Things are going well for Mayor Michael Bloomberg. The city has a surplus of more than three billion dollars, an amount that could grow much larger before the current fiscal year ends on June 30th. And then, when the mayor declared that he will use the surplus in what he calls a financially responsible manner in his proposed new budget for the coming fiscal year, he was praised by both fiscal experts and editorial writers.

Let mine, then, be a voice of dissent. Bloomberg’s financial plan for the coming year is underwhelming, with only one big budget idea, a baffling one at best -- the transfer of $2 billion of the surplus into a “Retiree Health Benefits Trust Fund.”

Yes, the mayor does deserve credit for raising the possibility of a new policy for surpluses. From 1997 through 2001, Mayor Rudy Giuliani surpluses averaged $2.3 billion, but they simply became “one-shot” revenues for the next year, hiding the underlying budget imbalances. The 2001 “one-shot” in fact created a huge problem for Mayor Bloomberg when 9/11 and a recession exposed the risks in this roll-over strategy.

But Bloomberg’s surplus last year was about $3.5 billion. Why didn’t he pursue this new policy then? Why now? And why is he promoting this new idea when there are better ones that have been proposed by members of his own administration?

Why A Health Fund?

Bloomberg has said that he has two reasons for creating a new reserve health fund for city retirees. One is long-term budget stability, the other is in order to comply with a recent rule change of the obscure Government Accounting Standards Board. But that seems far from the whole story.

For one, the accounting rule does not take effect for two years and even then only requires the city to account for its long-term benefit liability – in other words, to show what the city will owe its retirees in the future, not to create a fund, nor in fact to take any other specific budget action.

As for helping long-term budget stability, there are more obvious ways to achieve this – establishing a more stable and progressive tax code is one. But the health fund idea could very well short-circuit a broader discussion of such other ways.

That, cynics could suggest, might be the point of it. Education advocates might see the health fund as a way for the city to be able to cry poverty when the Campaign for Fiscal Equity case is finally settled, and the plan to improve city public schools requires not just funding from the state, but from city coffers as well. City labor unions may see this reserve fund as a way of parking funds so that they are out of reach, part of a “politics of scarcity,” providing leverage for the city in the next round of labor negotiations.

What Happened To A Rainy Day Fund?

It is puzzling that the mayor does not suggest a “rainy day fund,” the usual way of transferring surpluses. The mayor’s own charter revision commission heard a lot of testimony about such a fund. The commission’s August 2005 final reportnoted , “A rainy day fund can provide a source of funds to mitigate negative budget impacts created by changes in the economic cycle. Further, a rainy day fund can provide an accepted mechanism to spread repayment, over a period of time, of a deficit in a particular year.”

But the commission decided it would be legally difficult right now to create such a fund and deferred the idea to another time and another commission, even though it acknowledged “there may be, among the fiscal experts external to the city, a consensus that a rainy day fund is generally a good financial tool for fiscal stability.”

If a rainy day fund is not possible under current state law, then how does a retiree health fund, with arguably the same purpose as a rainy day fund, pass muster? And what is the city council role? One would assume the council would have to sign off on the plan.

What Happened To Property Tax Reform?

A health fund is not the only area where the preliminary budget does not address the full implications of mayoral policy. The mayor promises another round of $400 rebates to residential property owners (a loss of over $250 million), but he doesn’t mention what looks like a big change in the structure of the property tax.

The latest preliminary assessments of city properties have quietly created, in the interests of equity, yet another population of specially-treated owners, according to a recent article in the New York Times. ("Even as Homes Soar in Value, Some Will See Tax Bill Slashed" by Josh Barbanel.) The owners of rental buildings, co-ops and condos with 10 or fewer units have seen their assessments lowered. The estimated cost to city coffers is $90 million.

The intent sounds admirable: equity among, in this case, owners of small rental buildings and units in small co-op and condo buildings. But there are many questions. Does this require new legislation? Does this promote equity across classes? Does it create new inequities? Does it in fact create yet another new class of property in a system that is already Byzantine?

Moreover (as I wrote earlier about property tax reform) , co-op and condo abatements introduced in the 1997 (on a temporary basis, but still in place), were also sold in the interests of equity, but also created a big loss in revenues. Why must equity be equated with a net loss of revenue? As with the proposed health fund, from a public interest point of view there should be a wider public discussion about alternative policies. Why not, for instance, a revenue-neutral property tax reform? And why not a simpler property tax system that has only two classes – residential and commercial?

