(This article was updated on Thursday afternoon to reflect the mayor's comments.)
The idea that private companies can do much of what government does and do it better and cheaper has taken a battering in New York City over the past few years.
News accounts and prosecutors have detailed mind-boggling cost overruns on the CityTime project. A shadowy company whose owner was having an affair with a top Department of Education official allegedly bilked the department out of millions of dollars. And so on.
Yesterday the City Council stepped into the fray. By a unanimous vote the it passed a bill sponsored by Councilmember Darlene Mealy that would subject city contracts to a kind of cost benefit analysis and require agencies to publicly disclose what services they plan to contract out in the coming year.
Last year, according to the council, the city spent more than $10 billion on private contractors. This amount will go up by about 6 percent this year –- far more than the city budget overall. As Gotham Gazette reported this spring, the contract budget has grown by more than 70 percent during the Bloomberg administration. While social service contracts – many with nonprofits – account for the largest chunk of city contracts, the biggest increase has come in professional service contracts, which mushroomed from $357 million in fiscal year 2003 to nearly $1.5 billion projected for this year.
Against this backdrop -- to say nothing of cost overruns and corruption -- that contract budget became a point of contention during last spring's contract talks. City Councilmember Robert Jackson for one repeatedly questioned why the administration was increasing contracts at the same time it was threatening to lay off teachers.
Municipal employee unions, notably DC 37, the city's largest municipal employee union, have balked at taking tasks away from their members and giving them to private often non-union companies.
The administration has said it needs specialized outside expertise, and some officials – notably former Deputy Mayor Stephen Goldsmith -– have argued that private contractors can deliver service more cheaply than city workers.
The council bill -- Intro 624 -- takes direct aim at that contention.
Before a city agency could extend, renew or enter into a contract worth more than $200,000 it would have to analyze whether the contract results from displacement of city workers or would displace city workers. If the study determines some city workers would lose their jobs, the agency must then look at the benefits and costs of contracting out the work and submit that analysis to the city comptroller, who reviews city contracts.
In addition, after receiving bids, the agency would have to analyze the costs and benefits of the contract and tell the council, the comptroller and union officials why the contract makes sense for the city. The council can hold a hearing on the contract in question.
More generally, every year the administration must submit a contracting plan for every city agency. Along with boosting transparency, this provision is seen a possible aid to small and minority contractors who would have more advance warning of upcoming city contracts, giving them time to prepare possible bids.
Announcing the measure, Quinn portrayed it as a money-saving move. While privatizing government work has been seen as a cost-cutting measure, Quinn said in many cases, sending public work to private companies actually increases costs. The bill, he said, "will make sure that we are checking on whether we are saving New Yorkers money every time we consider contracting out."
Council, though, has gone down this path before. In 1990, it passed Local Law 35 requiring similar analyses of contacts. But, as Quinn put it, "the implementation of that law has not lived up to its promise." She noted that in the more than 20 years since, only two costs analyses have been conducted -- two during the Giuliani administration and zero under Bloomberg.
The new version -- 624 -- hopes to close loopholes that enabled the last two mayors to dodge the requirement.
To many New Yorkers the biggest concern about city contracts has been high costs and low performance.
Only last week, the city's special commissioner of investigation for the Department of Education found that Future Technology Associates, a firm the city hired to do computer work on school purchasing, payroll and finance systems, had overcharged the city by at least $6.5 million.
Earlier in September, the New York Times reported that the cost of a contract for a computerized personnel system for the city had increased by more than five fold with the work far from complete.
And then, of course, there is CityTime, the $63 million project whose costs rose to more than $720 million, amid what prosecutors charged was corruption and fraud. Already five people have been indicted in connection with that one.
Asked whether the council bill would help avoid such abuses, Quinn expressed some doubt.
"I hardly imagine that in an analysis you would have a column of estimated criminality involved," she said.
But, she added, the increased disclosure and transparency could help warn city officials of cost overruns and other contract problems.
"This piece of legislation is only the beginning," she said. "Oversight is a very important piece, one that is for a different piece of legislation."
