Gotham Gazette

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Looking at the Four-Year Financial Plan

The latest gyrations on Wall Street may complicate the city's financial picture somewhat but, assuming things do not go badly awry, Mayor Michael Bloomberg and the City Council can look forward to one and maybe two happy budget years. That's the finding of the city’s three major fiscal monitors in their July reports on the city’s recently adopted 2008-2011 financial plan.

The reports from the city comptroller, state comptroller and stateFinancial Control Board are especially informative on three major components of the plan: the big four-year tax cut, the large increase in education funding and city’s plans to spend the $6.5 billion “windfall” that accumulated in 2007. They also provide insight into the capital budget, hiring and accountability in education and stress what they see as the plan’s fiscal prudence.

The $6.5 Billion Surplus

Enjoying $6.5 billion in “surplus resources” the city, in the fiscal year that ended in June, pre-paid $2.7 billion that would otherwise be due in 2008, $2.9 billion due in 2009 and $1 billion for 2010. In doing this, the government retired $1.2 billion of debt early and spent $4.7 billion (what the mayor calls the official 2007 “surplus”) on other pre-payments, mostly on debt service.

This unique distribution of excess one-year revenues over three years apparently encouraged the big tax cuts, which cost $1.6 billion in 2008 and $2.2 billion in 2011. The monitors accepted and even cheered the tax cuts -- despite their professed worries about long-term budget problems. The state comptroller’s report applauds the tax cuts because they “stimulate economic activity and improve the city’s competitiveness with surrounding jurisdictions”

Bloomberg has often said that taxes have little effect on business location decisions. So who actually benefits from the property tax cuts?

Of the $1.6 billion in 2008 tax cuts, $1.05 billion came form the cut in the property tax rate. Although the mayor and council spoke of a 7 percent cut in the property tax rate, that was only an average. In fact, different types of property got different rate cuts, because of the bizarre structure of the city’s property tax system.

Commercial properties got an 8.5 percent rate cut and private home owners got a 4.2 percent rate cut. But that was actually good news for the home owners, because without a last-minute change in state law in June, they would have seen a slight rate increase under existing law, according to the control board.

Many of the ostensible gains from the rate cuts were washed out by increases in assessments. Projected revenue from the property tax system in 2008 is nearly $13 billion, or about $50 million higher than in 2007, says the control board.

Property market values increased by $122 billion, or over 18 percent, in 2007, according to the city comptroller. And assessments, which determine actual taxes paid and are always much lower than market values, went up $9.3 billion, or about 8 percent. (The actual tax for a home or business is the property’s tax rate times its assessment.)

The financial reduction plan also included elimination of the city sales tax on clothing, a child care tax credit and some business tax cuts. Together, over four years, they will cost a total of nearly $8 billion, according to the city comptroller.

Money to the Classrooms

The other big new expenditure in the plan is for the city’s public schools. By 2011, funding for the city’s public schools will rise by $5.5 billion, according to the state comptroller’s report.

The report shows a shift in education funding, from the city to the state, as a result of the settlement of the Campaign for Fiscal Equity case on spending for schools. Although both the city and state will greatly increase their funding for education over the four years, more will come from the state. In 2007 the total education budget (including pension and debt service costs) was $18.6 billion. Some $9.5 billion, or 50.9 percent, of that is city funds; $7.2 billion, or 38.9 percent, is state funds; $1.8 billion, or 9.8 percent, is federal funds.

By 2011 the education budget (including pension and debt service costs) will be $5.5 billion higher, or more than $24 billion. The financial plan assumes the city will then be paying $11.9 billion, or 49.2 percent of the total education funding, and the state $10.3 billion, or 42.6 percent.

Perhaps the best illustration of the increase in education spending is in the city comptroller’s report, which points out that per-pupil spending in Department of Education programs will jump by 35 percent over four years. “Even after adjusting for inflation, projected per pupil spending would still jump 23 percent during [the four-year] period, driven primarily by a 33 percent increase in real dollar growth for instructional spending,” the comptroller said.

With all this money come worries about accountability and management in the city’s education department. As the state comptroller points out, the increase in state education funding comes with strings: “The state will now require the city to submit plans and report annually on how it will use additional state education aid to improve student academic performance and to achieve other measurable educational goals.” The State Board of Regents is developing additional accountability measures. At the same time, the Campaign for Fiscal Equity and other advocates have criticized the Bloomberg’s administration’s plans for some of the state funding.

Plusses and Minuses

Overall, the city’s expense budget is projected to increase from $59.1 billion in 2008 to $69.1 billion in 2011. According to the financial control board, the bulk of the increase goes to wages, pensions, health insurance and other benefits for city workers (reaching $37.9 billion in 2011); Medicaid ($5.9 billion in 2011); and debt service ($6.2 billion in 2011) for the city’s capital program.

Other spending – so-called discretionary, other-than-personal-service, which includes all the contracted youth, health, social, and other human services – will rise by only 0.8 billion over four years.

The monitors include some other interesting details:

-- The city realized over $1.2 billion from tax audits in 2007, far more than the $600 million it usually gets from such audits each year. According to the state comptroller, the increase stemmed from “the settlement of several outstanding audits of financial firms and the clarification of the tax treatment of investment capital,” another example of the city budget’s dependence on Wall Street.

-- The city-funded workforce increased by 12,186 from fiscal 2004 to 2007, to about 264,000. Another 6,095 will be added in 2008. The largest growth is in new hires for the Department of Education. The uniformed police force remains at about 35,500, 11.5 percent below the total in June 2000. Since 2004, the police department has added 1,411 civilians to replace uniformed officers performing administrative duties, a cost-saving reform long sought by city comptrollers and council members.

-- The city has a massive $83.7 billion ten-year capital plan. By far the biggest element, according to the financial control board report, is the education capital budget of $28.2 billion. Some $20.4 billion of that will go toward bringing current schools to a state of good repair. More than 50 percent of the funding for the education capital projects, it is currently assumed, will be provided by the state.

--At the same time, the control board reports, the city will invest only $2.5 billion of the $5.1 billion needed to bring city capital assets up to a state of good repair over the next four years. The $5.1 billion figure comes from the recently published 2007 Maintenance Report. Projected highway maintenance funding is only $885 million of a recommended $1.9 billion. Bridge maintenance, on the other hand, is fully funded at just under $1 billion over four years.

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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