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Happy New Year Budget


City budget news gets better and better, setting the stage for a fresh kind of budget debate, beginning later this month when the mayor releases the preliminary budget for fiscal year 2007 (which begins in July, 2006), and the four-year financial plan that accompanies it. Both Mayor Michael Bloomberg and the newly elected New York City Council Speaker Chris Quinn begin in a happy budget place, just three years after the city faced budget deficits in excess of $6 billion.

The mayor’s November budget modification underplayed how good things are, at least in the short run, according to several fiscal monitors’ reports released in December. For instance, the report from the office of the state deputy comptroller for New York City estimates that the city’s 2007 budget deficit could be as little as $645 million, not the $2.25 billion deficit anticipated in the mayor’s November plan. In the longer term, however, little has changed in terms of the structural imbalance in the city ’s financial plan; the report also projects deficits averaging about $4 billion in 2008 and 2009.

Rise In Revenue, Cut In Pension Costs

The bright outlook for next year stems not only from the unanticipated tax revenue gains since June, but from likely changes in the city’s contribution to the city pension funds that were not included in the November modification. The fiscal monitors expect the January plan to reflect those changes –- which stem from a series of new calculations about what the city needs to spend each year to meet its pension obligations.

The pension changes will, in the short term, save over $800 million in city spending in 2007 and about $550 million or more in 2008, according to reports by both the state deputy comptroller and the state financial control board. These savings will be offset in part by higher contributions in subsequent years -- $290 million in both 2009 and 2010, according to the state deputy comptroller.

The Independent Budget Office in its December fiscal outlook, “An Improving Fiscal Climate Presents New Challenges,”(in pdf format) sums up the current context: “Today’s fiscal climate has changed dramatically, though it brings a new set of potential challenges as public acceptance of the need for austerity may shift towards calls for tax cuts and increased spending.”

Taxes

Of course one good reason the longer-term budget problems remain is that the new calendar year begins with a very large, previously determined tax cut. The two top personal income tax rates (4.25 percent and 4.45 percent), on the city’s wealthiest residents –- the most progressive of the budget-gap-closing actions in 2003 -- were eliminated at the end of December 2005, at a cost of approximately $500 million a year of lost revenues. And yet another tax cut has already been set, the $400 property tax rebate that goes to residential owners again in 2007 -- and will cost the city over $250 million in lost revenues.

 

In this context, the mayor’s recent call for a reinstatement of the commuter tax, which would get back roughly $500 million of recurring revenues, is a bit disingenuous, since the mayor and the new council speaker stand a much better political chance of restoring the top personal income tax (or PIT) rates on residents than the commuter tax, which is controlled by the state legislature and governor.

Property taxes and property transaction (mortgage recording and property transfer) taxes currently represent over 45 percent of all tax revenues. None of the monitors foresees the transaction tax revenues remaining at this year’s level, but the property tax remains the solid base of the city’s revenue system. The Independent Budget Office estimates that from 2007 to 2009, the property tax will average 7.5 percent growth each year, rising from $12.4 billion in 2006 to $15.4 billion in 2009.

Overall, the budget office estimates tax revenues will average only 3.7 percent growth from 2007 to 2009. The faster growth in property taxes means that property taxes alone in 2009 will represent 43.5 percent of all city tax revenues, versus 39 percent in 2006. This shift in tax burden to the property tax is another reminder that reform of the city’s bizarre and unfair property tax system should be a priority in the mayor’s second term.

Spending

If the $750 million in tax cuts already in place satisfies the tax-cut side of next year’s budget debates (unlikely), then all the action -– particularly from the newly reconstituted city council -– will be on the spending side. Here the basic message of the Independent Budget Office’s December report is that, on average, spending on city agencies has been essentially flat for the past two years, and in the mayor’s current four-year plan will remain so until 2009.

The flatness of agency spending is often obscured by the steady rise in overall city spending. City-funded expenditures, for instance, will rise by an average of nearly five percent a year from 2007 to 2009. But the bulk of that spending is in two general areas: 1) mandated spending for health insurance and other fringe benefits for city workers, pension costs, Medicaid, and debt service on the capital budget, and 2) increased wage costs from the recent (and anticipated future) labor agreements.

