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The Mayor's Budget Has No Big Ideas; The Council's Does


Mayor Michael Bloomberg’s $50 billion executive budgetfor fiscal year 2006 marks yet another skillfully crafted short-term financial plan. Its most notable feature is the carry-over of a $3.3 billion surplus from this year’s budget, which provides a very nice one-time boost for an election year. One can wonder how the revenue projections by the city’s fiscal experts could have been off by so much ($1.3 billion of it in just the last three months!), but the more interesting question is why, even with such a huge dividend, there is not a single Big Idea in the mayor’s budget.

One simple answer is that in an election year, the idea is to please as many people as possible, and that leads to spreading the wealth broadly, and thinly. Indeed, the mayor’s press release is a four-page listing of small initiatives and restorations in areas from education and public safety to health, parks, libraries and welfare. But the best the mayor can do in the expense budget is a $50 million initiative in education, which represents about half of one percent of city education spending.

The small vision in the executive budget is underscored by the little-noticed, but much more inclusive and ambitious, budget plan (in pdf format) that the City Council released a month ago. The council has its own list of small restorations and initiatives, but it also has several larger ideas:

Council’s Tax Proposals

The council tax plan is in marked contrast to that of the Bloomberg plan, which for individuals has just two parts: the $400 rebate for homeowners, and a city sales tax exemption for clothing under $110 (which averages out to about $28 per person). The council’s plan has several parts. It would double the earned income tax credit (EITC) for lower-income wage earners; some 700,000 households would receive up to $430 apiece. It proposes an expanded State Tax Relief (STAR) program that would enhance senior benefits and include tax relief (currently available only to homeowners) to some 150,000 renter households with children.

Commuter Tax

The Council re-states the argument for the city commuter tax that Governor George Pataki and the state legislature eliminated in 1999, but with a twist. Given the MTA’s financial struggles, especially on the capital side, the Council argues for a $1.1 billion tax (only one percent) that would be dedicated to the MTA capital program. This let’s-share-the-burden rationale is a refreshing perspective.

Taxing Insurance Companies

Another refreshing idea is to tax the 800 insurance companies in the city that, unlike all other general corporations, are exempt from the general corporation tax. The proposal would tax all but their health-insurance business, and would raise about $200 million over a full year.

Although the new revenues generated from the insurance companies could, of course, be used for other purposes, the Council would use them to pay for an across-the-board five percent cut in the corporation, banking, and unincorporated taxes. Benefits in the form of personal income tax credits ($40 million) would also go to resident shareholders in S-Corporations, which are mostly small businesses.

Rainy Day Fund

The Council tackles another important area untouched by the mayor: the possibility of some kind of “rainy day” or budget stabilization fund. Such a fund could give the city more flexibility with budget surpluses. Currently, a mayor must spend any surplus before the end of the fiscal year. He can’t park it, say, for use in tough economic times.

Thus Mayor Bloomberg must pre-pay some of next year’s bills with this year’s projected $3.3 billion surplus. (The fund might also temper the habit of mayors like Bloomberg and Rudy Giuliani to use surpluses as convenient one-shot revenues sources, preventing long-term structural budget balance.)

The council asks that the state authorize use of a rainy day fund, to be funded in good economic times (when, say, tax revenues exceed adopted budget projections by seven percent), and to be tapped only when revenues decrease. This would permit setting aside excess revenues over several fiscal years.

Improving Accountability

Another, more technical area of importance that the mayor ignores is the question of “units of appropriation.” So-called “U/A’s” are city charter mandated categories of spending that are supposed to permit the council and others to monitor city spending, but the council has long complained that the units are so big that they make monitoring all but impossible. This is an accountability issue that might well be suited for the current city charter revision commission, and it is good to see the council raising it.

Hiring More Cops

On the expense side of the budget, the council would add 1,000 cops. The council points out that, although the total number of officers has been reduced from over 40,000 to 37,000 in recent years, there hasn’t really been any budget saving because of associated increased overtime. Thus adding the new officers could be paid for by simply reducing overtime.

