De Blasio during a budget presentation (photo: Michael Appleton/Mayor's Office)
Mayor Bill de Blasio inherited a city with a healthy economy and strong tax revenues, allowing him to add billions in new spending for his priorities and increase the size of city government while also saving substantial funds for a rainy day. Though fiscal monitors and budget experts generally agree that the city’s budget has been handled responsibly, they are cautious about the future. This is a mayor who has encountered few budgetary challenges, and numerous loom on the horizon, from slowing economic growth to federal policies that threaten to create a sharp financial crunch. There are also ongoing financial crises at the city’s public housing authority, NYCHA, and public hospital system, New York City Health + Hospitals.
As de Blasio seeks a likely reelection on Tuesday, budget watchdogs warn that the incumbent Democrat might face his biggest tests in a second term, to which there are no easy solutions.
Under de Blasio, the city’s operating budget grew to $85.2 billion for fiscal year 2018, an increase of $12.5 billion or 17.2 percent from the last budget that was modified under Mayor Michael Bloomberg. Much of the new spending has come from an increase in the municipal workforce. The administration has added more than 31,000 employees in de Blasio’s first term for a total headcount of about 328,267 full-time and full-time equivalent employees, the highest it has ever been. That number is expected to grow to 329,055 by the end of the fiscal year on June 30, 2018. These new employees also come with future obligations in terms of pension and health care costs.
The administration has simultaneously put aside what the mayor and others often refer to as “historic” levels of reserves. This includes $1 billion each year in the general reserve, $250 million each year till 2021 in the capital stabilization reserve, and $4 billion in the Retiree Health Benefits Trust fund. Those reserves added up to a $9.8 billion or 11.1 percent budget cushion (reserves as a percentage of adjusted expenditures) at the start of fiscal year 2018, according to City Comptroller Scott Stringer’s report on the adopted budget. Stringer noted that the cushion remained at the same level as fiscal year 2017 since increased savings were matched by expenditures. He recommended an optimal cushion of between 12 and 18 percent, and has emphasized that the administration needs to create more savings through efficiencies at city agencies.
De Blasio has eschewed targeted cost-efficiency initiatives at city agencies, which were a signature of previous administrations. He has opted instead for a voluntary Citywide Savings Program which identifies savings at agencies, more often through re-estimates of expenditure rather than efficiencies. He recently announced a partial hiring freeze at city agencies, though some see this as something of a gimmick given how many employees he’s already allowed to be hired.
“My broad assessment is that [de Blasio] and budget director Dean Fuleihan have done an excellent job of managing the city budget,” said James Parrott, director of economic and fiscal policy at the New School’s Center for New York City Affairs. “They’ve been fortunate that the revenue situation has been accommodating to an ambitious agenda and they’ve been fiscally responsible to build reserves.”
In keeping with his progressive agenda, de Blasio has massively increased funding for social services and related to homelessness, education, public safety, and mental health services, among other major investments.
The combined budgets for the Departments of Homeless Services and Social Services increased to $11.5 billion in the fiscal year 2018 budget, up from $10.6 billion in the modified fiscal year 2014 budget that de Blasio inherited from Bloomberg. Department of Education spending increased by $4.4 billion in the same period, owing in large part to the implementation of universal pre-kindergarten and its planned expansion to three-year-olds. NYPD funding increased by $600 million, largely from the hiring of 1,300 more officers, while the Department of Corrections saw a nearly $340 million increase in its budget despite a continued drop in the city’s jail population.
“I think we're in a sustainable position,” de Blasio told the New York Daily News editorial board in an interview last month. “I think it also interacts. I think the investments we're making are strengthening our tax base. Safer city, better schools, stronger tax base. So it works. It's not limitless. You're absolutely right. It's not like you can just add all the time. There's a point -- and we'll have to watch Washington in particular very carefully – there’s a point where we may have to make tough decisions. But to date, I feel they've been responsible, and thank god, and I knock on wood as I say it, the economy continues to cooperate.”
