Gotham Gazette

The Place for New York Policy and politics

The City Budget: Avoiding Fiscal Meltdown

Mayor Michael Bloomberg has pulled it off. With only some last-minute negotiations with the City Council left before the city budget is adopted (as of this writing), the mayor has marshaled support to fill an $8 billion budget gap for fiscal year 2004 -- the biggest gap since the mid-1970s’ fiscal crisis. He has done so with relatively few major service reductions because of an emphasis on new revenues. New property, personal income, and sales tax increases alone will total over $3 billion in 2004. The personal income tax increase – worth $784 million in 2004 – is quite progressive. In fact, the depth and the character of the tax increases suggest a “Nixon-to-China” analogy -- that is, a radical shift in policy that only a Republican could get away with!

Problems remain. The 2004 budget for the new Department of Education is likely to be almost $400 million less than the 2003 budget, the first time since 1996 that funding has been reduced. The heavy property tax burden on lower-income New Yorkers – renters as well as owners – has yet to be addressed. The mayor’s service and workforce reductions – some of which will be restored by the council – seem targeted disproportionately at vulnerable individuals and communities. The elimination of the sales tax exemption on clothing and the sales tax increase are regressive. And the personal income and sales tax increases were – like last November’s property tax increase – stealth measures, introduced and enacted at the last minute, with no chance for public debate.

But the mayor’s overall plan has worked brilliantly. The Independent Budget Office says he got as much as $210 million more than the $2.7 billion from the state that he asked for, if in different forms. (Governor George Pataki has threatened to use the courts to try to overturn some of the State Legislature’s budget actions.) He got more than the $200 million he asked for from the federal government. He will end fiscal year 2003 with a billion dollar surplus. He has worked productively with the City Council, which has contributed its own ideas and generally supported the major elements of the mayor’s plan. Above all, the mayor has smartly averted a fiscal meltdown.

How to Find $8 Billion

The City Comptroller’s May report on the mayor’s executive budget for 2004, the State Comptroller’s June executive budget report, and the Independent Budget Office’s June report on the Albany aid package give the big picture of how Mayor Bloomberg found $8 billion in savings and new revenues to fill the awesome budget gap.

The largest components include:
· $3.2 billion in reduced agency spending
· $3.0 billion in new taxes
· $1.0 billion in surplus from fiscal year 2003
· $530 million in savings from the state taking over city debt
· $350 million from bond refinancing, taxi medallions, and state revenue sharing

The $3.2 billion in agency savings includes attrition, layoffs, funding shifts (state and federal dollars replace city dollars), re-estimates of needs, service contract cuts, and other service reductions and eliminations. Final service and workforce reductions will depend on the City Council/mayoral negotiations in June before the 2004 budget is adopted.

The $3.0 billion in taxes includes, most dramatically, the full-year effect of last November’s 18.5 percent property tax increase ($1.7 billion). The Independent Budget Office’s June study of the Albany aid package lists the gains from the brand new taxes: a personal income tax surcharge for individuals making over $100,000 a year, and couples making over $150,000 ($784 million), a city sales tax increase of 0.125 percent ($123 million), elimination of the sales tax exemption for clothing ($277 million), and a 25 percent surcharge on the property taxes of absentee homeowner landlords, a smaller version of an idea first proposed by the Council ($70 million).

The property tax increase remains a mixed bag: fair in the sense that nearly everybody, renters as well as owners, participates, and businesses pay a substantial part of it, but unfair in the lack of tax relief for most who need it. The loss of the sales tax clothing exemption – which translates into paying $86 more on $1,000 worth of clothing purchases – is especially regressive. The one clearly progressive new tax is the (temporary) personal income tax surcharge, which adds two new tax rates for high earners (affecting only 4.1 percent of taxpayers, says the Independent Budget Office).

The property tax increase in November, additional federal aid, and other actions means that the city will end the current fiscal year (June 30) with a billion dollar surplus, which will be used to pay next year’s bills. The $530 million savings in debt service was a last-minute deal with the State Legislature: The city owes $2.5 billion in debt service left over from the Municipal Assistance Corporation (MAC) bonds issued to resolve the mid-1970s fiscal crisis, and the city was going to pay it off over the next five years. Now the debt will be re-structured and the $2.5 billion will be paid off over 30 years -- $170 million a year – by the state (at a total cost of $5.1 billion, according to the State Comptroller).

