hope is that they do exactly what we've asked for, because we think that's in the best interest of the city. The practical realities are they may come close and not give us every single thing in exactly the way we want. But I think in spite of all of the stuff you read about Albany, these three people and their members in the Senate and the House in both parties all understand that as goes New York City goes New York State. And that they have an obligation to help us. And I think they will be there when we need them. And my hope is that they come to a resolution that is acceptable to all of them very quickly. And if they don't, we will have to make whatever adjustments to live until they do. But I assume that they will be there.

If, however, my assumption is wrong, prudence says I have to have a backup plan. If something happens to the city that we did not foresee, let's assume that all of a sudden a jury awarded half a billion dollars to somebody and the courts upheld a judgment against the city, or if the tax revenues of this city fall even further than what we're predicting, we have to have a contingency plan, and I will show you what that is.

At the end of the briefing, we have four separate books. One budget presentation of the slides that I'm going to show you. One the message of the mayor, which in detail goes through what's happening in the city. There is a summary of reduction programs, which has department by department lists of everything that we have done since January of '02 when this administration came into office through now, plus the $600 million in cuts that we are currently implementing, plus a billion-dollar contingency plan. They're separated, and they're added together as well. You can look at it in either way. We have the effect on programs. We've listed to the extent we possibly can, each program that has been, is being or will be impacted. We have listed the effect on our labor force, both in terms of number of people and full-time equivalents, and where we think that attrition when we have to downsize would not take care of it and therefore, there would be layoffs. There are summaries. They're done by percentages as well as done in dollar terms. So you can go through that. If you don't understand any of the numbers, call Skyler and he'll be happy to get somebody on the phone to explain that to you. And we have the 10-year capital strategy plan, something that we're also required to put out. So you'll be getting all of those afterwards.

Let me take you through the slides again. But just let me remind you that we all have a stake in this, all eight million people in this city. We cannot be divided or conquered. If we stick together, we will get through this. The long-term future of this city is better probably than it has ever been. From a competitive point of view, our city versus other cities, this is where you want to live. And that's going to be more true with time. The best and the brightest, the dreamers, those who want to actually be in control of their own destiny, this is where they want to come. And there is no indication that companies want to move out or that people want to move out. And, in fact, the alternatives of where you could move to are getting less attractive compared to New York every day.

It is very different than it was in the 70's where the future of this city was not bright. Today, yes, it's an expensive city. And, yes, taxes are going up. But that's true of every other city, except that our crime rate is coming down. Their crime rate is going up. Our services are getting better in virtually every part of this city and more accessible. Every other city, they're going in the other direction. So we have a fiscal problem. We will get through the fiscal problem. It will be painful. But we've got to make sure that we understand we all have to make sacrifices, both on the revenue side and on the service side.

I'll go through and show you what this administration's choices are. To some extent they are our priorities, and to some extent they are set by what the law requires. If the law of the courts require you to provide a service, you have to provide that service whether you like it or not. If the law says you can't cut any more, you can't cut any more, even if your priorities might be to do that. So we're not totally independent of the rest of the world in saying we want to do this and don't want to do that. We live in a world where it's a litigious society, where there are federal laws, state laws and the administration has to deal with a City Council that passes local laws. All three legislative bodies are well meaning. All three legislative bodies have their priorities as well.

Let me go through and show you what we've done. What I'm trying to show you is from January of '02 to now, what we're doing now, and what will happen we hope down the road if Albany comes through and also, what would happen if they do not.

We started out back in January of '02 looking at fiscal '04, which starts this coming July 1 with a $7.5 billion deficit, believe it or not, if you really looked at the numbers. And over 16 months, we cut $2.6 billion in expenses. But I would allege that not in services. Services generally improved, not every place, not in every department in every single program, but generally speaking, services are better today than they were, even though we cut $2.6 billion.

We raised property taxes by 18.5 percent. I asked to have a property tax increase of 25 percent.

City Council in its wisdom decided on 18.5. The difference is roughly $600 million a year. So we have $600 million more to come up with elsewhere than what I would have liked, but that's what the City Council did. That takes the $7.5 billion deficit down to 2.9.