The two biggest sources of budget growth are debt service and health insurance and other fringe benefits. Debt service will rise an average of 11 percent a year from 2007 to 2009, to $5.8 billion in 2009 –- largely from the mayor’s ambitious capital plan for school construction and other projects. Health insurance and other fringe benefits will grow six percent a year during the same period, reaching $3.9 billion in 2009. (Medicaid spending growth has slowed somewhat -- an average three percent a year increase through 2009 -- in large part because of a new cap introduced by the state on the local share of Medicaid spending.)

Leaving out mandated and wage costs, the Independent Budget Office sees agency spending from 2007 to 2009 rising less than one percent per year, far less than the rate of inflation. The report points out that there have been neither large spending initiatives nor major cuts in spending over the past years, and the mayor’s current plan promises nothing more.

Hope For Fresh Thinking for 2007

There is a happy disagreement over how high the budget surplus will be by the end of this fiscal year in June, with estimates ranging from $1.7 billion to $2.8 billion. The deputy comptroller raises an interesting point, however. Whatever the amount of the surplus, it depends entirely on the surplus that was carried over from 2005 to balance this year’s budget. Without that one-time surplus, there would be a big current-year operating deficit.

The big problem, in other words, is that the city keeps using huge one-shot revenues to balance its budget, masking what the deputy comptroller calls “an underlying structural imbalance between recurring revenues and expenditures.”

The Independent Budget Office is a bit more optimistic. It says the current improvement in the city’s fiscal outlook is “the result of both fiscal design and economic fortune.” The city has moved toward “a closer match between recurring revenues and recurring expenditures.”

After four years of narrow focus on fiscal crisis management, education management and governance, and a failed West Side stadium project, it’s a good time to use the city budget for fresh policy thinking. Countless ideas abound within and outside government on such issues as tax reform, human service and health policies, and broad-based housing and economic development.

The Independent Budget Office report, indeed, anticipates new budget pressures and seems to imply this will be threatening to the improved fiscal outlook. But one can hope that a term-limited mayor and a term-limited council speaker will welcome a debate on a mutual legacy that serves fiscal as well as social and political interests.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 

Good News For The Budget, For Now


The year is ending with good news for the city’s budget from two public officials. Mayor Michael Bloomberg is reporting both new revenue and new savings, and thus a projected deficit much lower than originally expected. City Comptroller William Thompson offers a generally encouraging view of the city’s economy in his annual financial report. The comptroller’s report also offers a useful review of the ways in which Bloomberg crafted balanced budgets despite daunting challenges.

But the report also hints at some of the management problems facing Bloomberg’s second term.

BLOOMBERG’S BUDGET, AS OF NOW

Bloomberg’s recent budget modification of the 2006 city budget promises a budget surplus for this year of at least $1.7 billion. The surplus is largely the result of nearly $2 billion of additional tax revenues, based primarily on the continuing boom in housing-market transactions. On the expense side, there are some $450 million of new Medicaid savings.

Add this projected surplus to additional tax revenues expected for 2007, and what once threatened to be a $4.2 billion deficit in 2007 is now looking to be $2.3 billion. This is still a lot of money to be in the hole, of course, but it is quite an improvement in less than five months.

But the good news in revenues obscured, at least temporarily, a big change in expenses for the future. Union contract settlements have added $661 million of labor costs to this year’s personnel budget and $1.1 billion to the 2007 budget.

THE AUDITOR VIEWS THE CITY’S PERFORMANCE

The comptroller’s comprehensive annual financial report, required by the city charter, offers a necessary independent view of both the city budget and an assessment of the city’s management performance.

The report notes that the 2005 budget marked the 25th year of balanced budgets for the city, an impressive rebound after the fiscal problems of the 1970s. The economy has improved, with the city’s gross city product increasing by 3.3 percent in fiscal 2005, after three years of decline. The unemployment rate dropped from 7.9 percent in 2004 to 6.1 percent in 2005. Moreover, the comptroller suggests that the city’s economy is healthier than the nation’s.

But the report makes clear that many problems remain in city agencies. The comptroller has, for instance, challenged the documentation and “fiscal clarity” of education department policy and practices. He suggests that budget reporting in the department has “not kept pace with [its] structural changes.”