When Will We See Budget Transparency?

One other general problem with the preliminary budget is the lack of detail about its few budget initiatives. In the beleaguered Administration for Children’s Services, for instance, some $16.5 million of new spending is cited for 2007 (less than one percent in a $2.2 billion agency). But the program areas where the money goes are only vaguely identified, such as $5 million “to expand oversight” in the “intensive family services unit.”

Contrast this with the information available on that same agency from the Independent Budget Office. The Administration for Children's Services is one of 16 city agencies that the budget office has analyzed in an effort to connect dollars spent with results achieved, in its newly-released Programmatic Budget Reviews. Its 32-page presentation of budgeting data for the Administration for Children's Services breaks down that agency's $2.2 billion in spending into 26 program areas. So, we learn that the family preservation program has 211 employees, and the program is spending $9.3 million this year. Not only that, the Independent Budget Office shows five performance measures for the program that measure such results as average caseworker caseload (2.4 in 2004) over four years.

None of this information is available either in the mayor's preliminary budget, nor in the annual mayor's management report. Interestingly, again, the mayor's charter revision commission studied the inclusion of such information, in order to make the connection between budget dollars and agency performance more clear.

Nothing came of this, but the mayor could take the framework from the Independent Budget Office and build on it, in order to inform the public better about its government’s spending and performance.

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

When Mayor Michael Bloomberg delivered his State of the City address to the crowd crammed into the Snug Harbor Cultural Center on January 26, he laid out some ambitious ideas. He wanted to slash poverty, cut down on illegal guns flooding into the city from elsewhere, and launch development projects throughout the five boroughs to create 250,000 new private sector jobs in the next five years. And that was just the start.

“During the last campaign, I promised more than 100 initiatives that will keep New York moving forward,” he said. “Have I forgotten those promises? Not one. Will I honor them? You better believe it!”

When Bloomberg stood at City Hall last week to present his proposed budget for the 2007 fiscal year, which starts in five months, it was hard to find any of those initiatives amid all the columns of numbers. This was true despite one number in particular that stood out -- a surplus of more than three billion dollars.

With such a giant surplus and so many promised initiatives, the most remarkable thing about Bloomberg’s budget is what isn’t in it. It does not call for hiring hundreds of new city employees. It also does not ask for new tax cuts.

Instead, the proposed $52.2 billion budget that Bloomberg laid out last week (in video, and slide show, with accompanying budget publications) is long on what he called fiscally prudent measures. "These are the steps that we need to take to produce a budget that is realistic and responsible," the mayor said during his presentation, "one that keeps New York on firm fiscal ground now, and in the years to come."

THE SURPLUS THEN AND NOW

When blessed with budget surpluses during the 1990s, former Mayor Rudolph Giuliani hired new employees and instituted tax cuts. Eventually, this led to something close to economic disaster, when the economic engine slowed dramatically toward the end of his second term, and this was made far worse by the terrorist attacks of September 11, 2001. Having spent the surplus, there was nothing to fall back on.

Thus, when Michael Bloomberg succeeded Giuliani, the new mayor had to scramble to balance the budget by both cutting spending on city services and raising taxes. Three years later, with an improved economy and higher than expected revenues, the city had a surplus once again -- which, occurring during an election year, Bloomberg proposed spending on various goodies and a large tax cut.

This made fiscal experts unhappy. "Taking a $3.3 billion surplus and spending it all next year is pretty short-sighted," said Charles Brecher of the Citizens Budget Commission, a non-partisan budget watchdog group.

The election is over now, and for fiscal year 2007, which begins on July 1, 2006, the mayor says he wants to use "today's good fortune to address some of tomorrow's most troubling problems." He has allocated $1 billion of the current surplus to go to reducing debt over five years and another $500 million for deficit reduction. He wants to earmark $2 billion of the surplus toward a trust fund for retiree health benefits. (Currently, unlike for pensions, there is no money in reserve to pay for future health benefits. A new accounting standard requires that municipalities eventually create such a reserve, and Bloomberg calls the $2 billion a "downpayment" on it.)