Parrott noted that the administration’s strongest achievement, begun early in 2014, was the settling of 99.1 percent of expired municipal labor contracts, which provided thousands of employees with retroactive raises and dispelled significant uncertainty about how the administration would handle a “daunting challenge” in a fiscally prudent manner. “That was an amazing feat,” Parrott said. “He gets four gold stars just for that, even if he hadn’t done anything else.”
But, with an increase in the employee workforce and the new union contracts, the city also added significant long-term funding obligations. The last budget under Bloomberg predicted that salaries and wages would be about $26.3 billion in fiscal year 2018, while latest estimates show them to be about $1 billion higher. In total, the city will spend about $47 billion in salaries, wages, pensions and benefits for the city’s workforce this year, increasing to $52.5 billion by fiscal year 2021. (The city’s pension contributions are estimated to be about $9.57 billion this year and are expected to grow to about $10 billion by 2021. City employees receive guaranteed pensions, funded by taxpayers, but the administration can do little to reform pension obligations since they are controlled by the state government.)
“I think he’s just been very lucky,” said Nicole Gelinas, senior fellow at the Manhattan Institute. “He’s had a good economy. He hasn’t had to make any decisions. He’s just increased spending on everything.”
“The mayor has not used the good times to make any reforms in government spending, particularly on health care costs for government workers,” she added. The city will bear $10.1 billion in the cost of health care benefits this year, which will grow to $11.7 billion by 2019, and Gelinas insisted that the mayor should look to reduce that cost in the current round of contract negotiations. “The city should really be thinking about how to bargain that workers pay some of the costs without putting the burden on taxpayers.”
Currently, city employees pay no portion of their health care premiums, a fact that has been a point of contention over time but de Blasio has not shown any interest in changing.
“I think it’s easy to be responsible when times are so good,” she added. “The real test will be if we have a recession. No two-term mayor has avoided at least a mild recession.”
Most experts agree that some form of slowdown will hit the city’s economy, which is currently in the ninth year of an unprecedented expansion. Gelinas warned that though the city has reserves set aside, “it’s kind of easy to run through those.” In the 2008-2009 recession, she said, about $3 billion in tax revenue “sort of disappeared overnight.” In a similar situation, de Blasio would have to make some difficult choices, and signs of lower revenues are already evident. At the annual meeting of the State Financial Control Board in August, de Blasio said his administration had already projected a $416 million reduction in revenue in the 2018 fiscal year.
The biggest uncertainty the city faces is cuts in federal funding and changes in federal policy on health care, taxes and infrastructure, though those have all remained a nebulous since before budget season. Efforts by the Republican-led Congress to repeal the Affordable Care Act have repeatedly failed; and a tax overhaul currently making it’s way through the two houses faces bipartisan opposition over a proposal to change the state and local tax deduction, which is a boon to filers in high-tax states like New York. Should it pass, however, tax revenues in the city will take a major hit.
De Blasio made no significant adjustments for federal policies in his 2018 budget, insisting that the city periodically adjusts its budget to account for economic trends. The next budget modification is expected later this month. “We have an obligation and responsibility to provide New Yorkers with quality services now,” said Freddi Goldstein, a mayoral spokesperson on budget issues, in an email. “We cannot and will not let threats of cuts to federal funding that have yet to be realized deter us from strengthening New York’s future.” The city has been cautious in revenue estimates, and tax revenues are expected to grow at 4.5 percent over last year, in keeping with the administration’s plans.
Carol Kellermann, president of Citizens Budget Commission, a nonpartisan fiscal watchdog, echoed Gelinas’ assessment of the mayor’s fiscal management. “He hasn’t really been tested in terms of fiscal policy,” she said, “because times have been so good so he hasn’t had to exercise as much restraint as CBC would’ve liked.” CBC gave the mayor’s last budget “mixed marks” over the growth in employee headcount and compensation costs.