Unfortunately, we don't live in a world where our costs are stagnant. So the 2.9 really has grown to 3.8. Why? Well, the governor's budget proposes to reduce our subsidy or grants from Albany for education by $553 million. And the national economy is still not growing so briskly as we had hoped. There's $300 million in tax revenues we're expecting less than what we had hoped. And some expenses have gone up. There's always, when you have a budget of $42 billion, some small things, insurance costs or things that we really just don't have any control over and you can't cut the service. We have found another $400 million in terms of moneys that we didn't spend that we moved over. But the net result of that is to take a $2.9 billion gap and increase it to 3.8. And so what I'm about to show you is how we go and cover a $3.8 billion deficit, which is what the law requires us to do.

The first thing we're doing is we are cutting another $600 million in expenses right now. And you will in the summary of reduction programs see what those are, where they come from. The office of the mayor is taking as big a cut as anybody else. There are in here, and I'll show you the percentages, there are clear priorities. We have to keep the streets safe. And we have to comply with the law. And then within that, we've tried to set our priorities. We can get some more help. That 6 would take us down to 3.1 billion. There's the 600 million, plus 75 million in savings from combining some small agencies.

Let me remind you that we live in a world where a lot of this stuff is not just up to the mayor's office. We have to convince the City Council and the State Legislature in some cases to combine things, to make things more efficient. There's always people that don't want to do that, because they want their agency to stay independent. They think that it would provide better services. But if you're trying to save money, we have to look at government in a different way. And I'll show you the list and it's in - everything I'm showing you are in these books, of how we can combine some small agencies. We are going to ask the state to get us the tax reform, which would spread the burden of the taxes over everybody that works in New York City.

Let me just once again remind you, the State of New York taxes everybody equally if they work in New York State, no matter where they live. If you want to call that a commuter tax, it's a commuter tax. But they do it already. The State of New Jersey has a commuter tax. The State of Connecticut has a commuter tax. The City of Philadelphia has a commuter tax. The City of Yonkers has a commuter tax. What we want to do is simply say fairness says if you work in a place you should be taxed the way - everybody should be taxed the same. D.A. Morgenthau yesterday proposed a plan which would tax everybody the same way. This is not a new concept. The State of New York already does it. It is what's fair, and it would let us reduce the burden that the city taxpayers have by spreading the burden across everybody who works here. Some say that's not fair to tax others to reduce New York City's taxes. I prefer to look at, when they got rid of the commuter tax, they just saved the money in the suburbs and forced the city to pay more. This would just be taking it back in the direction that it was before. And it is consistent with the way New York State, State of New Jersey, State of Connecticut and most other places that have personal income taxes tax. This is nothing revolutionary. It is fairness. If you get a service, you should pay for it. So we're asking Albany to do that, and that would yield us, roughly at the right rates, not only reduce everybody in the city's taxes, it would raise us $1.4 billion.

We've asked the state, and I'll show you where they can give it to us without costing them anything for another 250 odd million. Mass transit taking over some of our subsidies. We're negotiating, as you know, with the Port Authority. I'm optimistic about that. We're asking the governor and the State Legislature to not cut or to restore depending on where you want to look at it, 750 odd million dollars in aid to education. And there's a variety of other things that the state can do to help us with another $100 million.

We're asking the federal government for 200 million. There are a variety of different programs. I'm optimistic. Let me remind you that for fiscal '03, previous times when I've stood here and talked about it, and we said we needed money from Albany and we needed money from Washington, in the end we got both and we got more from both than what we'd asked for. So I'm optimistic that that will, certainly in the case of the federal government where the number is relatively small, will probably be able to do that again.

There is this issue of negotiating with the Port Authority over rents on the airports. I think we'll do a lot better than this, but I think it's unrealistic to have it in '04. Most of those moneys will come in '05 and '06 - if we can negotiate a good deal earlier than that, fine. But where this city is not going to put itself in a position where the Port Authority can force us to take less than what is fair simply because we say we need it for this year's budget. You just cannot do that. And so we're not counting on much of it for this year. We're counting on it for the out years.

Now, if none of these things happen, we have developed a billion-dollar contingency plan. Don't confuse the billion-dollar contingency plan with the $600 million in cuts that we're currently implementing. The $600 million in cuts will be painful. It will be particularly painful for people that lose their jobs. And we're dealing with human beings here. It will cut back services that people depend on and people need. But it is not of the magnitude or the damage to the city that the billion-dollar cut over and above that would do. Each time you cut, it gets harder and harder to do what we've done up through today, and that is provide better services with less money.