Now, some fiscal experts are happy. “The mayor did an extraordinary thing,” said Diana Fortuna of the Citizens Budget Commission. “He’s getting out ahead of the curve here by proposing to allocate $2 billion to defray those costs. It’s a very prudent move. This defines why this is a good budget.”

(Not everybody agrees. See The Mayor’s Underwhelming Budget For 2007, by Glenn Pasanen.)

GOODIES IN THE BUDGET

Continued Tax Rebate
The mayor’s budget contains one conspicuous perk for taxpayers: the continuation of the $400 property tax rebate for the next three years.

Children
The fine print includes some initiatives Bloomberg had previously touted. During his State of the City address, he said the Administration for Children’s Services would get “$16 million in new initiatives that will improve oversight, ease caseloads and ensure coordination among all city agencies.” And indeed, there it was in his preliminary budget.

Diabetes
Bloomberg said he wanted to help address the city’s diabetes crisis by creating a diabetes registry. In his budget, Bloomberg set aside money for 14 staffers to begin this project.

Housing
Bloomberg also put $2 billion toward the $7.5 billion affordable housing program he discussed in his State of the City address. Presumably, that could go a long way toward his promise of building 15,000 new units over the next year.

Capital Budget
The capital budget, which is separate from the operating budget (and is funded largely by loans to the city), also contains money for some new projects beyond maintaining streets and bridges. Bloomberg earmarked:

-$265 million for parks and infrastructure at the new stadiums for the Yankees and Mets;
-$133 million to help turn the General Post Office on Eighth Avenue into Moynihan Station;
-$23 million for development of Governors Island;
-$16 million toward creation of electronic medical records for community clinics. In his State of the City address he asked for state, federal and private money to bring the total up to $100 million.

BADDIES IN THE BUDGET

New Fees
The budget contained some ways to increase revenue, including:

• more than 100 new traffic agents issuing more parking and traffic tickets
• increasing fees for some housing applications, charging nonprofits for fire inspections (which are currently free to them) and other jumps in city fees
• charging fees at all Parks Department recreation centers, raising almost $2 million.

Albany and Washington
As usual, the city’s budget relies on money from state and federal governments. And the mayor argues that neither Washington nor Albany gives the city as much as it deserves, given all the taxes we send them. “New York City pays $11 billion more in state taxes than it gets back in funding despite being the economic engine of the state,” according to the mayor, and about $13 billion more to the federal government than it gets back. Bloomberg wants the state to give New York City an additional $250 million and the feds to contribute an additional $100 million.

Missing: Education Settlement
One thing is conspicuously absent from the budget: money for city schools from the Campaign for Fiscal Equity lawsuit, which would fund school construction and operating expenses. The courts have ruled New York City schools need billions of dollars more a year than they now receive, but the state has appealed the ruling.

But Bloomberg’s explanation for not relying on money from the Campaign for Fiscal Equity suit was simple: We do not have it yet and probably won’t get it this year because the case will remain tied up in court. “CFE has nothing to do with this budget,” he responded to a question from a reporter.

"Hidden Cuts"
There are other missing items,according to members of the City Council members -- $320 million in “hidden cuts" (reductions from current appropriations) to various city programs:

-about $40 million from city libraries;
-more than $20 million from senior programs;
-more than $20 million from cultural programs like art, theater and dance;
-$26 million from city educational programs like computer training;
-$53 million from the City University of New York;
-more than $45 million from youth programs;
-$45 million from the healthand mental health programs.

According to Domenic Recchia Jr., chair of the council committee on Cultural Affairs, Libraries and International Intergroup Relations, the Natural History Museum has already volunteered to take the brunt of a $1.8 million arts cut. He said the Metropolitan Museum of Art did the same thing last year.

“We will continue to fight to restore the services that are a priority for all New Yorkers,” said Finance Committee Chair David Weprin. This is an annual ritual in New York: The mayor proposes cutting some popular programs, with the apparent assumption that the council will negotiate a restoration of the cuts by the time the budget must be passed five months later. The strategy is evidently intended to keep the council from fighting for greater increases. Weprin and Speaker Christine Quinn have vowed to change this yearly “budget dance.” (See related article, The Last Dance?by David Weprin)

REACTION

When Bloomberg proposed his 2006 budget about nine months before Election Day, his political opponents were quick to attack it. Representative Anthony Weiner assailed the property tax rebate as an “election year gimmick,” while other Democrats called for more money for housing, schools and youth services.

