Thanks to a higher-than-expected wave of tax revenues, Mayor Michael Bloomberg last week presented an executive budget that reduces some taxes and reverses some spending cuts that he had proposed earlier. He is able to do this, he says, because there is now an estimated $3.3 billion surplus for the current fiscal year, which began in July 2004.
But the mayor does not use this record surplus to launch expensive new programs or propose big tax cuts--certainly temptations in an election year.
There are good reasons for the mayor's caution. The budget plan projects that the following fiscal year, beginning in July 2006, will have a gap of $4.5 billion.
The mayor and City Council have tamped down growth in spending on most city services, such as police, sanitation, and programs for seniors. But other expenditures have grown significantly and some are likely to continue to grow: Medicaid, debt service, and pensions and other fringe benefits for city employees. The mayor often calls these items nondiscretionary or uncontrollable costs. He is right -- to a point.
In the near term, there is not much the city can do to ease expenditures on these items. This spending is locked in by law, prior commitments, or collective bargaining. So the fixes cannot be quick or unilateral. But, while the city has taken some steps, unless it increases its work on bringing these costs down, makes very large cuts to other programs and services, or finds new or unexpected revenue, we could soon find ourselves in deep trouble. Here are the pitfalls ahead.
The mayor expects this health-care program for low-income people to cost the city $4.9 billion this year and $5.5 billion by 2009. Decisions about Medicaid spending are made in Washington and Albany, not City Hall. The recently adopted state budget offers some relief by capping the rate of growth in city spending on Medicaid. But that assumes the state will be able to pick up a larger portion of the tab, an assumption that could fall victim to the state's own fiscal problems. Even if the assumption holds, New York City must still shoulder a far bigger share of Medicaid costs than other cities around the country.
To lower the Medicaid burden, some people have suggested that the city be less active in helping people to enroll in the program. But this could result in more uninsured New Yorkers using the city's public hospitals. Last year, the public hospitals provided about $200 million of unreimbursed care for the uninsured, part of the reason the system is facing its own budget shortfalls and the mayor and the City Council decided to increase the city subsidy to the hospitals.
The city's ability to rein in pension costs for its employees is also complicated. The mayor projects that the city's contribution to pension costs will jump from $3.4 billion this year to $5.0 billion in 2007, before declining as the funds' strong investment gains in 2004 are phased in. The city will still be spending more long term because of decisions made in Albany, such as providing a cost-of-living adjustment for retirees, and demographic changes, such as longer life spans. One way to ease future pension costs is to move from a pension plan where people are guaranteed a certain benefit to one, resembling a 401K, where they make a set contribution but are not promised a guaranteed benefit amount when they retire. But again, that is not just up to the mayor, the unions must agree as well.
EMPLOYEE FRINGE BENEFITS
The mayor anticipates that the costs of fringe benefits for city employees will grow steadily from $5.2 billion in 2005 to $6.5 billion in 2009. Some have proposed that city workers make larger co-payments to their health plans as a way to rein in the cost of benefits to the public. Here, too, the decision is not the mayor's alone. The unions must also agree.
Of all these growing spending items, debt service costs may be most under the city's direct control. But even here, fixes take time and may make matters worse in the short run. The mayor estimates that debt service—the payment of interest and principal on the funds the city borrows to build or repair its infrastructure—will rise from $3.3 billion this year to $4.9 billion by 2009.
While the city cannot undo its obligations from prior borrowing (and further opportunities for refinancing are limited), it can borrow less in the future. But this is easier said than done considering the city's needs for new schools, road and bridge repairs, and the like. The city could also eliminate what some might describe as discretionary capital spending on cultural institutions, stadiums, and so forth. Additionally, the city could forgo some borrowing and undertake more capital projects on a pay as you go basis, although this approach reduces the funding available for general operating expenses.
CONTRACTS AND SCHOOLS
At least two other potentially hefty costs lurk on the not-too-distant horizon. Police, fire, sanitation, and corrections officers, along with teachers, continue to work with expired contracts, and pacts with the rest of the city's unions begin to run out this June. Although the budget includes some funds set aside in anticipation of the settlement of these contracts, agreements will likely come at a higher cost.
The eventual resolution of the Campaign for Fiscal Equity lawsuit on school funding also continues to pose risks for the city's budget balance. With Governor George Pataki's decision to appeal the lower court ruling, a settlement is unlikely until at least next year. But the ultimate costs to the city could be large given that a court-appointed panel determined that spending should increase over four years so that it will be $5.6 billion higher (adjusted for inflation) than in the current year. If the city were required to fund one-quarter of that increase, as in an example presented by CFE, the city's share could eventually be over $1 billion annually.
Given the high and growing costs to the city for Medicaid, debt service, and pensions and fringe benefits for city workers along with potential new costs from labor and CFE settlements, there are ample reasons for the mayor's cautious approach to the 2006 budget. This year's large surplus does not guarantee that balancing the city's budget in future years will be easy.
Doug Turetsky is chief of staff and communications director of the New York City Independent Budget Office.