Can we go through the next 600 with providing more services for less? That's the challenge that all of the commissioners have. And I am very comfortable; I think we've put together an amazing team. I think they've done an amazing job. The only sad thing is they are going to have 5,000 fewer people to work with. Because, unfortunately, this next round of cuts, there just is not the way to save the $600 million and maintain the size work force we have with the current levels of attrition. If more people were to retire, we'd have to lay off fewer people, but we just don't have the money to do that. And I think when you think about the billion dollars, the billion dollars doesn't have to be implemented if Albany comes through. The $600 million we need no matter what. And we're not going to be bailed out by anybody else.

We've done a good job as I said, crime down, caseloads and welfare down, education we're going in the right direction, still working on building lots of housing, 311 is starting for the first time to make city government accessible. People say don't spend the money, we're spending $40 billion, $42 billion to provide a service. To say that people shouldn't be able to get at it is ridiculous. The fact of the matter is for the first time, 24 hours a day, seven days a week, in 170 different languages, the people of this city are starting to be able to take advantage of all of the services that that $42 billion provides.

Let me show you what's happening to us generally. Consumption, this is at the national level. You can see where it was and where it is. This is not good for New York City. Employment growth, negative. We are not seeing the growth nationally. The economy is not coming back. And those that say, ah, there will be a big boon after the war, well, a lot of people think the war is over and have thought that for a few weeks. The stock market has not rallied. Companies aren't rushing out to buy capital equipment that would let them hire more people and stimulate the economy. In fact, people are starting to talk about the high cost of rebuilding Iraq. So I don't know any more than anybody else what's going to happen, but I don't think it is realistic to sit back and say we shouldn't worry about this, the economy's going to bail us out. Nobody would be happier if it does than me. But the fact of the matter is at the moment there is not an indication of that happening.

Here is what's happening in the city. Private sector jobs continue to be down. Fire, this is finance insurance and real estate and business and legal services, those are two industries that generate the taxes in this city. They're high-paying jobs. And high paying means more revenue for the city. And you can see what's happened. Retail, not good, that's the tourism part of it. Manufacturing, a trend that's continued for a long time, manufacturing jobs, I know people don't like to hear it, but they are being replaced as entry-level jobs by tourism. And construction, not doing well.

The only two areas where employment is going up is education and medical. And that's why you see companies screaming about their pension costs.

Occupancy rates, occupancy rates are here. If you showed revenue for the hotels, it would be way down here. Because hotels have reduced their room rates to keep occupancy up. But in the end, they make their money from revenues. And they pay their employees with moneys from revenues, not from the number of bodies in rooms.

Tourism is a very big problem for this city. Let me remind you, we are dependent on two industries: Wall Street fundamentally for tax revenues, tourism for jobs for all five boroughs for people starting their ways up the economic ladder. It is devastating at the lowest level when tourism is down. That's why the emphasis on expanding the convention center and getting mass transit over to the west side. That's why SARS and things like that are particularly damaging to this city right now.

National level, we had a forecast of 2.9 percent growth. Now we are projecting 1.9 percent growth for this year.

Wall Street continues forecast is for fewer and fewer jobs means fewer and fewer dollars in terms of wages, which means fewer and fewer dollars into the city's treasury.

Taxes way down, down for '03. There is a forecast for a bump up in '04, '05, '06, '07. Whether that materializes, I don't know. The city uses nationally recognized economic models. Because we have to make projections and base our assumptions on something, and it shouldn't be just what we want to have happen. We want as independent as we can.[as spoken] And these are the best models. They do say that if you get into the next few years things will be better. And at some point, they will be. But whether they will be better starting in '04 or '05 or '06, nobody really knows.

Here's the numbers. We started out this past January only five months ago with a $3.4 billion gap to close. We've cut another $440 million. That got us down to 2.9. Unfortunately, lower tax revenues cut that to 2.7. But we did move some money from '03 to '04. So that got us back up to 2.8. A couple hundred million dollars which I'll show you in small amounts of things that cost us more.