In his role as city contract administrator, the comptroller found that the department of homeless services had “falsified an annual inspection report” on a 800-bed homeless facility in upstate New York. Sanitation department contracts were rescinded because of altered scoring sheets during the contract-selection process.

Contracts – 15 Percent Of The Total Budget

The report underscores the importance of city contracting. Contracted services (not including capital budget contracts) totaled $7.84 billion in 2005, nearly 15 percent of the total city budget. The dollar value of contracts was up six percent from the previous year. The biggest contract areas include $690 million for school transportation, $895 million for non-public school handicapped children services, and $625 million for mental hygiene services. The scope of these privatized, publicly funded services may deserve much closer mayoral and legislative oversight.

Yankee Deadbeats

In another role, the comptroller’s 81 audits and special reports provided further oversight of mayoral agencies. The comptroller found – not for the first time – that the New York Yankees, who lease the stadium from the city, shortchanged the city. They underreported over $9 million in revenues and overstated deductions against revenues by $34.5 million. The Yankees, who stand to receive hundreds of millions of dollars in future city and state subsidies for a new stadium, owed (and subsequently paid) an additional $3.6 million in fees.

Problems In Human Resources, Finance, Fire, Etc

The audit unit also found problems in the human resources administration (questionable vendor payments), the department of finance (weaknesses in the administration of the commercial incentive and abatement programs), and the fire department (inadequate controls over EMS ambulance transport fees). Audits also revealed major problems in implementing information technology at HRA and the department of city administrative services.

Budget Up 31 Percent, Taxes Up 33 Percent

One of the most useful sections of the comptroller’s report is a series of 10-year statistical tables. Those tables are a handy way to see what happened during the first Bloomberg term. Comparing fiscal years 2001 and 2005 (which ended June 30, 2001 and 2005, respectively), for example (not adjusting for inflation):

· The city budget grew 31 percent, from $40.2 billion to $52.8 billion.
· City taxes were up 33 percent, from $23.2 billion to $30.9 billion.
· City real property taxes rose 41 percent, from $8.2 billion to $11.6 billion.
· Property-transaction taxes grew 161 percent, from $900 million to $2.3 billion.
· The personal income tax was up nearly 16 percent
· The sales tax, 19 percent
· Business income taxes, up 27 percent.

The mayor’s $1.50 per pack increase on cigarettes (split with the state) jumped receipts by over 350 percent, from $28 million to $127 million.

IBloomberg’s18.5 percent property tax rate increase and the explosion in property transactions (resulting in the huge property-transfer and mortgage-recording tax gains) have been key to the 31 percent increase in the city budget. The mayor’s November modification says that those property tax transactions continue at an unexpectedly high level.

During the same four years, the size of the city workforce increased by nearly six percent, from 249,824 to 264,061.

And Non-Mayoral Parts Of City Government

Given the expansive nature of budget-building over the past four years, there is a touch of irony in the fact that the comptroller’s own budget has declined during that period by over 2.5 percent, to $51.3 million.

The other citywide office, the public advocate, which had a tiny budget to begin with, did see a 17 percent increase in its budget, to $3.1 million.

The borough presidents, who lost most of their budget and land use powers with the elimination of the Board of Estimate in 1989, have also seen their offices cut back dramatically. The combined offices lost 26 percent of their budgets from 2001 to 2005, dropping to $23.1 million.

The city council, which determines its own budget under the charter, has been very conservative in budget terms. Its budget increased only 4.4 percent from 2001 to 2005, from $44.4 million to $46.3 million.

Perhaps there is a case to be made that in a city so dominated by the structural powers of its mayors that the city’s countervailing institutions – the comptroller and city council in particular – should be given more resources.

The Mayor’s Optimistic Number

The mayor’s budget numbers are optimistic. But let’s not forget that, very soon, the city and state comptrollers, the state Financial Control Board, and the Independent Budget Office will all be weighing in with their own analyses of the mayor’s optimistic forecasts.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 

 

 

 

 

 

 

Tax Reform In Bloomberg's Second Term?