Small Vision

The council, like the mayor, has abandoned some other Big Ideas. For instance both sides of City Hall have chosen to let “sunset” (end) both the temporary personal income tax surcharges (on the wealthiest New Yorkers) and the sales tax increase; this means, by 2007, a loss of some billion dollars in revenues. Quiet decisions like this help keep future budget deficits high. (The mayor estimates deficits from $3.7 to $4.5 billion a year from 2007 to 2009). And neither the council nor the mayor has accepted the responsibility of contributing to the very big increase in school funding ordered by the state courts in the Campaign for Fiscal Equity case.

But the council has at least kept important ideas like tax fairness, accountability, sacrifice, transparency, and long-term fiscal stability alive in an otherwise lackluster budget debate. Whether or not they will work their way into the 2006 budget, the city’s future depends on them.

Glenn Pasanen, former associate director of City Project, teaches political science at Lehman College of the City University.

Related:
Frequently Unasked Questions About The Budget

Caution: Budget Pitfalls Ahead

Bankruptcy "Reform"


Going broke follows much the same rules as winning the lottery — which is to say, the rules of chance.

Bankruptcy “reform,” on the other hand, much like welfare “reform,” assumes that people who benefit from the existing system just need a little tough love to force them to take financial responsibility for their own lives. Accordingly, the bankruptcy bill now making its way through Congress makes it harder for middle-class people to make a fresh start after declaring bankruptcy, because they will have to pay back more of their creditors.

Who declares bankruptcy?

About half of all debtors file bankruptcy because of medical bills, even though three-quarters have health insurance during all or part of their illness. Many lose coverage as a result of losing their jobs. Three out of five can’t afford to visit a doctor or dentist when they needed to, at least once during the two years before filing for bankruptcy. Almost 40 percent of patients with terminal illnesses report having to cope with financial problems as they prepare to die.

There are big gaps in the patchwork of income supports available when you can’t work because of illness or disability. Worker’s compensation doesn’t cover all employees, and only applies to conditions caused by work itself. State disability payments don’t cover all employees either, and they only last for six months. You can’t get federal disability payments until you’ve lost a year’s income, and even then, you must be facing death or another year away from work in order to qualify for benefits. The Family and Medical Leave Act allows many workers to retain health coverage while they care for sick family members, but it doesn’t provide any income.

The American Bankruptcy Institute estimates that fewer than four percent of filings are by people who could actually pay their debts. Many debtors put off declaring bankruptcy until they have lost their telephone service (40 percent), gone without necessary medicine (43 percent), or been too poor to buy food (19 percent) at least once.

Children are a big risk factor for insolvency: married couples with children and single mothers are two and three times more likely to go bankrupt, respectively, than their childless counterparts. Divorced mothers face an additional risk, because they often lose health coverage linked to their ex-husbands’ jobs.

The Effect On New York City

New York residents will be hit especially hard if the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 becomes law:
The number of personal bankruptcies is going up faster in New York City (8.4 percent in 2003) than nationwide (5.6 percent). During 2004, there were about 76,000 filings for personal bankruptcy in New York State.
New Yorkers face greater financial challenges than the average American. Prices are rising faster in the city than nationwide, due to large increases in the cost of housing, food, and transportation. In 2003, local salaries dropped by 1.6 percent, when adjusted for inflation.
The new law would eliminate important protections for debtors whose landlords are evicting them for back rent.

Personal Bankruptcy Before “Reform”

Bankruptcy itself is not a financial disaster. It protects filers from collection agents, “repo men”, and other consequences of an overwhelming level of debt.

In 2004, four out of five personal bankruptcies were filed under “Chapter 7,” which allows all debts to be cancelled except for student loans, overdue tax payments, child support, and alimony. Debtors must sell any available assets to pay their bills before debts are written off, but 96 percent of them have nothing to sell.

Under “Chapter 13,” the bankrupt person or family must follow a court-approved repayment plan under which all available income is paid to creditors for three to five years. In practice, two-thirds of them never finish the repayment plan. Some are allowed to change over to Chapter 7 status, if it becomes clear that repayment is impossible for them. Others lose the protection of bankruptcy and have to deal directly with creditors again, with additional interest on their debts for the time they were in bankruptcy.

Under both Chapters 7 and 13, debtors must keep up-to-date on payments for loans backed by houses, cars, or other assets, or those items will be repossessed by the creditor.

