Because of the slumping economy and uncertain financial markets, officials managing government budgets across the nation can expect a tough year or two. But recent press reports and a review of new reports from New York City's fiscal monitors suggest that the federal government and New York State face deeper problems in the immediate future than the city does.

Why the difference? The answer for the fiscal monitors seems to be that the Bloomberg administration has done a good job of managing its short-term budget problems. Their reports include, however, some details and caveats that suggest some of the short-term political calculation built into the city's four-year financial plan. It says little about the city's major budget problems beginning in fiscal year 2011, just after the current, term-limited administration and City Council leadership depart. The few actions mentioned for the longer-term - such as property tax increases and labor savings - are vague and politically difficult.

Red Ink in Washington and Albany

First the larger context: The federal budget problems are enormous. The Times recently reported that the deficit for the 2009 fiscal year (beginning Oct. 1, 2008) will exceed $500 billion. That can only be bad news for the city -- and other local governments -- whoever wins the presidency and control of Congress in the fall elections. Of course, Congress and president can manage the deficit in the short run just as they have for several years -- borrowing more money to balance the budget, something New York City and New York State can't do.

Closer to home, the New York State budget problem is less clear. A flurry of remarks and actions by Gov. David Paterson in late July suggested big trouble just ahead. But there is some doubt how deep the problem is. In fact, the Times found at least some anonymous critics who think the governor is crying wolf.

With state revenues, particularly from Wall Street, falling faster than anticipated, the governor projected that the deficit in the state's next fiscal year (FY 2010, beginning April 1, 2009) will be $6.4 billion, up from $5.0 billion, and the total deficit for the next three years from 2010 to 2012, will be $26.2 billion, up from the $21.5 billion originally projected.

But to put these big numbers in perspective, the New York State Financial Control Board July report on the city's adopted budget for 2009 and financial plan for 2009-2012 says city deficits could total more than $19 billion over the next three fiscal years, 2010 to 2012. (The city's total budget is generally only about half of the state's budget.) Yet neither the Financial Control Board nor the other two city fiscal monitors reporting in July, the city comptroller and the state deputy comptroller for New York City, seem unduly concerned about the city's ability to meet those gaps.

The City's Short-term Deficit

Certainly if the state has a major problem, the city will have a problem, dependent as it is on state aid. (It accounts for nearly 20 percent of the city's total revenues.)

As required by state law, the adopted budget for fiscal 2009, which began July 1, 2008, is balanced. Beyond that, the financial plan projects budget deficits of $2.3 billion in 2010, $5.2 billion in 2011, and $5.1 billion in 2012. The Financial Control Board projects the possibility of much higher deficits those years: $4.3 billion, $7.5 billion and $7.5 billion, respectively. The state comptroller's report projects roughly similar risks.

The city comptroller's July report estimates much smaller risks for 2011 and 2012, averaging $5.6 billion, and, in fact, projects a smaller deficit for 2010 ($2.0 billion) than does the mayor. The main reason for the comptroller's lower deficit number in 2010 is his projection that the mayor is underestimating tax revenues for that year by $570 million. (For more on the mayor's proclivity for underestimating revenues, see the July finance column.)

The biggest variable for 2010, however, is a projected 7 percent increase in the average property tax rate (the rate was cut by 7 percent last year). The $1.2 billion that this would generate in 2010 is in the four-year plan. That would increase to $1.3 billion in 2011 and $1.4 billion in 2012. But the revenue is not there until the City Council votes to adopt it. The mayor and city comptroller assume the council will do so; the other two monitors aren't so sure, so they call its inclusion in the plan a risk.

Since it is nearing legacy time for the term-limited mayor and City Council leadership, it is a little hard, from a political perspective, to see their parting on the heels of a significant tax increase, particularly when so many members of the council, including Speaker Christine Quinn, will be seeking higher office. A more likely scenario is some forthcoming plan that generates a $1.2 billion substitute for the tax increase.