Kellermann emphasized that many of the programmatic expansions made by the de Blasio administration are permanent and escalating in cost, making them harder to pare down in the future. “It’s very hard for public officials to cut back,” she said. “Every program has its constituency and it’s very hard to take those things away, and it’s very hard to layoff public employees.”
Both Kellermann and Gelinas also pointed out that the mayor has repeatedly touted the Retiree Health Benefits Trust fund as a reserve, even though it should be solely used to fund retiree health benefits and not in cases of a general shortfall.
The mayor has also significantly expanded capital investments to support his agenda. The ten-year capital budget increased by about $6 billion this year to $95.9 billion. The increase includes $1.9 billion in additional funding for affordable housing, $1.1 billion to create new borough-based jail facilities, $300 million to renovate 30 homeless shelters, among other investments. These investments also add to the city’s debt service -- the money spent to satisfy debt from borrowing each year -- which is $6.5 billion for fiscal year 2018, and is expected to grow to about $8.3 billion by fiscal year 2021. “If the interest rates go up, that’s gonna be a big burden down the road,” Kellermann said.
Assemblymember Nicole Malliotakis, de Blasio’s Republican challenger in the mayoral race, has repeatedly criticized the mayor’s ballooning budget and his “tax-and-spend” policies. At the first mayoral debate in the general election, on October 10, she attacked the mayor for the 300 new special assistants he has hired at City Hall, and his administration’s overall expenditure. “When we’re spending $15 billion more and we still have roads that are broken, we have subways that don’t run, we a homeless crisis, we have so many issues that are plaguing our city, then that is...the epitome of mismanagement,” she said, insisting that the city needs to streamline agencies.
She particularly noted the Department of Design and Construction’s consistent cost overruns for capital projects, which was a source of concern for the City Council as well when this year’s budget was adopted.
Two crucial areas where the city already faces a budget crunch, which would be further exacerbated by federal budget cuts, are NYCHA and Health + Hospitals. “These are two so-called independent authorities that all mayors, particularly this mayor, have forthrightly stepped forward to subsidize,” said Kellermann. “They were both meant to be self-sustaining and depend on federal revenue streams.”
NYCHA has a $17 billion capital backlog and though the mayor has made large capital investments -- including more than $1 billion to repair roofs at all NYCHA developments -- the agency’s woes are far from solved. The NextGen NYCHA plan has born some fruit, clearing the agency’s operating deficit for the first time in years, but progress would be threatened if the Trump administration follows through with funding cuts to the Department of Housing and Urban Development.
NYC Health + Hospitals, the municipal hospital system, handles about 5 million patient visits each year and serves about 500,000 uninsured New Yorkers. But the cash-strapped hospital systems depends heavily on the city bolstering its finances. Even though the city has increased funding to the system from $1.3 billion in 2013 to $1.8 billion this year, Health + Hospitals projects an expected budget deficit of $1.6 billion in fiscal year 2019, growing to $1.8 billion by fiscal year 2020.
“[De Blasio’s] been hoping and saying that they will reinvent themselves into a new model, but it’s just not happening,” Kellermann said, referencing the city’s plan to overhaul the hospital system. “It’s the same thing with NYCHA. The [NextGen NYCHA] plan has the prospect of bearing fruit. But will it fill the $17 billion need? No...Both are open questions for which there are no answers at this point.”
Parrott, who recently co-authored a report on Health + Hospitals for the New York State Nurses Association, said the city’s approach to restructuring the system has been flawed since it only focuses on finances without taking into account the larger eco-system of healthcare. The city and state must work together, he recommended, to create an integrated system that involves private hospitals doing their fair share for a more equitable health care system overall.
“The testing of the ability to manage these things will come sooner or later,” said Kellermann. “He gets an incomplete,” she added about de Blasio’s budget record, “That’s the grade I would give.”