Gotham Gazette

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Brighter Budget = Unique Opportunity

Several new reports suggest that city budget news is not only good for the short term, but perhaps for the longer term as well. This year’s budget surplus –- well in excess of $4 billion –- makes for an easily balanced budget next year, and new economic and fiscal projections for subsequent years show lower budget deficits and some slowing of allegedly “uncontrollable” costs such as Medicaid and pensions. The result is that the city is closer to a structurally balanced budget than it has been in several years.

The mayor’s response to the good news is to control spending in the short run. He has expanded his own extraordinary budgetary powers by an unusually large mid-year budget modification, with minimal council and no public debate. The April 5 modification approved by the city council captures much of this year’s big surplus, parking $1 billion (nearly equivalent to the sanitation department’s total budget!) into a health retirees fund that – as one fiscal monitor observed – takes money “off the table” before the council can offer ideas about what to do with it.

The immediate result of this April modification and the city council’s own very modest proposals for next year will be little or no change in discretionary spending for next year. The mayor’s reluctance to review the huge tax cuts that will in 2007 be fully phased in – some $1.2 billion in cuts, with the largest benefits going to high-earning households – means that he will pursue budget balancing only by cutting spending.

Good News for the Short Term

The April 5 budget modification – approved in the shadow of the Yankee Stadium deal – obscures the extent of this year’s huge budget surplus. Various recent reports give different estimates of what this budget will wind up being:

State Comptroller’s Report -- $5 billion
State Financial Control Board -- $4.8 billion
City Comptroller -- $4.3 billion
Independent Budget Office-- $4.1 billion

All of these are above last year’s $3.5 billion.

The IBO report explains that the surplus stems from three basic sources:
1. Increased Revenue. There is $2.8 billion more in tax revenues than the $29.6 billion projected in June, primarily from income taxes and property transfer taxes. (This means that the mayor’s Office of Management and Budget underestimated city tax revenues by nearly ten percent in 2005 when this year’s budget was adopted.)
2. One-time Savings. There is $1.4 billion in one-time savings from accounting and actuarial changes in pension-fund contributions and Medicaid.
3. Delays In Payments. Some $200 million in payments are due from a tobacco-settlement fund.

The New Fund and Other Spending

The April modification – which also includes an unexpected payment of $575 million to the Health and Hospitals Corporation -- in effect spends down this year’s projected surplus, so that the actual end-of-fiscal-year (June) surplus will be much less than would otherwise be the case. As of April (and subject to further changes before June), the new surplus is projected by the IBO to be $3.1 billion. The IBO explains the rationale for the spending-down process:

“[T]he Bloomberg Administration has sought to take money ‘off the table’ through steps such as the creation of the retiree health insurance trust fund and the deferral of tobacco revenues. These are steps that manage the use of surplus prudently and can help to reduce the burden of rising health insurance costs or cyclical declines in the local economy in future years.”

The report goes on to say, “But these are not the only means for achieving those goals. For example, using more of the surplus for pay-as-you-go capital would not commit the city to recurring expenditures.” I have pointed out in past articles (such as Tax Reform In Bloomberg’s Second Term? And The Mayor’s Underwhelming Budget for 2007) that there are other prudent means available to address long-term budget stability. The elimination of the top two rates of the city ’s personal income tax took well over $500 million a year “off the table” ($541 million in fiscal 2005, says the IBO). And the homeowner property tax rebate will cost the city another $256 million in lost revenues. (Sales tax cuts, which primarily benefit lower-earning households, total about $400 million.)

Two of the recent reports question the transparency of the new $1 billion fund (projected to get another $1 billion in 2007). The city comptroller report suggests that if the mayor uses the health fund as a “rainy day fund” – drawing down from it in times of fiscal stress – “it would raise concerns about transparency” because “a portion of the city’s true obligations would be moved ‘off-budget.’” The business-supported Citizens Budget Commission’s March 22 report (The Analysis of Mayor's January Financial Plan) gives “strong support” to the new fund. But the CBC, too, has several reservations about the fund.

The CBC worries that fund money could be used for other than stated fund purposes, that transparency and accountability will be clouded by its off-budget structure, and that payments into the fund will not continue after 2007. (The CBC goes on to urge the mayor to pursue other ways to deal with budget surpluses, including creation of a real rainy day fund.)

The Council Response

A day after the council’s acceptance of the budget modification, Speaker Christine Quinn released the council’s formal response to the mayor’s preliminary budget . If the mayor intended with his new fund to take money off the table to restrict spending, he certainly succeeded. Quinn’s plan would add only $84.5 million in new programs and $154 million in tax credits to the mayor’s $53 billion budget.

Speaker Quinn’s plan, like her predecessors’, also restores the cuts made by the mayor to current programs established by the Council ($338 million this time) – cuts that every year have been mostly restored after what the speaker calls a “dance” between the mayor and council. Council-proposed cuts and higher revenue estimates would pay for these restorations and the new programs.

Given the questions about transparency and accountability with the $2 billion in transfers to the new health fund, it is a bit ironic that the speaker suggests that she and the mayor have now agreed to pursue transparency in the budget together and “reform the budget process once and for all and put an end to the annual dance”

Mixed News for the Longer-Term

The monitors’ reports allude to several promising trends for longer-term budget balance. For the fiscal years 2008 through 2010, for example, the Independent Budget Office projects deficits approximately $1 billion lower than the city projects. In 2010 the IBO estimates the deficit will be down to $1.7 billion, far below out-year deficit projections over the past several years.

The mayor’s preliminary budget devotes several pages to the fact that “non-controllable” (non-discretionary) spending is increasing much faster than “controllable” (discretionary). Discretionary spending in almost all service areas from education to police is essentially flat or near-flat for the next four years.

But the monitors note some improvements in controlling the non-controllable areas. For instance, the recent state cap on city Medicaid costs means a slowing of growth in one major non-discretionary spending area. In another “uncontrollable” area the city comptroller says, “Pension cost increases are expected to abate over the [the next four years] and costs will remain at a level comparable to that reached in the mid-1980s, when considered as a percentage of general fund revenues.”

But health care and other fringe benefits for the city workforce will continue to climb, from $5.5 billion in 2006 to $6.7 billion in 2010, according to the IBO. The mayor has indicated he wants future employees to contribute to their health insurance costs, a major cost-cutting proposal in the CBC report, but no big change seems imminent in this area.

The other big non-discretionary area – debt service on the city’s capital budget – is the fastest growing part of the budget, rising 10 percent a year over the next four years, to $6.2 billion in 2010. However, the IBO’s new report on the affordability of the debt (in pdf format) that finances the city’s ambitious 10-year, $62.4 billion capital plan suggests that there is “a generally positive outlook for the city’s debt affordability given the financing plan for the current” capital plan.

The study concludes, however, that growth in the non-discretionary areas will continue as a percentage of the whole budget and is projected to reach nearly half of city-funded spending by 2010. That means that future recessions “will put pressure on operational spending.”

All these reports add up to a unique opportunity for the mayor and council to design a longer-term budget plan and process that does away with the annual budget-negotiation angst and lack of transparency. The current cooperation between the mayor and council speaker could be a useful first step. However, the mayoral domination of the huge April budget modification and the obfuscation surrounding OMB’s new health fund suggest the council has a lot of work to do to catch up.

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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