But this year –- with Bloomberg still reaping the benefits of his re-election victory -– reaction was muted and largely favorable. “The reaction from the city's business community and those who follow the city's long-term fiscal health was nearly unanimous: He may not be political, but Bloomberg is certainly prudent,” David Saltonstall wrote in the Daily News.

Although expressing concern about future fiscal problems, City Comptroller (and probable future mayoral candidate) William Thompson issued a mostly favorable, if brief, statement: “The mayor has identified enhanced revenue sources and not sacrificed essential services,” he said.

However, Nicole Gelinas of the Manhattan Institute called on Bloomberg to reduce employee pension and health care costs – not just save money to cover them. “To get the budget on a sustainable path, the mayor must first acknowledge that there's lots of dirty work that must be done in Albany and in negotiations with (or against) municipal unions,” she wrote in the Post.

More controversy could emerge between now and the end of June, when the council must approve the budget. But for now it looks as if this year’s budget season will be unusually calm.

A WORRISOME FUTURE

Though the city is flush with money now, the mayor warns not to expect big surpluses in the future.

For one, the real estate market boom that has contributed so much tax revenue to the city is already starting to taper off. Prices for single-family homes are expected to fall by 10 percent over the next few years, and sales themselves are expected to drop by 14 percent. Revenues from real estate transfer taxes are also expected to level off.

What’s more, the city is notoriously over-reliant on profits and tax revenues from Wall Street. While bonuses were up again last year, profits are expected to decline for the third year in a row once interest rates are factored in.

Bloomberg warns that the city’s “non-controllable” or “non-discretionary” expenses -– costs the mayor says the city has little or no ability to control –- will become increasingly burdensome in years to come. Chief among these costs are “alarming” and “worrisome” Medicaid and pension obligations, and the money the city owes on funds it has borrowed. “Making a down payment on these costs now is the fiscally responsible thing to do,” he said.

These costs are the biggest contributor to a budget deficit that dogs the city year after year. Despite the good news this year, the mayor warns that a gap –- roughly $3.5 billion in 2008 and again in 2009 -– will loom over city finances in years to come.

As people live longer and health care gets more expensive, the rising costs pose a national problem. “Those are things that not only is New York City wrestling with, every municipality across the country is wrestling with and every company in the private sector is wrestling with,” Bloomberg said. “Nobody has enough money to pay everything.”

But the mayor was optimistic -- more or less: "I don't think people should be depressed; quite the contrary. We've shown we know how to get through tough times. We've shown that we are responsible. We are taking steps to make sure that we are preparing for the future. But the city still spends more than it takes in, in the billions of dollars each year."

 

The budget season has begun. Last week, Governor George Pataki announced his proposed state budget. Mayor Michael Bloomberg is expected to put forth a spending plan for the city soon.

While politicians will undoubtedly argue over the specifics of these proposals, the bruising fights over massive spending cuts or tax hikes of years past are unlikely to emerge this time around. In general, the city and state are in fairly good fiscal shape.

Recently, at a forum sponsored by New School's Milano School, several experts offered their views of the city's fiscal state now, how we rebounded from the financial problems of 2001 and 2002, and what we should do to keep the city in good fiscal health.

From Austerity to Surplus

By Ronnie Lowenstein

The city's fiscal situation has improved remarkably. Six months ago, when the city budget for this fiscal year was adopted, the city expected that there would be a gap for the upcoming (2007) fiscal year of $4.5 billion. It was a big number, there was concerns about how we were going to manage it. But lo and behold six months later the city is not looking at a gap of $4.5 billion anymore but something closert to the tune of half a billion dollars

That's not chicken feed, but in the larger scheme of things it is relatively small, less than one percent of total city spending. There is still a significant gap of about $3 billion for the following (2008) fiscal year, which is now a year and a half off. But that is down $1 billion from the estimate that was made last spring.