During the disputes over contracts, Mayor Michael Bloomberg has shown no sign of retreating from his reliance on them. And over the past months he has defended some of the most problematic ones. At one point he said the city did a pretty good job" on CityTime. And in response to questions from the Times about the problems with the personnel system known as Nycaps, a mayoral spokesperson said both it and CityTime are now "fully functioning systems used daily by thousands of city employees."
Bloomberg says Wednesday that he opposes the a law passed by the City Council . WNYC's Bob Hennelly reports the mayor says the bill will cripple the city's ability to be more efficient.
"To put impediments to us getting the best deal for the taxpayers particularly during this economy is something we can not tolerate. We are just not going to have this bill," Bloomberg said. "This also is probably unconstitutional."
With the council voting unanimously for the bill, it seems it could easily override any mayoral veto -- the kind of showdown that Quinn has rarely allowed to happen during her tenure. If -- as he implies -- Bloomberg takes the issue to court, it could set the stage for the dispute between the mayor and the council over contracts to drag on for years.
If it's September, it must be time for Mayor Michael Bloomberg and his budget office to start cutting spending by city agencies. The current, fiscal 2012 budget that was adopted less than three months ago projects a $4.6 billion deficit for the next fiscal year. A year ago, facing a much smaller projected deficit for the next year -- $3.7 billion -- the mayor began a series of cutbacks that eventually reduced spending by $1.1 billion.
If there was any doubt about fiscal prospects, recent reports from the state Financial Control Board, the state comptroller and the city comptroller dispel them. These grim reports from fiscal monitors and recent studies from the Independent Budget Office, however, also suggest some new ways the mayor could fill budget gaps.
The key reality facing the mayor is that, unlike in recent years, there is no sign that the city will have a substantial budget surplus at the end of this year. Without something like last year’s $3.7 billion surplus, and with deficits averaging $4.8 billion over the next three years, the city's fiscal future looks "problematic" to the Financial Control Board and "challenging" to the state comptroller. Put a bit more dramatically, the board says, "The city's ability to avoid contentious expenditure reductions will be tested."
Over the last three years, the mayor has shown a certain political genius in avoiding "contentious" responses to his 10 packages of budget reductions. To accomplish this, he has very effectively used his extraordinary discretionary powers to make modifying the city budget a year-round -- rather than once-a-year -- process, with little opposition from the City Council.
The impact of 10 consecutive reductions is equally extraordinary. The State Financial Control Board totaled the effects: The $1.1 billion cut in 2011 was preceded by cuts of $1 billion introduced in fiscal year 2008, $2.1 billion in 2009, and $1.1 billion in 2010. Add them together and that means that the current $66 billion city budget is $5.3 billion smaller than it would otherwise be.
The fiscal monitors are not in the business of telling the city how to balance its budget, but they do a good job of explaining how the mayor balances the budget and at noting the fiscal uncertainties the city faces. The uncertainties include questions about projected out-year budget deficits, collective bargaining, pension costs, workforce cuts and the use of reserve funds.
In explaining why the city faces an ominous budget outlook, the state comptroller analyzes what actual revenues come in during a fiscal year and what actual spending occurs during that year. For instance, in spite of the cuts of more than $3 billion introduced in 2008 and 2009, "spending exceeded current-year resources by about $2.4 billion in FY 2009 and $2.1 billion in FY 2010." Those budgets were balanced only by using surpluses accumulated from previous years.
In FY 2011 the report estimates that, because of unanticipated revenues from an improving economy, current-year spending exceeded current-year revenues by only $303 million. The report goes on to say, "For FY 2012, however, we project a current-year deficit of $4.4 billion, reflecting the city's heavy reliance on nonrecurring resources accumulated in prior years to balance the budget."
The Financial Control Board suggests what the mayor should do next: "The task for the city will be to manage the FY 2012 budget in a way to start to build a surplus to the level achieved in FY 2011." In other words, the mayor should continue the same early-year and mid-year budget cutting he has made into a near science.
But there are many other uncertainties this year, including contract negotiations with city workers. The mayor's current three-year wage freeze, for instance, has freed up labor reserve funds for balancing the current budget.
The question is how long the mayor can keep the freeze on. According to the state comptroller's report, more than 90 percent of the city workforce is working without a collective bargaining contract. And the adopted budget includes funding for only a 1.25 percent annual wage increase for three years following the expiration of the three-year wage freeze.