Here is the Albany budget as the governor has proposed it. Costs us $850 million total. We did manage to move some other moneys here. The bottom line is the deficit that we're dealing with, and I'm going to show you how we close it, of $3.8 billion, up from $3.4 billion. Keep in mind '05 and '06 are problematic in their own right. And particularly problematic if Albany goes and balances their budget this year with one-shot things, because that will leave them next year in a position in an election year for them where they don't have the money to keep supporting New York City. So we do have a very big vested interest in Albany getting its budget under control. Because they, remember, do give us roughly $10 billion. And if they have to start cutting back the 70 percent of their budget goes back to cities, if they start cutting dramatically, we will have a much bigger problem next year than this.

These were some of the small items, you'll see these in your book, that changed. Here's the 3.8 billion. We're cutting $600 million right now, another 75 million in terms of merging some small agencies. This is the federal moneys and airport stuff gets us down to 2.7. How do you close a $2.7 billion gap? Well, I showed you before, 1.4 billion in personal income tax reform, a couple hundred million dollars ending a subsidy, the governor restoring the 478, 275 and 100 million dollars that he'd cut. And there's 250, which we've identified how they can help us without costing us anything. That does in theory close the budget gap. You would have a zero budget gap.

What happens if we don't get everything, or if our revenues are worse or our expenses higher? Well, we've identified three contingencies. One, you could cut education, I suppose, if the state doesn't restore these moneys here, that's the effect of that. Two, labor productivity. I'll come back to where we stand on that in a minute. Six hundred million dollars is what we've asked for. We got nothing in '03, as you can see. And three, we've identified a billion-dollar contingency plan over and above the 600 million that we are implementing now. And in this book it shows clearly the difference. The papers today generally confuse the two things, taking some things out of the contingency plan, some things out of the 600. The 600 we're implementing over the next month or two, we have no choice. The billion dollars, if we can get the help from Albany and if we don't have any calamities, either in terms of revenue shortfall or expense increases that we haven't budgeted, we'll be O.K.

Here's what we've done, and all these are in your books. This is the $25 billion was the plan of how much money we were going to spend - $23 billion - of city moneys for '04. We cut 2.6 billion roughly out of that. Here's the $600 million we're currently cutting. So we've really cut $3.2 billion so far on the expense side. Those that say that we're not cutting expenses, there's the answer. I don't think any government has ever cut that amount of money. We've cut 3.2 billion. And we've done what we should be doing. We've basically maintained the services, not perfectly, not every case. Most of them we've even been able to improve on. But this city still is the world's second home, spending $3.2 billion less than we would have had we not taken these actions.

Here is the really scary part of what is happening to the city. If you go back and take a look at the Giuliani budget which we inherited on Jan. 1, 2002, he had a budget for '04. And that budget was to spend $15.5 billion of moneys that the city controls. Unfortunately, there was, this is for '03 and 15.7 for '04, there was an extra billion dollars, which I'll show you, of things that just normally take place that we have little control over that just were expenses that weren't budgeted: more snow removal, overtime for Operation Atlas, things like that, insurance rates a lot higher in the city because of 9/11. Things that weren't budgeted, but there's just not a lot we can do about it. You can't run without insurance. You couldn't open your schools or do those kinds of things. So in fact, what we really have instead of a 15.5, $15.7 billion controllable budget to work with, it was 16.7 and 16.8. The 16.7 was 9 percent over, almost 10 percent over the original budget. And the 16.8 is only slightly higher for '04. But we didn't just sit there and let expenses get out of control. As I said before, we really did make some cuts, not in services but in the budget. And we cut 1.7 in '03 and 2.1 in '04. And that was a dramatic cut in expenditures.

Here's the $600 million program. There's a variety of footnotes, which will explain to you why the numbers aren't exactly the same. And restructuring services.

What we really did, the bottom line is the original budget was for 15.2. In spite of having to spend a billion point one more, we still reduced '03's budget of what we spent by roughly 2 percent and another 6 percent for '04. So in spite of a billion dollars more, we really have made very substantial economies without a lot of pain. Here's the scary part. If you take a look, in '02 the city was in control of $15.2 billion of expenses. And the expenses we could not control were $13.1 billion. Not control means you would have to get Albany to change them or the labor unions to change them.

We did manage to reduce our debt expenditures in '03 by refinancing because interest rates were down. Interest rates are not going down below zero. So it's unlikely you will be able to do that again.

