City budget news gets better and better, setting the stage for a fresh kind of budget debate, beginning later this month when the mayor releases the preliminary budget for fiscal year 2007 (which begins in July, 2006), and the four-year financial plan that accompanies it. Both Mayor Michael Bloomberg and the newly elected New York City Council Speaker Chris Quinn begin in a happy budget place, just three years after the city faced budget deficits in excess of $6 billion.

The mayor’s November budget modification underplayed how good things are, at least in the short run, according to several fiscal monitors’ reports released in December. For instance, the report from the office of the state deputy comptroller for New York City estimates that the city’s 2007 budget deficit could be as little as $645 million, not the $2.25 billion deficit anticipated in the mayor’s November plan. In the longer term, however, little has changed in terms of the structural imbalance in the city ’s financial plan; the report also projects deficits averaging about $4 billion in 2008 and 2009.

Rise In Revenue, Cut In Pension Costs

The bright outlook for next year stems not only from the unanticipated tax revenue gains since June, but from likely changes in the city’s contribution to the city pension funds that were not included in the November modification. The fiscal monitors expect the January plan to reflect those changes –- which stem from a series of new calculations about what the city needs to spend each year to meet its pension obligations.

The pension changes will, in the short term, save over $800 million in city spending in 2007 and about $550 million or more in 2008, according to reports by both the state deputy comptroller and the state financial control board. These savings will be offset in part by higher contributions in subsequent years -- $290 million in both 2009 and 2010, according to the state deputy comptroller.

The Independent Budget Office in its December fiscal outlook, “An Improving Fiscal Climate Presents New Challenges,”(in pdf format) sums up the current context: “Today’s fiscal climate has changed dramatically, though it brings a new set of potential challenges as public acceptance of the need for austerity may shift towards calls for tax cuts and increased spending.”

Taxes

Of course one good reason the longer-term budget problems remain is that the new calendar year begins with a very large, previously determined tax cut. The two top personal income tax rates (4.25 percent and 4.45 percent), on the city’s wealthiest residents –- the most progressive of the budget-gap-closing actions in 2003 -- were eliminated at the end of December 2005, at a cost of approximately $500 million a year of lost revenues. And yet another tax cut has already been set, the $400 property tax rebate that goes to residential owners again in 2007 -- and will cost the city over $250 million in lost revenues.

In this context, the mayor’s recent call for a reinstatement of the commuter tax, which would get back roughly $500 million of recurring revenues, is a bit disingenuous, since the mayor and the new council speaker stand a much better political chance of restoring the top personal income tax (or PIT) rates on residents than the commuter tax, which is controlled by the state legislature and governor.

Property taxes and property transaction (mortgage recording and property transfer) taxes currently represent over 45 percent of all tax revenues. None of the monitors foresees the transaction tax revenues remaining at this year’s level, but the property tax remains the solid base of the city’s revenue system. The Independent Budget Office estimates that from 2007 to 2009, the property tax will average 7.5 percent growth each year, rising from $12.4 billion in 2006 to $15.4 billion in 2009.

Overall, the budget office estimates tax revenues will average only 3.7 percent growth from 2007 to 2009. The faster growth in property taxes means that property taxes alone in 2009 will represent 43.5 percent of all city tax revenues, versus 39 percent in 2006. This shift in tax burden to the property tax is another reminder that reform of the city’s bizarre and unfair property tax system should be a priority in the mayor’s second term.

Spending

If the $750 million in tax cuts already in place satisfies the tax-cut side of next year’s budget debates (unlikely), then all the action -– particularly from the newly reconstituted city council -– will be on the spending side. Here the basic message of the Independent Budget Office’s December report is that, on average, spending on city agencies has been essentially flat for the past two years, and in the mayor’s current four-year plan will remain so until 2009.

The flatness of agency spending is often obscured by the steady rise in overall city spending. City-funded expenditures, for instance, will rise by an average of nearly five percent a year from 2007 to 2009. But the bulk of that spending is in two general areas: 1) mandated spending for health insurance and other fringe benefits for city workers, pension costs, Medicaid, and debt service on the capital budget, and 2) increased wage costs from the recent (and anticipated future) labor agreements.

The two biggest sources of budget growth are debt service and health insurance and other fringe benefits. Debt service will rise an average of 11 percent a year from 2007 to 2009, to $5.8 billion in 2009 –- largely from the mayor’s ambitious capital plan for school construction and other projects. Health insurance and other fringe benefits will grow six percent a year during the same period, reaching $3.9 billion in 2009. (Medicaid spending growth has slowed somewhat -- an average three percent a year increase through 2009 -- in large part because of a new cap introduced by the state on the local share of Medicaid spending.)

Leaving out mandated and wage costs, the Independent Budget Office sees agency spending from 2007 to 2009 rising less than one percent per year, far less than the rate of inflation. The report points out that there have been neither large spending initiatives nor major cuts in spending over the past years, and the mayor’s current plan promises nothing more.

Hope For Fresh Thinking for 2007

There is a happy disagreement over how high the budget surplus will be by the end of this fiscal year in June, with estimates ranging from $1.7 billion to $2.8 billion. The deputy comptroller raises an interesting point, however. Whatever the amount of the surplus, it depends entirely on the surplus that was carried over from 2005 to balance this year’s budget. Without that one-time surplus, there would be a big current-year operating deficit.

The big problem, in other words, is that the city keeps using huge one-shot revenues to balance its budget, masking what the deputy comptroller calls “an underlying structural imbalance between recurring revenues and expenditures.”

The Independent Budget Office is a bit more optimistic. It says the current improvement in the city’s fiscal outlook is “the result of both fiscal design and economic fortune.” The city has moved toward “a closer match between recurring revenues and recurring expenditures.”

After four years of narrow focus on fiscal crisis management, education management and governance, and a failed West Side stadium project, it’s a good time to use the city budget for fresh policy thinking. Countless ideas abound within and outside government on such issues as tax reform, human service and health policies, and broad-based housing and economic development.

The Independent Budget Office report, indeed, anticipates new budget pressures and seems to imply this will be threatening to the improved fiscal outlook. But one can hope that a term-limited mayor and a term-limited council speaker will welcome a debate on a mutual legacy that serves fiscal as well as social and political interests.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.