So in short, the news is genuinely good. Now I'm enough of an economist to never give you good news without giving you something depressing at the same time. So, I'd like to caution you that if there has been a roughly $4 billion improvement in the last six months, about half of that is due to accounting changes. These aren't tricks or fake, but they are changes that at least in the short term have had the happy side effect of making the city's fiscal situation better.

Another caveat is, of course, that there is always risk. And it is possible that some of the problems that the federal government is having will start to affect the city in the form of lower aid flows. The Campaign for Fiscal Equity suit [on school funding] will finally be settled. This would be good news for the city and its school children, but perhaps somewhat difficult fiscal news for the city to the extent that the city will be asked to contribute. But, overall, the news is genuinely good.

Past Misuse Of Surpluses

Back in the late 1990s, New York City budgeters acted as if the good times would never end. Every year was better than the next, every year we racked up a big surplus because tax revenues were greater than we expected them to be. We used that surplus to help fill the gap for the following year. That's not a great way to budget. It only works if every year is better than the next. And over time it inured people to large out-year [or future year] gaps. If a problem goes away every year, you start saying, "what's the problem?"

There wasn't a problem until 2001. The recession, both at the U.S. level and the local level, combined with the impacts of 9/11. The fact that we had no big surplus to help remedy the following year's gap put the city in a very serious bind. Over the course of two years, the gap was estimated at well over $6 billion, and the city had to resort to a number of measures to bring the budget back into balance. It raised taxes sharply. It cut back on spending, and it also borrowed over $2 billion long term to fund short-term operation expenses, the cardinal sin in public finance.

Saved By Three Revenue Sources

We have come a long way in a few short years. Once again this year and looking at the last two years, tax revenues are going to come in stronger than the Independent Budget Office or the administration has expected. That's due to three different revenue sources.

First, the real-estate transfer taxes. We all expected the market for real estate to cool off, and it has at least anecdotally. But those property transfer taxes and mortgage recording taxes that make up the transfer taxes are continuing to go gangbusters. For the first four months of the fiscal year, we have gotten well above what we had expected for the first six months of the fiscal year. Transfer taxes don't sound particularly important, but last year they brought in $2.3 billion, which was just a little bit more than we got from the city's general corporation tax. Even though they were insignificant as recently as the late 1990s, now they are a huge mainstay of the city budget.

The personal income tax is also coming in stronger than expected. One thing that's bolstering personal income tax collections is a very strong year on Wall Street. Bonuses are on track to equal their record levels of several years ago. Wall Street profits are also doing very good things for the business tax collection, so we're seeing much greater strength there than anyone had anticipated.

We expect that together, the real estate transfer taxes, the personal income taxes and the business taxes will bring in an additional $2 billion over what had been anticipated last spring. So if we've had $4 billion improvement since last spring, a little more than half of that is right there.

Spending Restraint

Another big factor in the city's fiscal fortunes is spending restraint. Spending by city agencies has been not entirely flat, but it has grown very modestly. I'm talking about the services that the city provides: educating our kids, cleaning the streets, providing public safety. We anticipate that spending for those city services, including labor settlement, will grow at an average annual rate of 1.6 percent between 2006 and 2009. That is much less than the rate of inflation.

This is a continuation of recent trends since the city's fiscal difficulties in 2001. There is virtually no growth in existing programs, and there are no major new spending initiatives.

"Non-Discretionary" Spending

By contrast, citywide spending, which some people call non-discretionary or mandatory spending, is expected to increase more rapidly. These are big-ticket items and have all been increasing rapidly, some at double digits. They are Medicaid, pensions, health insurance, and debt service. They have all been driving city spending.

Let me start with the debt service and health insurance. We expect debt service to grow at an average annual rate of 11 percent over the next several years. This is double-digit and the numbers are huge. We are anticipating that debt service will total over $6 billion in 2009. It is being driven by a larger and larger capital program for the city and is very difficult to control, particularly with rising interest rates. Without sharp cutbacks in the capital program, there are unlikely to be changes in that forecast.

Health insurance costs are also rising very rapidly. We see them growing at an average annual rate of 6 percent a year and reaching $4 billion in 2009.

In contrast to these two very big ticket items, some of the other non-discretionary citywide spending is beginning to moderate. Medicaid was the bane of the city budgeters in recent years, and although it is still rising and still large, we are at least starting to see some moderation in that rate of growth.