But when you add up all of the changes, in pensions which you would need the unions and Albany to help with, Medicaid, fringe benefits, general reserve, collective bargaining, these are things that really we don't have any control, it's Albany and the unions that we need help. The fact of the matter is here in '02, 13.1 billion compared to the 15.2 that would could control. Take a look at '04, $14 billion we can control, close to 17 billion that we can't. For the first time, because of Albany's largess or because of factors beyond our control, interest rates, labor settlements forced on you by the arbitration panels or whatever, for the first time more of the city's budget is something we have no say in than the part that we do have a say in. And that trend is going to get worse. Because we know we've got to take this $14 billion down even more. You saw what the budget looked like for '05 and '06. And we said the state is not going to be able to help us, we don't think as much as they have been.

But these benefits are going up. Pension benefits, I think, in '05 go up another billion dollars. When you read the contingency plan, which is a horrendous thing for this city, you could implement that whole thing next year and all of the savings would be eaten up by the increase in pension costs. And the pension costs do not go down, in spite of what people think, when you lay off people. They don't do it a lot, because you have to by law lay off the most junior people who don't make that much money. It's the senior people that have the big pension interests. And if a senior person retires you don't really save a lot of money because they get their pension and you have to fill in with another person who might not make as much money, but when you add the pensions along with that, the first year it saves money; by the second year you're behind the eight ball; by the third year it is a terrible thing. And what's more, you lose the expertise of the senior people who you really want to keep. Those are the ones that are really making this city what it is and training the younger people and bringing them along and keeping things together.

So the pension fund really, that part of it is a very scary thing, and we need for all of these things, big help from Albany and from the labor unions. We have done our part. We have reduced spending from 15.2 for this year down to 14, even in spite of $1 billion of expenses, 1.1 we couldn't control. But unfortunately, because of the increases in the things that we have little control over, and certainly no control of short term, the total amount of money the city's spending is going up. That's why we need tax revenues. The bottom line is we've cut between, let's say, 8 percent, from $15.2 to $14 billion in what we can control, but the 13.1 went to 16.8, and the total amount of moneys that this city spends went from 26 billion projected in '02 to 30.6 billion in '04.

These are the things, the $1.1 billion, I talked about. You'll see these in your book. There are things that we really didn't have very much control over. Here are the specifics. You can see some of them have pegs that didn't work, some are higher costs, some are overtime. Here is the cuts that are in the $600-million peg. And I know it's hard to read, but it's in the book. And you can see here, this column is what we cut percentagewise from January '02 through today. This column is what we're cutting in the next 600, and in rough terms you could add these two numbers together. The third column is what we would propose if we did not get the help from Albany that we need or if a calamity were to hit this city that we had not foreseen and had to implement that very draconian set of plans.

People say, why put it out? Because the answer is we have a responsibility to tell people what would happen. We have a responsibility to plan even for things that are horrendous, distasteful or unimaginable. And we hope that we never have to implement it.

What it says, if you take a look at our priorities, the uniformed services fundamentally 13, 14 percent; health and welfare services, in the low 20's; all the others start to get way up there. Let me remind you, education, a total of 6 percent before, 2 percent now.

There are a couple of numbers that when you look at them you should have some things in your mind. One, when it comes to police, fire, if you don't have safe streets, you don't have a tax base. So even if your priority isn't police, you really don't have a lot of choice. Ray Kelly and the men and women of the Police Department, Nick Scoppetta, the men and women of the Fire Department, have to keep this city safe. And we have to pick up the trash. And while long term we may find some ways to reduce the costs, short term if you pick up the trash every second day, it costs double the amount per day when you do it than if you do it every single day. There are limitations as to how much you can reduce and still pick up the trash.

There are also court orders. We operate in a world where the judges tell us how far beds are apart, how many correction officers you have to have, which translates into how many jails. We aren't totally free to do what we would like.

Also, when you look at these numbers, remember that in education we have a maintenance of effort agreement in state law. So even if your priorities - and it would not be mine, but if you had a priority and said, let's cut education more and put the money elsewheres, you can't do that, because the law will not allow you to do that.