Changes Under The Proposed Bankruptcy Bill

The biggest change would be that people who earn more than their state’s average income might not be allowed to file for Chapter 7, regardless of their actual expenses. The Internal Revenue Service sets annual guidelines for how much money a household needs for such essentials as food and housing; any income beyond those levels would be considered available for paying creditors. Judges would no longer be able to take individual circumstances into account, as they do now.

The poorest debtors would not be affected by this change. Many don’t file for bankruptcy, as they have no assets to lose. Those who do file would still be eligible for Chapter 7 status. Wealthy debtors retain major loopholes under the new bill, such as the right to keep valuable homes and retain assets in special trusts.

The changes would fall squarely on the shoulders of middle-class people facing life crises like illness, disability, unemployment, divorce, and death in the family. Democratic members of Congress unsuccessfully introduced dozens of amendments that would have helped consumers and debtors, including specific protections for the elderly, veterans, and caregivers to sick or disabled family members.

Some single parents who manage to avoid bankruptcy themselves would have a harder time collecting child support and alimony. When noncustodial parents are forced to declare bankruptcy under Chapter 13, rather than Chapter 7, the repayment plan diverts some of their limited income from child support and alimony to credit card debts.

Legal fees would probably rise sharply under the proposed bill, which would hold attorneys responsible if their clients filed bankruptcy petitions with missing or incorrect information. This would lead to more paperwork and higher malpractice premiums. In addition, more bankruptcy court judges would be needed, so the bill raises court fees to pay their salaries.

Never A Free Ride, Soon To Be Worse

While bankruptcy can free debtors from their worst predicaments, it has never been a comfortable safety net. A stigma of failure and irresponsibility surrounds it. Credit reports list bankruptcy for up to ten years, a problem even for those who have no interest in new borrowing. After bankruptcy, insurance premiums are often raised, as well as interest rates on new or remaining debt. An increasing number of landlords and employers are checking credit reports as part of the application process.

One year after they file for bankruptcy, half of all filers report that they are no better off financially. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 would prolong their troubles, and ensure that more filers get less protection from the law.

Linda Ostreicher, a former budget analyst for the New York City Council, is a freelance writer and consultant to nonprofits. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State Budget, On Time But Imperfect. Also -- City Budget; City Performance


For elected officials who tend to look at budgets one year at a time, the news lately has been very encouraging, especially in an election year. The state budget was passed by the deadline for the first time in 21 years! Three separate fiscal monitors are optimistic about the city’s finances, and the Independent Budget Office predicts a $2.5 billion surplus by June, some $500 million more than the mayor projected two months ago.

But let’s take a closer look.

The State Budget

The new state budgetpassed by the legislature (the governor may still veto parts of it) may be on time, but it does little to help the city’s long-term prospects. Worse, it has several regressive components. The big blow is that state education aid to the city will grow only by $325 million next year, in the face of the state Court of Appeals’ order in the Campaign for Fiscal Equity case to add $1.4 billion.

On the tax side, the little guy gets hit the hardest. The temporary state sales tax increase set two years ago was allowed to sunset on schedule in May. But in an all-too-familiar, last-minute deal, the Metropolitan Transportation Authority share of the sales tax (0.25 percent) was increased to 0.375 percent (The total city/state/MTA sales tax, if the city lets its increase sunset, will be 8.375 percent.)

This adds insult to injury. On top of the apparent bargain-rate sale by the MTA to the Jets and the recent fare increases, city residents (and residents of metropolitan counties) will now pay the MTA some $250 million more next year. For car owners, fees will go up by $180 million.

Then there is the broken promise of a tax cut that would help lower-income residents. The scheduled restoration of the sales tax exemption on clothing costing less than $110 was killed, making the sales tax even more regressive. At the same time, the promise to sunset the progressive state personal income tax increases was kept -- a $1 billion benefit to the state’ s wealthiest residents.

The City’s Preliminary Budget

Several new fiscal reports describe what could be called a city financial plan on automatic pilot. Mandated city expenses – Medicaid, pensions, health benefits, and debt service – increase substantially over four years. Projections for everything else -- the discretionary programs ordinarily adjusted one way or another each year -- are pretty much flat. There is no vision, no sense of priorities in the plan. Further, flat spending on city services, adjusted for inflation, translates into a long-term cut in actual dollars and, presumably, services.