When Mayor Michael Bloomberg said in his victory speech that he believed his re-election sent a message “that you can make the tough decisions and be re-elected, as long as they are the right decisions," it seems clear what tough/right decisions he was talking about. At the top of the list has to be his tax hikes.

The boldest move of his first term was proposing and selling a $3 billion tax package, the key to resolving a $6 billion budget deficit. The package was a burden for most New Yorkers, but the public seems to have accepted his argument that this is an expensive city, and taxes are basic to essential services.

That is why there is hope among fiscal experts of both liberal and conservative perspectives that Bloomberg will devote his second term to reforming the city’s tax system, particularly its incomprehensible property tax, its roller-coaster personal income tax rates, and its mostly hidden corporate tax breaks.

In New York’s think-tank world, the conservative Manhattan Institute’s E. J. McMahon’s new study, “Pricing the ‘Luxury Product’: NYC Taxes Under Mayor Bloomberg,” urges restraint on city personal income tax rates and calls for a city/state commission to reform the city’s property tax system.

The progressive Fiscal Policy Institute’s James Parrott, in a new study, “Hudson Yards Tax Breaks, Unwarranted and Fiscally Irresponsible,” analyzes an acceleration of corporate tax abatement and argues against long-term tax breaks for West Side developers. (Juan Gonzalez provided a short review of the study in the Daily News.)

The Property Tax

E. J. McMahon believes reform should begin with, if not end with, the city’ s property tax system, which produces nearly 40 percent of all city tax revenues. At a Baruch College School of Public Affairs seminar on the property tax held October 31, Independent Budget Office Deputy Director George Sweeting released new data that underscore the inequities and what McMahon calls the “Byzantine” complexities of the current system.

The current problems began with 1981 state legislation that set up the current system, which essentially protects city homeowners. But one kind of owner (1-, 2- and 3-family house owners) has a lower burden than most coop and condo owners. Commercial owners have a much higher burden, and renters, who pay a substantial share of their landlords’ property tax in their rent, have almost as high a burden as commercial owners.

So, for example, according to the new data from the Independent Budget Office, on a piece of property worth $300,000 – if the property is a one-family house, the typical 2005 property taxes would be $1,602; if it’s a co-op, the typical property taxes would be $2,772; but if it's a rental property, even though it's worth exactly the same amount as the private home or the coop, the typical property taxes would be nearly eight or five times higher, $13,050.

These inequities are, in large part, created by a bizarre assessment process. In most localities, a property assessment is based on a property’s market value, and the tax bill is determined by simply multiplying that assessment by the current tax rate. Not in New York City.

Here assessments are only a fraction of market value. Assessments of houses, for instance, are targeted at six percent of market value. Thus a $300,000 house would be assessed at $18,000. Assessments of commercial and rental apartment buildings, on the other hand, are set at 45 percent of market value. A building with a $10 million market value would have an assessment of $4.5 million. Co-ops and condos are assessed as if they were rental apartment buildings, creating even more confusion.

To further protect homeowners, there are caps on annual assessments -- no more than six percent for house owners in one year, or 20 percent over five years. There are slightly higher caps for co-op and condo owners.

Recent data from the city’s finance department show the effects. A house with a market value of $350,000 saw its market value rise by 76 percent from fiscal year 2001 to 2006, but the assessed value rose by only 20 percent. The effect of the residential caps is that much of the increase in market value in owner-units is never “captured” in the assessment, thus reducing owner tax bills over the long run as well as short run.

The McMahon report says, “While all cities have real property taxes, few if any could rival the complexity, inequity, and opacity of New York’s system.”

Absent the overall reform that McMahon urges, attempts to fix property tax inequities have only created new problems. For instance, in order to lower the burdens of coop and condo owners, the mayor and city council in 1997 introduced a property tax abatement for them (since extended to 2008). The abatement ranges from 17.5 to 25 percent of the property tax bill.

The new Independent Budget Office data show that because of the convoluted assessment practices, over 78,000 co-op and condo units actually had lower tax burdens than the typical house owner before the abatement. And the abatement has moved several thousand more units into this privileged house owner tax status. In dollar terms, it means that nearly $100 million of the annual abatement is a “waste,” because it goes beyond the original equalizing goal.