There are also some constraints on some of the smaller agencies. The bottom line is once an agency gets down to zero, you can't cut it any more. And what's more, small agencies, when the percentage changes, it doesn't change the total dollars. In the end, the city spends its money on five agencies: the Department of Education, Police Department, Fire Department, Corrections and Sanitation.

When it comes to social services, the numbers that we spend are big, but three-quarters of those moneys are federal moneys, they are matching programs. If we cut $1 out of what we spend, you cut $4 out of what the city is spending to provide services. And so the impact of $1 cut on social services typically is very onerous.

Mayor's office, here I can show you - you'll see this in your book - but we have cut the mayor's office the same as we've cut everybody else that's an elected official. We've cut elected officials more than any agency. There's a couple of numbers here. The City Council, we do not control their budget. They dictate their own budget. Everything else - the D.A.'s, the borough presidents, the public advocate, the comptroller - that's up to this administration, and in the end the City Council does have to pass it, although we can withhold moneys. The City Council, their own budget, we have no control over that.

The Office of the Comptroller, we had cut a lot less before, because we thought that Bill Thompson really was taking over an agency, and it's terribly important that this city gets a good accounting, that we make sure there's no fraud, that we make sure that the books and records of this city are accurate and available to everybody. He's not happy with the cuts that we put in this time for him, but I think he is in control and now he's got to make the same sacrifices everybody else does, so he's playing some catch-up here.

But you can see, basically, 34 percent plus 6 percent, some of the smaller ones. We've tried to treat the district attorneys as part of the police kind of law enforcement group, where we've cut all of them roughly the same amount together, and that's why they are lower than that.

Here's what's happened to our head count, gone from 310,000 down to 288,000. Up until now, it's mostly been with attrition. Unfortunately, and very tragically, there are 4,000 or 5,000 people who will lose their jobs in the next round of cuts. What I'm trying to do is to make that as painless as - I don't know if you can make it painless. These are human beings. It's very easy to deal in cold numbers, but we have a great municipal work force, and we have no choice but to downsize. And we have to be as helpful as we can and give them priorities in coming back if and when there is other attrition, and mitigate the pain. But I cannot tell anybody that it will not be painful. Of course it will be.

These are - and you'll see these in your book - $75 million in savings we think we can make by consolidating some small agencies. Big agencies, you probably wouldn't save any money by combining them. It sounds nice, but the fact of the matter is that they are so large they're difficult to manage. Combining them generally would make it harder. That's not true with corrections and probation, which is one we're trying to do, two big agencies. But I think that it's the smaller ones that give us the potential to save some money.

The state things that I talked about, I'll just run through them quickly. These are the gap-closing things that they could do to get us the $252 million we've asked for them, over and above the restorations of the cuts, and these really wouldn't cost them anything. There are some things that we keep asking them for - Medicaid reform and trying to do some other things. Long term, maybe we'll get those things; short term, we really can't count on it.

These are the effects of recent state actions on our budget, and you can see how the commuter tax, which was repealed, would have this year given us for '04 another $465 million. Remember, we're asking Albany to reform the tax system so we get $1.4 billion in more revenue. If they were reinstitute the old commuter tax at the old rate, it would only solve a third of our needs and it really is not - that would not be helpful. We need much more than that. Here are the cuts in this year's budget, which hopefully we can get restored.

We talked about getting a couple hundred million dollars by reducing our subsidies to mass transit. These are the federal things that we're asking for. All we need in our budget is a couple hundred million dollars. Let me remind you again, we did get from Albany and from Washington for '03, in spite of all of you being skeptical, we did what we asked for and then some. So I think there is a decent chance of that happening.

I said before that there are two things that can help us with all of the noncontrollable expenses: Albany and labor. We've asked labor for some help. What they've come back with, unfortunately, isn't really very helpful. We don't have the same situation that had in the 70's. In the 70's, we woke up one day and didn't have any money to pay our bills. We had a cash-flow problem, the accounting systems were so terrible they didn't know what banks the moneys were deposited in. And the banks said, `Wait a second, if you're out of control and you don't have any money, we're not going to roll over your commercial paper.' And so the city came very close to going bankrupt, and Victor Gotbaum and Felix Rohatyn and Governor Carey together got everybody together, and they got some companies to prepay taxes - get a discount when they did it, but they prepaid their taxes - and the unions agreed to postpone some of the expenses or let the city borrow from the pension funds, pay a rate of interest. But they solved the cash-flow problem by moving revenues up near term and postponing expenses. It was a very expensive thing for the city. It was a terrible waste of finance, but the city was in a situation where they didn't really have any choice. They had to do something virtually instantly, and they had a very high tax base - tax rate, much higher than we have today. And the city was falling apart, to some extent, already. And you can argue they exacerbated that problem, but they had to get through it and keep the city out of bankruptcy, and they did. But they did it by moving cash flows around.