Since the three-year freeze and proposed minimal raises for the following three years are still being negotiated, the state comptroller points out, "If instead wages were to rise at the projected inflation rate during the six-year period without any offsetting savings, costs would increase by $1.5 billion in FY 2012, $1.6 billion in FY 2013 and reach $2.7 billion in FY 2015."
The teacher's negotiations present more uncertainty. The state comptroller notes that the city "has yet to conclude an agreement with the United Federation of Teachers for the previous round of bargaining." That means that in FY 2009 and 2010, while other civilian employees received 4 percent annual increases, the teachers had no increase. Instead, the labor reserve funds for teachers again went to budget balancing.
Negotiations between the teachers union and the city, with the help of a mediator, continue, but a settlement apparently is not imminent. The state comptroller concludes, "A retroactive agreement similar to those negotiated by the city's other unions for those years would increase costs by $1.7 billion in FY 2012 and by $900 million annually thereafter."
Another uncertainty is the projected cost of city pensions. Costs have increased dramatically beginning in fiscal 2003 after the "state enhanced benefits, and pension fund investments fell short of expectations," according to the state comptroller. The city currently estimates pension costs, which averaged about $1.4 billion a year in the 1990s, will be $8.4 billion in fiscal 2012, increasing to $8.7 billion in 2015.
In anticipation, the city in its four-year financial plan set aside $1 billion a year in a reserve fund. But it's not clear it will need that fund this year.. Nor, on the other hand, is it clear $1 billion will be enough.
To balance budgets recently, Bloomberg has tapped into the Retiree Health Benefits Trust Fund -- to the tune of $672 million in the current budget. The fund was set up by the mayor several years ago to set aside money for the city to cover its accrued liability for future post-employment retiree benefits, including health benefits. That liability, according to the state comptroller, reached $75 billion as of fiscal 2010. (The city has been paying these benefits on a pay-as-you-go basis.)
The state comptroller and Financial Control Board, object to what the mayor is doing. "The city, to its credit, deposited $2.5 billion in the Retiree Health Benefits Trust during the last economic expansion to fund these costs," the state comptroller says, "but it has begun to draw down these resources to help pay current operating expenses. … The state comptroller believes the city should avoid using these resources to help balance the budget."
The Financial Control Board agrees: "It is unfortunate that the city has continued to reduce the trust over the last two fiscal years to cover investment losses incurred in prior years while [post-employment benefit] liability continues to grow at a constant high rate."
Yet this fund, which now holds about $2 billion, remains a tempting resource for an administration reluctant to find new and recurring tax revenues and that regularly uses ad hoc, non-recurring revenues for budget balancing.
Cutting the size of the city workforce has also helped balance the budget. The fiscal 2012 executive budget in May reduced staffing by more than 9,000 positions. However, the City Council reversed some of those cuts. The state comptroller estimates that the final budget eliminates 5,475 slots in fiscal 2012, including 2,655 positions in the Department of Education.
Originally, the mayor wanted to eliminate 6,166 schools jobs, including 4,166 teachers. But the negotiated restoration of 4,666 education jobs should not mask the loss for the school system. Many of the restored positions, for instance, are funded for only one year.
The state comptroller notes that in fiscal 2012 the schools will have 7,000 fewer teachers than in fiscal 2009, and another 1,200 fewer in fiscal 2013. The effect? "Class sizes are expected to continue to rise, and other services, such as after-school programs, may be reduced," his report says.
The fiscal monitors also touch on some management areas where potential savings could help budget balancing. One is the rapidly growing contracting budget, which emerged as a point of contention during last spring's budget talks. The state comptroller notes the "heightened scrutiny because of the increasing amounts spent on [contracted] services, and instances of waste and fraud." This, of course, is undoubtedly a reference to the scandal surrounding the City Time contract, which continues to unfold.
Spending on contractual services rose by nearly 75 percent between fiscal 2001 and fiscal 2010. It then totaled $10.6 billion, or 16.3 percent of the 2010 budget. According to the state comptroller, the 2012 budget is slightly less -- $10.5 billion for contractual services -- although that could grow as the city receives federal and state grants later in the year.
