Mayor de Blasio is facing difficult budget choices (photo: Michael Appleton/Mayor's Office)
Mayor de Blasio called the Executive Budget he presented on April 16 a “wartime budget.” With New York City’s economy shut down virtually overnight and without a clear path or timeline to reopening, that is definitely what the circumstances require. But, we don’t quite have one yet.
Estimates of cumulative city revenue losses from the city’s budget office and outside fiscal monitors range from $7 billion to $15 billion for this and next fiscal year, but there is no precedent for the current situation so modeling on the experience of past recessions could well understate both the extent and the timeframe of the losses. Absent a large infusion of federal assistance, the best way to close the city’s budget gap is more and larger expense reductions, not tax increases or borrowing.
While the Executive Budget, which will form the basis for negotiations with the City Council, shows an overall year-to-year reduction of 3.6 percent from the budget adopted last year, it would increase city-funded expenses by 1.3% -- not as generous as the annual growth in recent years (which averaged 4.8% for most of de Blasio’s tenure) but not a cut. Significant withdrawals from reserves and the Retiree Health Benefit Trust as well as $2.7 billion in cost savings currently make up for the anticipated loss of tax revenue. But most of these are one-time savings (and many caused by the impact of the virus and stay at home order); if tax revenue losses are higher and last longer because the economy doesn’t bounce back quickly, these actions will not be sufficient.
Moreover, there is little indication that the City Council is on a “wartime” footing and will refrain from its usual demands for more spending. In its formal response to the mayor’s Preliminary Budget, issued after the virus shutdown began, the Council listed many areas it believes should be fully funded and proposed adding more than $1.4 billion in new spending but suggested only half as much in spending reductions to offset it (and some of those savings ideas have been incorporated into the Executive Budget to offset current expenditures). And new legislation proposed by the Council last week, characterized as a coronavirus aid package, would impose new costs on businesses that would make it even more difficult and costly for them to operate and hence, to pay their employees and taxes.
The mayor is holding back on more cost-cutting in the hopes that the federal government will come through with financial assistance to help close city and state budget gaps. But the most recent aid package passed by Congress didn’t include state and local aid and Senate Majority Leader McConnell and other Republican legislators say they are not in favor of this type of assistance. Indeed, McConnell effectively said ‘Let ’em go bankrupt.’
Federal budget relief for states and localities is clearly warranted and some will eventually come through, but it will be preceded by a fraught, ideological battle about blue states’ high taxes and overspending and cannot be counted on to happen in time for final New York City budget adoption (on or before June 30). And New York State, which is facing its own $13 billion revenue loss, is not going to come to the city’s rescue. Indeed, aid reductions and cost-shifting by the state could make the city’s problem worse. So there needs to be a more serious plan to ensure that the city can balance its budget with little or no federal help.
It is difficult to cut city programs and services. Each one has a constituency of supporters who believe fervently in its importance. Many of the cuts and reductions in the Executive Budget, though relatively small and temporary, have already been decried by those who especially care about them, e.g. advocates of recycling urge restoration of the costly organics collection program; social service youth care providers denounce the suspension of the summer employment program. One of us is especially pained by the cut to a nationally recognized college completion program she helped create, CUNY ASAP.
But the city simply does not and will not have the money to keep doing everything in an annual budget that has grown to well over $90 billion. There will have to be deeper cuts and sacrifices of favored programs and activities than the Executive Budget proposes, at least for now. Labor contracts should be re-evaluated in light of the pandemic and efforts to achieve more productivity negotiated with public employee unions. Otherwise, the city risks having to take more draconian measures, such as laying off public employees and imposing cuts to essential services as the coming year unfolds.
Two things that should not be done except as a last resort are raising taxes and/or borrowing to pay operating expenses. It should be evident to the mayor and the Council that raising taxes now would only exacerbate the risks to the already fragile revenue base, as many business owners consider closing and the pandemic is causing many people to consider leaving New York.
Nor is borrowing a good idea. Borrowing money to fund capital projects is appropriate because the value of the expenditures for things like roads, school buildings, and water mains – their ‘useful life’ – lasts for years and it makes sense to pay for them over a long time period. In contrast, paying for current expenses like employee salaries pushes the responsibility for payment into the future, burdening taxpayers for years with debt service for services that have already been consumed.
Every $1 billion in borrowing now will cost at least $65 million a year for debt service every year the loan is outstanding (based on 5% interest on a 30-year loan). Especially now, every penny of the money that would go to interest is needed to pay for the costs of operating city agencies.
There will undoubtedly be many, including Council members and public employee unions, who endorse the borrow now, pay later approach because it avoids making hard decisions in the short run and allows city services and agencies to keep operating as if there is no problem. But if the economy and its tax revenue do not bounce back, the gap between costs and income will remain and more borrowing will be needed to close it.
This is a particularly frightening prospect to those, like one of us who was a First Deputy Budget Director in the mid-seventies, who remember the massive retrenchment and downsizing of city government during the fiscal crisis of that time. Instead of aligning the cost of city services with its revenue, it had borrowed money to pay its operating expenses year after year, until eventually institutions would not loan any more money because they realized the city would never be able to pay it back. There was literally not enough cash on hand to make payroll. (See this story for a good summary, with warning signs for today, of the fiscal crisis of the 1970s.)
Many felt it was acceptable when Mayor Bloomberg borrowed $2.1 billion to pay operating expenses right after September 11, 2001. But the nature of that crisis was quite different than what we face now. Only lower Manhattan was directly impacted and the rest of the economy, though suffering temporary setbacks, was able to quickly recover, so the city’s coffers could be replenished. In addition, Mayor Bloomberg instituted significant cost controls, including personnel reductions. The Council also agreed to an 18% increase in property taxes, and the state Legislature extended a 14% surcharge on the city personal income tax, neither of which would make sense in the current situation.
If, instead of making tough decisions about curbing expenses now, the mayor and Council decide to try and kick the can down the road by borrowing, the state Legislature should deny permission unless and until the city can demonstrate that it is holding the amount borrowed to an absolute minimum by taking every other possible step – including savings on personnel costs – to reduce the city-funded operating budget. If borrowing is permitted, it should be conditioned on the creation of a ‘control period’ during which the city’s finances are subject to oversight and intervention by the Financial Control Board, created during the ‘70s fiscal crisis to help ensure that the city adopted balanced budgets and sound financial management. Since 1986 the Board has served in a monitoring role, but this could be the time to bring it back into action.
Correction (May 7): In the original version of this piece, we incorrectly stated that after 9/11 Mayor Bloomberg negotiated a multi-year no-raise contract with the teachers’ union. That contract was negotiated during the recession in 2008, and mention of it has been removed. Mayor Bloomberg signed a 30-month contract with raises following the city-wide pattern of 4% a year with the teachers in early 2002 when he was pursuing Mayoral control of the school system. But, as we said, the city budget adopted post 9/11 did include significant cost cutting, including early retirement measures, attrition, and difficult and unpopular agency spending reductions such as curtailing plastic and glass recycling.
Carol Kellermann was president of Citizens Budget Commission from 2008 through 2018. Norman Steisel was a First Deputy Mayor of New York City, Sanitation Commissioner, and First Deputy Budget Director, all between 1974 and 1994.