There are a couple of reasons for that. The city's share of the cost of Family Health Plus [a health insurance program for low income families] was absorbed by the state last year. In addition, the state has added caps on the increase in Medicaid spending that kick in 2007. Medicaid will reach a total of $5.5 billion in 2009. It's still really big. It's still growing faster than the rate of inflation but we're expecting that growth to moderate.

The other very interesting thing about Medicaid is an accounting thing. Now normally you don't think of accounting changes as being enormously exciting, but the switch to caps by the state on the rate of growth in Medicaid is necessitating a change in how the city and the state account for Medicaid. This means that, based upon the law that was adopted, the city is going to get a $450 million Medicaid windfall this year. It is already legislated, it is going to happen. And it adds to the good news on the Medicaid front.

There is also some good news on the pension front. Pension contributions have more than doubled since 2002 following several years of really bad returns. But those problems are largely behind us... We are beginning to see some of the better returns beginning to phase in and we are expecting that pension contributions by the city will level off. In fact, if trends go the way we anticipate, they will actually begin to decline in 2008.

Even bigger, however, is an accounting change. This has not been adopted yet, but it has been accepted at the local level and is awaiting state action. The change in accounting rules would change the way we schedule our pension contributions. It is going to stretch out the number of years under which extraordinary gains and losses are accounted. These are good, common sense things to do, and they have the additional side effect of having an impact on the city budget. If they are adopted in Albany, the city will have a windfall of about $800 million this year and over $500 million next year. That is going to be followed by some modest additional costs in 2008 and 2009 and thereafter. But the net effect of those pension accounting changes is once again a big positive for the city.

The pension accounting changes together with the Medicaid accounting changes gives you roughly another $2 billion in fiscal relief. So of the $4 billion we have had of good news since last spring, about half of it is genuinely stronger tax collections than we had anticipated. Another half of it is accounting changes and to some extent it is all made possible by continued spending restraint. So rather than having a $4.7 billion gap for '07, we're looking at a gap that's more like half a billion - a gap that is very, very small by comparison to gaps in recent years. Even that could change between now and the end of the fiscal year. The gap for '08 remains considerable, but is down significantly from what we have anticipated.

Changing Our Ad Hoc Approach To Future Gaps

The way we deal with our out-year or future gaps is relatively ad hoc. Right now while the memories of 2001 are so vivid in our minds, I think everybody - the administration, the City Council, the monitors - worries about those gaps and tries to come up with ways to deal with them before they come up and bite us. But that's not always going to be the case. And, if we're fortunate over time, the memories of 2001 will recede just as they did in the late 1990s and somehow those out-year gaps will look less and less pressing. The way to handle that would be to move from a system in which we deal with them in an ad hoc basis to something more systematic.

There have been lots of differing calls for how to do this. The comptroller has called repeatedly for the establishment of a rainy day fund. Others have discussed ways of routinely doing more pay-as-you-go capitol financing. You could take some of the surpluses and invest them in new technology. Doing so would increase productivity and help damp down spending growth over time. There are lots of different things to do, but the right time to worry about how to more systematically deal with the out-year debt is when the sun is shining.

The very fact that the city's fiscal situation is better means that there are going to be new pressures and new demands on the city. There are going to be lots of calls, rightly, for important things that the city needs to fund. Similarly, there are going to be a lot of calls for tax cuts. This is a very high tax place -- the highest taxed major city in the country -- and that has a major impact on competitiveness. So it is perfectly reasonable to say we should be worrying about tax cuts. How the mayor and the council address these pressures for increased spending and reducing taxes is going to largely determine the course of the city's fiscal fortunes over the next few years.

Ronnie Lowenstein is director of the New York City Independent Budget Office

NEXT: Highest Credit Rating In History --Robert Kurtter

 

I work for Moody's Investment Service, and we do credit ratings. Credit ratings play a very narrow role in the financial marketplace. They help to set pricing in the financial marketplace. Our role in this is kind of a narrow middleman role, yet our ratings seem to reverberate quite loudly throughout the general media as they are often viewed as sort of a Good Housekeeping seal of approval, even though that's really not our function.

We are independent. Our job is to do financial and credit analysis. We are a private company, we are for profit. And our ratings only have value to the extent investors in the financial marketplace view them as being accurate and independent barometers of credit risk.