But three fiscal monitors do share short-term optimism about the city’s fiscal condition. A report(in pdf format) by the state comptroller says, “Fortunately, the budget has benefited for the second year in a row from an unexpected surge in tax revenue.” (Last year the surge came from Wall Street revenues; this year it is real estate transactions.)

With this year’s budget surplus used to help balance next year’s budget, the state comptroller sees the 2006 risks as “manageable for this point in the financial planning process.” Similarly, a report(in pdf format) by the city comptroller says the 2006 budget “appears on course toward balance assuming the risks it contains are expeditiously addressed.” The big risk is the “ambitious” assumption of $750 million in budget relief from state and federal governments.

A state financial control report(in pdf format), like the two others, focuses on the structural problem: Fringe benefits, pensions, Medicaid, and debt service are “projected to rise at a pace that outstrips the growth in tax revenues.” Other risks include the court-mandated education spending ignored in the new state budget and uncertainty about future labor settlements.

The city comptroller adds a worry about the Health and Hospitals Corporation, which, he says, faces budget gaps ranging from $485 million to $636 million in fiscal years 2006 to 2009. Those gaps might require the city to increase its recent $150 million subsidy to the corporation.

Building Better Measurements Of Management Performance

The Independent Budget Office (Analysis of the Mayor's Preliminary Budget for 2006 and Financial Plan through 2009) paints an optimistic picture. It projects that this fiscal year’s tax revenues will be $1.5 billion higher than last June’s adopted budget claimed, helping boost the 2005 surplus to $2.5 billion. Looking further ahead, the IBO projects 2008 and 2009 deficits to $3.0 billion and $2.2 billion, respectively, much lower than earlier estimates.

This brightening picture unfolds even though tax revenues in 2006 will actually decline by more than $140 million, primarily because of lower property-related taxes and the sunset of the city’s own temporary personal income and sales tax increases from 2003.

But the report also reveals a curious loss of revenue – and one which adds to the inequality of the city’s bizarre property tax system (discussed in earlier Finance topic page articles) while giving a benefit to a relatively few homeowners. Next year, the city will (assuming the property tax rate remains the same) lose $31 million in tax levy from a new assessment process affecting one-, two-, and three-family homes.

The benefit (in addition to the $400 homeowner rebate set for next year) goes to some 50,000 owners, who will get an average savings of $775, while the other 630,000 owners will actually pay about $60 more on average.

What’s most interesting about the IBO’s 154-page report, however, is its new focus on program budgeting, which will assist researchers looking at city management issues. Program budgeting differs from the mayor’s “units of appropriation” budgeting (which lump dollars into large categories like “personal service” (PS) and other-than-personal-service (OTPS)). The IBO use of program data numbers is to “link budgetary resources to the results produced,” a tool, in other words, to measure accountability.

For example, the Preliminary Mayor’s Management Report (Preliminary Fiscal 2005 Mayor's Management Report (PMMR)), released in February, lists the Department of Education’s $13.7 billion in 2005 expenditures on one line only. (The city charter’ section 12(In PDF format) says the Preliminary Mayor’s Management Report should link such numbers to program goals and results, but in practice it does not do that in a way that measures performance.)

The IBO report, in contrast, lists four program areas of education expenditures -- instruction ($10.3 billion in 2005), administration ($629 million), non-instructional support ($2.0 billion), and non-public school payments ($812 million) -- over five years.

Instruction dollars, it turns out, are up 24 percent over the past four years, and non-public school payments are up 46 percent over the same period.

For the Administration for Children’s Services, the Preliminary Mayor’s Management Report lists one-line expenditures of $2.1 billion in 2005. The IBO breaks that into nine program areas, from child care ($478 million in 2005) and Head Start ($152 million) to adoption ($326 million) and foster care ($802 million). That breakdown then allows the IBO to analyze shifts in spending among the program areas in an agency undergoing major adjustments in its in-house and contracting services.

This is only a first step --“ more program lines would be better -- but with a city financial plan on automatic pilot and mayor’s management reports that dodge their accountability mandate, this IBO innovation provides a useful starting point for measuring administrative performance.

Glenn Pasanen, former associate director of City Project, teaches political science at Lehman College of the City University.



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