Among smaller parts of the new revenue package are: $165 million from the re-financing of Battery Park City Authority bonds, $65 million from the sale of taxi medallions, and $73 million from some accelerated state revenue payments. The Independent Budget Office report shows how $2.3 billion of the $2.9 billion in state aid represents gap-filling, and the rest restoration of services that the city would not have provided itself. The restorations of health, education, and social services were made possible by the State Legislature’s own progressive enactment of state personal income tax surcharges for high earners – an idea pushed effectively by a statewide coalition of community, labor, and human service advocates.

The Politics of State Aid

From a fiscal and political perspective, the “state aid package” is a misnomer. After all, more than $1.2 billion of the package – the city’s new personal income and sales taxes – is simply the state giving the city authority to tax itself. And the state’s assumption of $2.5 billion in city MAC debt adds another dubious instance of borrowing money to pay for current operations (the state budget includes $4.2 billion in tobacco bond revenues to be used for state budget balancing).

The politics of the state package are especially interesting. As the city comptroller’s report points out, its “components…are significantly different than those assumed in the [mayor’s] executive budget.” The mayor’s revenue request to the state, beginning in November 2002, was for a commuter tax, and the city council’s alternative revenue proposal in April also focused on a (different) commuter tax. But those commuter taxes never had a chance in Albany politics. The proposed commuter tax thus worked only as a revenue “placeholder.” The last-minute shift to city taxes had political advantages: the authorship of the taxes was shrouded and any need to have a public debate was minimized. A clever if disingenuous strategy.

The Downside of the FY 2004 Budget

The state comptroller’s June report on the executive budget (and state and federal actions subsequent to its release) says, “the change in the city’s short-term fiscal outlook is dramatic and fiscal year 2004 budget balance would be achieved without draconian cuts to core municipal services – although the current plan does entail layoffs and painful service reductions.” The pain level will likely be eased somewhat by last-minute council/mayoral negotiations – also shrouded in secrecy – over several hundred million dollars of council demands.

The state comptroller also notes that the city will get some additional help from Washington from provisions in the recent federal tax cut law. States will get $20 billion from two new programs: higher federal Medicaid payments to the states and a new federal revenue sharing program. The city could receive as much as $290 million in new Medicaid funding over 15 months ending June 30, 2004. In addition, New York State will get about $650 million from the revenue sharing program, but it is not clear if the city and other localities will share in that new money.

But if the 2004 budget looks solidly balanced, it is not clear what its real impact will be.

The city comptroller’s report points out the new Department of Education’s $12.2 billion budget is nearly $400 million less than projected 2003 spending. This three percent decline is the first reduction since fiscal year 1996 and occurs as new state and federal mandates on school standards unfold. City funding is $4.9 billion, which represents only the minimum required by the June 2002 education law that gave the mayor authority over public education.

The impact of workforce reductions on services is also not clear (and also subject to last-minute adjustments before adoption). Currently, it is clear that over 50 percent of the layoffs hit two of the largest agencies working with children. The city comptroller says that 4,483 city employees will lose their jobs by June 30, 2003. Forty percent of them (1,813) are education employees. Another 12 percent (528) are children’s services workers.

Moreover, the workforce cuts are a reflection of a major shift in city spending priorities. Although the executive budget anticipates a no-growth 2004 budget of $44.7 billion --only $70 million higher than 2003’s -- the city comptroller points out that this masks dramatic changes. The 2004 budget will actually see over 23 percent growth -- $2.7 billion -- in just five non-service areas: pensions, health insurance, Medicaid, debt service, and judgments and claims. At the same time, all other city spending will decline by nearly $3 billion, or 8.7 percent. That is a worrisome sign for future city services.

The city comptroller is also more pessimistic about the city economy than the mayor. He sees job losses of 63,500 in 2003 and a gain of only 5,100 jobs in 2004, whereas the mayor sees losses of 75,000 jobs in 2003 but a gain of 20,000 jobs in 2004. The comptroller sees gross city product rising only 0.8 percent in 2004; the mayor projects it rising 2.9 percent. And the state comptroller projects that the three years beginning with fiscal year 2005 will face budget deficits ranging from $3.5 billion to $4.0 billion a year.

In other words, there is plenty to worry about in the future. But in the meantime – and absent any surprises from the governor or from the adopted-budget negotiations – it may be time to commend the mayor for a bold and successful budget strategy that stabilizes the city’s fiscal condition and maintains most city services.

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

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