Personal Income Tax

The second most important city tax – now representing about 22 percent of city tax revenues – is the personal income tax.

Looking to Bloomberg’s second term, McMahon and the Manhattan Institute fear an extension of the city’s temporary top personal income tax rates for the city’s highest earners (over $150,000), which under current law expire December 31, 2005. They fear many of the city’s millionaires will flee the city to avoid the 4.45 percent top tax rate – which if extended beyond the end of this year would bring in approximately $500 million.

But a similar top 4.45 percent personal income tax rate was in effect through most of the 1990s, after being introduced by former Mayor David Dinkins and Council Speaker Peter Vallone during a recession and fiscal crisis in 1990. The fear of high-end earners flight seems exaggerated, since that rate apparently had no negative impact on the booming city economy of the late 1990s, and in fact, helped create huge Rudy Giuliani budget surpluses.

A city tax commission could take a look at the roller-coaster changes in personal income tax rates over the last 15 years and test McMahon’s dubious claim that the early 1990s tax increases triggered the loss of 300,000 jobs in the city. As McMahon suggests, personal income tax revenues can be volatile because of economic ups and downs, but that does not mean the rates can’t be set efficiently and progressively.

Commercial Tax Breaks

James Parrott’s study of commercial tax breaks – which mayoral administrations sell as “economic development” -- is revealing: In the four years after 2000, these increased over 72 percent, from $334 million to over $575 million. Parrott argues for a review of the rationales for these breaks, many of which were arguably unnecessary, especially in Manhattan; the developments would have gone ahead without deep city subsidies.

Parrott also pulls the curtain on what’s happening in Manhattan’s West Side (Hudson Yards) development area. The city’s financing of the infrastructure that will support this development – the extension of the #7 subway line is the biggest piece – is not yet completely clear. The mayor and the city council agreed last winter to use city funds for the start-up of the financing, but long-term financing is based on using new property tax revenues generated from the development area.

The problem is that the mayor wants to use a pre-determined PILOT – a payment-in-lieu-of-taxes – for the whole development period. A PILOT is usually determined by a negotiation on a specific property between the city and a developer that sets a less-than-full-property tax payment. (The Port Authority, for instance, paid the city a PILOT for the World Trade Center that was about 25 percent of what it would have been had the property been fully taxed.)

But here, the city proposes, through its obscure Industrial Development Agency, to establish what is called a Hudson Yards Uniform Tax Exemption Policy that Parrott says “will likely permanently institutionalize the granting of across-the-board tax breaks for any commercial development in New York City.” The immediate Hudson Yards effect would be to grant a “uniform” break for all Yards developers through at least the year 2040.

Public economic development investments provide incentives for private development. Why assume decades in advance that further incentives will be needed at all, let alone at some arbitrary and uniform tax-cut level set in 2005? Parrott argues that what “gets locked in with this ill-advised economic policy are the inequities that result when large companies receive sizable property and other tax breaks that shift the city’s tax burden to smaller businesses and other taxpayers.”

The Industrial Development Agency will, according to Good Jobs New York (a joint venture of the Fiscal Policy Institute and Good Jobs First which monitors the secretive processes of New York’s public authorities), in the near future hold a hearing to determine just what this important uniform exemption will be. Will it be a 50 percent discount? A 20 percent discount? The long-term costs – through lost property tax revenues – could be in the hundreds of millions of dollars.

Another obscure public authority – the Hudson Yards Infrastructure Corporation – is the financing mechanism that controls the borrowing that will pay for the Hudson Yards infrastructure. It has a mayoral-dominated six-member board: the city comptroller, the speaker of the city council, three mayoral appointees, and one independent member, appointed by the mayor. They will have to approve any financial plan.

A City Tax Commission?

Before the city goes ahead with this dubious financing mechanism, there ought to be a serious public review of its long-term economic, revenue, and equity consequences. A city tax commission would be the perfect vehicle.

A city tax commission could take the long, comprehensive view. It could examine the overall impact of all revenue policies and recommend changes that would -- among other goals -- make the property tax fairer, simpler, and more efficient; stabilize and make more progressive the personal income tax; and analyze the revenue as well as economic impact of current economic development policy.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.

 



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