Our problem today, tragically, is that our expenses are exceeding our revenues. And so some of the help that the unions came back with, like letting us borrow money from the pension funds at 8 percent, did nothing to solve our problem. No. 1, it would be a terrible financial deal - we can go into the marketplace and borrow at 4 percent, not pay 8 percent. And No. 2, we have plenty of cash in the bank. Cash is very different than your expenses. We can meet our payroll every day. We know we have a great accounting system in this city now that came out of the problems of the 70's. We know exactly where every penny is. But the problem is we've got to reduce our expenses, not postpone our expenses. And the two big things that labor came back with were, one, borrowing from the pension funds - and I said that doesn't help us - and, two, there was a suggestion that if we encouraged Albany to remove the requirement for city, police and fire who live outside the city to pay taxes as though they lived in the city - there is a law that says you can live outside the city, but you have to pay city taxes, it's commuter tax, but it only applies to our municipal workers living outside the city. If we'd agree to get rid of that, which would reduce our tax revenues and make our problem worse, they said they would come and help us lobby in Albany. I just don't know that that was something that really would be a good deal for the city, let me phrase it that way.

The only things that they did identify, when all were said and done - and Jim Hanley, you can call him afterwards and he'll be happy to detail with you - I think out of the 600 million that we offered, I know they say they came back with 600 and 100, the bottom line is there were $20 million in real savings; $20 million when you do the math on a base of 600 is what, 3 percent? So the bottom line is we did not get the help we needed.

What we need and still need from the unions is things that really let the city do more with less: changes in work rules, a fifth tier for the pensions for new people coming in won't get as good pensions as the current ones. Remember, once you get a pension benefit in this city or state, the State Constitution says it can never be taken away. So there's nothing the city can do about the $1 billion extra we're going to have to pay for pensions next year and the year after, but we could do something for the long term, still protecting the existing municipal workers if we could get Albany - and it would be helpful if the union signed on, although it's really up to Albany - to come up with a fifth tier for the pension system so that new employees don't get as generous benefits and the city's expenses over 10 years would start to decline. It would not help you short term, but it would help you long term. And if you talk to somebody like Nick Scoppetta, is old enough, he is in Tier 1, and his pension system is a lot better than Tier 2, better than Tier 3, better than Tier 4. The bottom line is the city has done this a number of times. Nick is not about to give it back to the city, he needs the money. It the changes in work rules, it is the ability to deploy people the way the needs are for today, not where they were 100 years ago, those are the kinds of flexibility things that will save money. And it's really hard to see how anybody is going to ever get a raise for the foreseeable future, because the deficits really are significant going out, without finding some other productivity things.

And so we're trying, Jim Hanley is trying to work with the unions and some of the stuff plays out on the steps of City Hall, but the real stuff plays out in his office. And we're trying as hard as we can. I'm sympathetic to people who have needs. They have families. There is a rate of inflation in this country, even when it's not high, that you have to live with. Everybody would like to have more, and my hope is that we'll be able to find some things.

So far, here are some of the things that you can do: co-pays for insurance and work rule changes and the pension thing. So far, let me read you one of the things. Well, this one guy said - you can go back and check The Times to see who it was - I don't think the city should be at all looking at labor for savings. That was one of the labor leaders. Some of the other comments were just as encouraging.

Here are the expressions of support that we have had for this program, and I'll just let you read them for a second. [long pause] So, while I'm always optimistic that we can get people together, I will say it's - the slope is reasonably steep. Let's phrase it that way.