The three largest areas are education-related: payments to private special education and charter schools ($2.2 billion), student transportation ($1.1 billion), and direct professional education services ($845 million). The Independent Budget Office has noted that, as school budgets have been cut, school contracting has increased.
The city could also save some money by reducing overtime costs, now over $1 billion a year. Uniformed agency overtime alone, including civilian personnel, reached $963 million in fiscal 2011, according to the Financial Control Board. That's $240 million more than the city projected at the beginning of the fiscal year.
The board says the current four-year financial plan "grossly underestimated" future overtime costs. The city comptroller estimates the city's overtime projection for fiscal 2012 is $210 million less than it will ultimately be. If he is correct, the city would have to fund the extra costs during the fiscal year, adding yet another uncertainty to mid-year budget balancing.
As the mayor begins his mid-year -- or earlier -- modifications in the current budget to meet next year’s $4.6 billion deficit, there is no indication he is willing to address tax revenues. But as the reality of yet another $1 billion to $2 billion mid-year cut in agency services unfolds, it might be time to do just that.
The Independent Budget Office's Budget Options is an excellent source of practical expenditure-saving and tax-revenue programs. One of the more familiar ones is a restoration of higher personal income rates for joint tax filers with incomes above $200,000. New top rates of 4.013 percent and 4.264 percent (affecting only 7.8 percent of city resident tax filers) would still be much lower than the top rates in effect from calendar 2003 through 2005 and most of the 1990s, yet produce an additional $450 million in fiscal 2012.
In a recent web blog the budget office noted that the city's biggest tax, the property tax, will bring in $17.6 billion in fiscal 2012, about 42 percent of city tax revenue. But it would generate $13.5 billion more were it not for "the slew of [property] tax exemptions."
Most of these exemptions, of course, go to government property and religious property, and so are untouchable.
Some exemptions, however, could be challenged. Perhaps the most outrageous case is Madison Square Garden, which has not paid any property tax for decades, costing the city $15.1 million in lost revenue in this year alone. The Independent Budget Office points out that a case can also be made that some private institutions -- health facilities, foundations, charitable organizations, and private schools, colleges and universities -- could negotiate voluntary payments (called payments in lieu of property taxes, or PILOTs). Many do that in other cities.
In other words, the mayor need not simply announce yet another autumn round of agency downsizing and lost services. He has a chance to address alternative strategies that could minimize such cuts: Management reforms and a willingness to find new, equitable tax revenues would be good places to start.


 Glenn Pasanen, who has taught political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.
In the face of extreme budget cuts and tough times, Mayor Michael Bloomberg recently has turned to private donations to fill some high-profile budget holes. Last month, Bloomberg announced that six private donors -- himself included-- would each donate $250,000 to reinstate a round of state standardized testing that had been eliminated because of budget cuts.
"For thousands of our students, taking the Regents exams in January will mean the difference between graduating and not graduating," Bloomberg said at the time. "I've always believed that you can either complain about your problems or do something to fix them -- in New York City, we choose the latter."
In this high-profile use of outside funding to provide a core service in the public schools, many education experts see more than just a last-minute save.
"From a systemic point of view, this is a very worrisome pattern in New York and around the country,” said Michael Rebell the executive director of the Campaign for Educational Equity at Teachers College, Columbia University. Rebell, who critiqued the decision in a New York Times op-ed last month that lambasted states for leaving public schools in New York and around the country without adequate funding.
Private money in the public service doesn't stop at education. Increasingly, donations fund all sorts of programs -- parks, social welfare initiatives and museums, to name a few. While some praise the philanthropy, others question the lack of funding by government and the increased influence these often-unnamed donors may have on policy and decision-making.
In his announcement, Mayor Bloomberg emphasized the importance of a long-term solution for funding the January Regents, as the donations will only cover the 2012 tests.
Rebell says the one year reprieve from budget cuts could hurt prospect for solving the schools’ funding issues in the long-term. Private donations like this alleviate pressure points, but they don’t fix the problem, Rebell said.
