After a contentious battle between Mayor Michael Bloomberg and Council Speaker Gifford Miller, the adopted city budget for fiscal year 2005 reflects a number of small victories for both men. The mayor got his $400 property tax rebate for homeowners and maintained city services, and the speaker got a long-sought, progressive city earned income tax credit (EITC), as well as several modest program initiatives.

But the adopted budget ignores several big issues, two of which - looming budget deficits and uncertainties about court-mandated school funding reform - may well threaten services during this new fiscal year.

Another fiscal problem - an inequitable city tax structure - got worse as the speaker's property tax saving plan for renters was abandoned. And the petty bickering between the administration and the council over the meaning of "budget cuts" unnecessarily obfuscated the budget process and may have set the stage for even more contentious political battles over the next sixteen months leading up to the 2006 citywide elections.

Property Tax Rebate and Earned Income Tax Credit

The mayor's win on the property tax rebate means a substantial benefit for lower-income owners, especially seniors on fixed incomes. The victory was somewhat diminished, however, by the late revelation that the rebate could be taxable and a delay in receiving state approval for the rebate itself. The cost of the rebate - about $250 million in the first year - is a lot more than the $50 million cost of the council's new earned-income tax credit.

This tax credit will benefit 700,000 working New Yorkers, who will save up to $215 a year (or an average of about $72), and complement the benefits from the similar (and larger) state and federal credits.

There's no doubt the tax benefits will help many over-burdened residents. But the costs -- $300 million a year in total - and the haphazard nature of their introduction only compound the city's underlying budget deficit.The city's projected deficit for 2006 is currently about $3.7 billion. For 2007 it is $4.5 billion. It will also favor house owners over owners of co-ops and condos (a consequence of the Byzantine property tax system.)

The Ups and Downs of Budget Surpluses

The mayoral and council tax cuts and council restorations and new programs were apparently encouraged by the $1.9 billion surplus in the 2004 fiscal year just ended. The $1.9 billion is an extraordinary $600 million more than the surplus projected just two months earlier in the mayor's executive budget. (Revenues were $600 million higher than projected in April.) Such a surplus is a mixed blessing at best. It helps disguise the fact that the city will spend a lot more money in 2005 than it is bringing in - at least $700 million more, according to a projection by the Independent Budget Office.

The big surplus and the new tax cuts are also eerily reminiscent of the multi-billion dollar budget surpluses during the later years of the Giuliani administration. Those surpluses encouraged Giuliani and the council to introduce multi-billion dollar tax cuts in the late 1990s, a step that in turn contributed to the fiscal turmoil in Mayor Bloomberg's first year as the September 11 attack and a national recession drained revenues. The immediate result of that fiscal crisiswas a $3 billion increase in taxes in one year.

While the new tax cuts are a small fraction of those in the Giuliani era, they set a poor precedent in a time of structural budget imbalance, especially when two of the stabilizing 2003 tax increases (higher personal income tax rates for high earners and the 0.125 percent sales tax increase) are being phased-out, and they make worse the basic mismatch between city spending and city revenues.

Problems for City Services

In addition to its progressive tax initiative, the council not only restored $215 million in services that the mayor had cut; it added about $50 million to five new or existing programs: job training for the long-time unemployed, 1,400 new day care slots, legal services, school class-size reduction, and libraries.

But all new and expanded services - as well as existing services -- are threatened by the underlying budget deficit.

By focusing on tax cuts, the mayor and council seem almost to guarantee that there will be cuts to services in the future. This was an odd choice, since the mayor's major political and fiscal success in the past year has been his ability to minimize service cuts; the adopted budget is notable for its lack of such cuts.

Of course, even at current funding, several services are in effect being cut back, since they do not restore the cuts made in previous budgets. Library spending, for example, dropped from $255 million in 2002 to $230 million in 2004. Now, in the new adopted budget, library funding is at $241 million - more than it was last year, but less than it was three years ago.

In a similar way, as a report from the Independent Budget Office showed, there were cuts of ten percent for the Department for the Aging and for the 34 so-called Cultural Institution Groups (those housed within city property.)

Then there is the prospect the city may have to provide additional funding for education in the final settlement of the Campaign for Fiscal Equity case in state court. According to an Independent Budget Office review of several recent studies, the city's own share of education funding might increase by $950 million to $3.6 billion a year. The report goes on to point out this increase "is nearly twice as much as the city currently spends on parks, cultural affairs, and libraries combined."

The other problem on the service side is the rapid increase in mandated expenditures. Those costs must be paid, throwing more pressure on the discretionary service budget. According to the Independent Budget Office, Medicaid; settlement of lawsuits against the city; and pensions, health care, and other fringe benefits for city workers will grow by $4.7 billion between 2004 and 2008, to $18.9 billion.

Politics and the Deficit

Another odd thing about the adopted budget's focus on tax cuts is its apparent political folly. The 2006 budget will be determined a few months before mayoral and council elections. Reducing budget deficits by tax increases and service cuts is certainly not an attractive option for a mayor running for re-election and a council speaker presumably challenging his re-election. By delaying the hard choices, the mayor and council seem to be flirting with political trouble next year.

If recent history is any guide, one possible scenario is a mid-year budget modification of major proportions, perhaps as early as November 2004. In November 2002, after all, Mayor Bloomberg in little more than two weeks pushed through $2.3 billion in agency cuts and a $1.7 billion property tax increase. The timing precluded any public debate and eased the final deficit reduction planning in the spring of 2003.

The adopted budget for 2005, in other words, is likely to be modified in major ways before the end of the fiscal year. It will be interesting to see how long the political compromises that provided a few small victories in June hold up in the face of the big fiscal problems ahead.

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