This is the contingency plan, and it's all in your book so I won't go over it. I'm just trying to explain to you one more time, there's the $600 million we're implementing. It closes eight firehouses. There's the $1 billion, which we hope we never have to implement, that would close 30 or 40 firehouses. There's the 600 million that cuts support for the parks and culturals and everybody else, cuts overtime in the Police and Fire Department, cuts people in sanitation. The $1 billion is devastating, and we hope we never get to the $1 billion. Now, unfortunately, it's the $1 billion that makes the front page of the newspapers, but the $600 million is what people really are going to have to live with. And my hope is that it will never have to be implemented, but, as I said before, we just have an obligation to be prepared for anything.

And I want Albany and everybody else to understand what would happen. We are constrained by the fact that we really can't borrow; the law requires us to balance the budget. We only have one tax that we're in control of, it went up 18 percent and I think it's unlikely the City Council would raise even me asking them to raise it even more, the other taxes are up to Albany. And then there's the outside world, where there can always be a court judgment or a further downturn on the national economy or some other unforeseen thing. There was a scare, and maybe it's still out there, that the tobacco revenues we get, and the city gets roughly $150 million in revenues from the tobacco settlement, there was a scare that those revenues would stop because if Philip Morris were to declare bankruptcy, the agency that gets the revenues, collects them and passes them on to us, and also has to pay debt - pay principal and interest on tobacco bonds that we use for capital expenses, they would have to withhold all the revenues. That's another $300 million out of our budget. So you can go through and look at these, but the 10,000 layoffs are over and above the 5,000, but only if we cannot get the help that we need.

And in the end it is Albany and the labor unions that we have to depend on. We have raised our own taxes; we have cut our own expenses; we have made city government more efficient. We continue to do all of those things. But there is just a limit to how much this city can do when it provides services for people who don't pay a fair share or when we have to provide services because we are the bellwether, not only for the state, but for the country.

This shows you where the $1 billion would come, and you can see it starts to get onerous. The Department of Education, smaller than police, cuts even though the agency is much bigger. That's because of the maintenance of effort. You can see here these are reductions - some would come as layoffs; some would come through attrition.

You will notice that the Fire Department does not have any layoffs. In fact we are expanding the number of firefighters in this city. We are about to graduate a class of 300, and there is another 300 we're about to hire. And the reason for that is the minimum manning in the contracts require us to pay overtime if we don't have enough firefighters, and the overtime is so onerous that we'd be better off with more firefighters so we didn't need as much overtime. The Fire Department is obviously another department that we have very brave people who work very hard and we depend on them, but when we were in the fiscal crisis of the 70's they closed 25-odd firehouses; we've closed about 40 firehouses since, right after World War II. And tragically, we're going to have to redeploy our assets. We are, in fact, expanding the number of firefighters, but we just have to put them in places that we can afford, where they will be able to help the city.

These are some of the things, and all of these are listed in your book, contingency things. They are all onerous, and I hope and pray that we never have to deal with them.

In dealing with all of this, it sort of leaves me a little sad, a little angry, I suppose, and a little determined. It is very sad that we are having to make cuts, they hurt people. It's very easy to get caught up in the numbers and, remember, there are human beings that get these services, and there are human beings that provide these services. Angry, we're not totally in control of our own destiny, unfortunately. We are very dependent on Albany and a little bit dependent on Washington. And that's not good. I've always thought the city should be in control of its own finances. The thing is, there's an old saying: You take the king's shilling, you become the king's man. We take money from Albany, and with that we give up control. A lot of that happened in the 70's, and we are paying for that today.

And I'm sort of also angry a little bit because everybody always phrases it, `I want mine, and I don't care about the others.' And the fact of the matter is we are all in this together, and we are all going to have to make sacrifices together. And when somebody says, `Well, I'm just not going to participate,' I sort of shake my head and wonder what they're thinking about.

I am determined that we're going to get through this. I do think, as I said earlier, the best is yet to come. The financial picture will brighten at some point in time as the recession ends and Wall Street comes back and people start to travel. We've got to make sure that we have a city that remains the bellwether for democracy, for being able to speak your mind, for, if you want to protest, this is where you should be coming to protest. If you don't want to protest, this is also where you want to live. If you want to build a career and be in charge of your own destiny, this is it. If you want to be a dreamer, there's nobody that's - the difference between dreamers around the world and dreamers in New York is people in New York turn those dreams into reality. There's a reason why people come here from around the world, and there's a reason why New York City is really the bellwether for the state and for the country.