"It takes the attention and the pressure off the need for adequate public funding of public education," he said. If the donors had not stepped in, he added, "People might have been up in arms when they saw graduation rates go down."
From a government standpoint, the funding also poses a risk, said Charles Brecher, the executive vice president and director of research for the Citizens Budget Commission, a government watchdog group. "What do you do if it disappears? What if that money goes away?" he asked.
Brecher, who is also a professor at New York University's Wagner School of Public Service, published a study in 2007 that tracked how private donations leverage public funding to the parks.
Many parks have non-profits, such as the Prospect Park Alliance, that augment their park's public funds. Donations to the nonprofits are usually given with a stipulation that public funding will be maintained to certain levels, allowing donors to use their philanthropic muscle to preserve public funding -- even in times of budgetary crisis. Brecher said this often leaves "parks without Fifth Avenue and Central Park West as neighbors" with less public funding and comparatively limited funds.
"It's always good to have extra resources," Brecher said, but "it's best done when it doesn't distort what otherwise would have been done with the public money."
In many cases, the private funds influence use of public funds as well. Officials see a donor giving money to cover 80 percent of the cost of a new skating rink, say, and then ante up the remaining 20 percent, even if that money might have ben better spent on a playground. In education, some critics have charged that school districts like New York City's have embraced smaller, themed high schools, not because they are necessarily a good idea but because funders such as the Gates Foundation have poured so much money into them. Gates himself has expressed disappointment in the result
"They say 'don’t look a gift horse in the mouth' – don't ask questions to someone who is giving money -- but in some instances you want to look the gift horse in the mouth," Brecher said.
Last month, Bloomberg announced a $30 million donation from his own foundation -- and a matching one from hedge fund manager George Soros -- to fund a new initiative aimed at young black and Latino men.
The city added $22.5 million dollars in public funding for the program to the City Council budget at the last minute, as well, alarming many City Council members who complained that they hadn’t been alerted to the change in the budget or included in the discussion.
Queens Councilmember Peter Vallone Jr. now is looking into possible legislation that would prevent such late in the game additions to the budget.
"I have no problems with private money for public programs," Vallone said, "but I'd just voted on a budget without more police officers, and we were on the cusp of closing firehouses. Yet after the budget was passed, there was an announcement for a program that had millions of dollars and no public oversight at all," he said.
Bloomberg's announcement came less than a week after the council approved its budget. "If Bloomberg was able to find that money, then we should have been able to direct it to more police officers if we saw fit," Vallone said.
Brecher said the funding for the initiative exemplifies how private donations affect the city's allocation of public funds. "In this instance, it probably did affect the priority setting process," he said.
The $22.5 million addition was included in the final, printed $66 billion budget that was given to City Council members, but Vallone said it is "impossible to be aware of last minute additions in a massive document like that."
Marc LaVorgna, a spokesman for the mayor, said that while the initiative's public funding was added at the end of the budget process, "the council was notified that we were seeking to add dollars for this program into the budget and the program was printed in the budget."
He said that the presence of the private money in the deal had "zero to do with" the public funding of the program, adding that "the City Council changes literally hundreds of millions of dollars in the budget at the 11th hour every single year."
Private donations often leave those in poorer areas with even fewer resources than they might have otherwise had.
In public schools, parent teacher associations have long been sources of private funds. When services are cut, fundraisers and private donations fill out the budget. But in poorer areas, where donors are scarce, the services remain un-funded and can face cuts.
This inequality is "totally inconsistent with any concept of [public] schools," and often unconstitutional, Rebell said. (Most state constitutions have a provision that guarantees an education, though exactly what that means in practice is often debated.)
The private funding also has an effect because upper or middle-class parents --the people at "the forefront of political advocacy" – then are not affected by cuts and so are less likely to complain about them, Rebell said. The people who are hurt -- those in low-income communities -- are less able to make their concerns known. If more affluent parents have "found a way to satisfy their needs, it’s not going to come to the floor," Rebell said. "Its well-known that low-income people don't have the articulation or organization skills to protest it themselves."
Vallone, however, would rather have the money donated than not.
"We’re not living in John Lennon's imaginary world," he said. "We're living in a world where very few people would donate if their kids wouldn’t see the results."