One possibility: another round of the mid-year cuts across agencies that were made last fall. However, the monitors' reports suggest that further reductions might provoke more opposition than last year's cuts, which generated savings of $618 million in FY 2008 and $1.145 billion in 2009.

Education got cut last year and, given its size, presents a likely target in a new round of cuts. The city's 2009 education budget is $21 billion (including education's share of pension and debt service costs), or 35 percent of total expenditures. Cuts, though, would put the mayor's legacy in his priority area - education -at risk.

The Bloomberg years have seen very large increases in city funding for education. From 2003 to 2008, according to the state deputy comptroller's report, city education funding increased at an annual average rate of 10.9 percent; during the same period, state funding increased at an annual average rate of 6.7 percent.

But 2009 is a different story. In spite of the City Council's last minute restoration of $125 million in education cuts made by the mayor in the executive budget, city-funded education this year is up only 1.9 percent. (State funding - which currently represents 41 percent of all education funding -- is up 5.6 percent in 2009.)

Long-Term Deficits

The reason the 2009 and 2010 budgets look manageable is mostly because fiscal year 2008 ended with a $6.6 billion surplus. That surplus had to be spent, by state law, in 2008, so $3.81 billion was used to pre-pay 2009 expenses and $2.45 billion to pre-pay 2010 expenses.

But the huge rollovers of surplus revenues are over. The most sobering line in the three July reports may be the state deputy comptroller's: "In FY 2009, spending is projected to exceed current-year resources by $4.5 billion, a clear sign of fiscal stress."

The current plan anticipates only an $812 million surplus in 2009. There is also a separate, $300 million reserve fund for 2009 in the plan. Either fund could be drawn down from to make up for any threat in the next few months to this year's budget.

The real trouble looks to be in 2011 and 2012, with the potential of $7.5 billion deficits each year. One reason is a big new expenditure - paying for pollution remediation in the expense budget -- which will add $500 million to each of the 2011 and 2012 deficits. All three fiscal monitors point this out, but the financial plan does not address it.

The Government Accounting Standards Board has said governments must place the remediation costs in the operating budget, not in the capital budget, as New York City has been doing. Placing those costs in the operating budget means the city has to pay the full bill each year. Using the capital budget allowed the city to borrow the needed money and pay it back over the long term, say 30 years, much as a mortgage is paid off.

Cuts and Consequences

There are other smaller, but interesting details, in the monitors' reports.

The mayor has slowed down the four-year capital plan, extending it over five years, partly to ease debt service costs. However the cutback, amounting to about $1.7 billion in capital expenditures, will take a toll in jobs and economic activity in the struggling local economy. Meanwhile, the short-term savings on debt service savings are slim: a total of $27 million in 2009 and 2010. (The savings increase in later years, peaking at $143 million in 2015, then diminishing.)

The plan eliminates four years of $200 million-a-year pay-as-you-go capital financing, a move favored by fiscal monitors because the city pays cash for capital projects, rather than incurring the long-term interest costs of capital borrowing. In addition, the plan projects, but provides no details on, savings of $200 million a year in health costs for city workers. The plan also underestimates overtime costs by $100 million a year from 2010 to 2012, according to the city comptroller. (Overtime cost $756 million in 2008, including police overtime of $371 million.)

Lastly, for readers who have followed the bizarre history of property tax politics the past few years (see "Property Tax Reform - NOT"), the Financial Control Board notes that once again the state legislature quietly saved New York City private homeowners from what would have been a higher property tax rate in 2009. Had the complicated law governing annual adjustments to property tax assessments been followed without new legislation, "residential properties would have experienced a much larger tax rate increase."

Paterson has called the state legislature back into session on August 19 to deal with the $26.2 billion in deficits projected for state fiscal years 2010-2012 He has already cut spending for the current 2009 fiscal year to meet a $630 million shortfall this year.

Bloomberg, in the meantime, has expressed no such sense of urgency. His financial plan, at least for the 17 months remaining in his term, looks pretty solid. The fiscal monitors seem happy. Sound management and clever politics suffice for the moment.

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