Just this week, the Dow for the first time crossed 11,000. This is being used as a kind of barometer of the economy recovering... Similarly New York City's economy has recovered since September 11 and the bursting of those stock market bubbles and finds itself in pretty good financial condition right now.

Above Average Credit Rating

In recognition of this in April we raised the city's rating to A1, which is generally viewed as a slightly above average rating. At A1, the city's rating is the highest it's been in our history of rating the city, which is probably about 60 years. It reflects the fact that, in our view, the city has recovered from September 11, which is arguably one of the most severe stress tests ever applied to any municipality around the country, until Hurricane Katrina in the Gulf Coast. New York City's economy recovered as a result of external forces nationally and internationally and as the result of good internal management. A lot of hard decisions were made by this administration, in terms of taxes and spending, to do the things that were necessary to restore budget balance.

When we do credit risk, the calculus that we look at can get quite complicated, but it boils down to something very simple, which is: When you set your priorities -- when elected officials decide what's important -- they raise enough money to pay for what they want to spend. To the extent they do, you're in balance. To the extent they don't, you run deficits.

Relying On The Financial Services Industry

The equation of course gets much more complicated because these growth rates are not always in sync. They are driven by different forces. And of course, in New York City, perhaps the most significant force they are driven by is the financial services industry. Though New York City is by no means a one-industry town, the financial services industry's direct and indirect effects disproportionately drive the city's finances. And the financial services industry can be highly volatile. New York City is a far better place for the fact that the financial services industry has chosen New York City as its home and remains here. But with that comes attendant risks for budget management and for fiscal policy. That risk is simply that the city must recognize the inherent volatility that its primary revenue driver creates and build buffers around that. It must also adopt conservative views in revenue forecasting and budget management generally --more so than other cities or other states around the country.

Now is the time to do this. The city's finances are in good shape, and it's a good time to build some of these buffers.

Challenges

Notwithstanding the city's very strong financial performance, it is important to note the city hasn't really fully recovered in all respects. Jobs remain about 200,000 below the peak, which occurred back in 2000.

And the city does face some significant out-year budget gaps, as well as some challenges that are not fully reflected in those gaps. One, of course, is the Campaign For Fiscal Equity [school funding] lawsuit, which for better or worse has been pegged at a cost of $5.6 billion. At this point there is no determination about how that is going to be paid for. The state -- the governor -- has indicated that in his view the city should pick up about 30 percent of that cost, which would be $1.8 billion. That's not factored into any of those out-year budget gaps at this point.

One other looming factor out there is another accounting change. It is the requirement to account for the accrued liability for retiree healthcare. It's going to be a very, very significant cost to New York City. That reporting requirement begins in fiscal 2008. That's still a little way off but it's going to require the city to set aside more money to fund that liability, which is a rapidly growing one.

To sum up: The city's finances are in good shape. There are significant challenges out there, and there is not as much money out there to fund all the desires as many of the interest groups would like. The city is probably going to continue to be in a tight budget mode despite the revenue surge it's going through and it probably would be prudent of the city to try to set aside more of these moneys as buffers because we have learned the hard way over the last 20 years that the financial services industry, which is the revenue bread and butter of this city, is prone to some pretty dramatic swings. Recovering from those swings can be very painful.

Robert Kurtter is senior vice president of Moody's Investors Service

Next: Preserving the Economic Growth, by Kathryn Wylde

 

The surplus $1.7 billion we expect to have comes not from tax increases but from real economic growth. The transfer tax, the real estate transfer tax, is due to a lot of real estate activity. That is a positive message. And our obligation is to look carefully at what's fueling that real economic growth in the city and to try to reinforce that.

Over the last 25 years, the securities industry has been responsible for more than half the growth in the New York City economy, so we start with the importance of maintaining New York as the world's financial center. But we have to so some things that are not quite as obvious.

One out of every ten private sector jobs in the City of New York is working for a foreign company. Our relationship to the foreign, international community is something that is deep, that is important and is unique for New York City as compared to the rest of this country. Often that puts us at odds with national foreign policy, trade policy, visa policy and is an important thing to keep in mind.

A second contributor has been a rebound in the travel and tourism industry, reaching record levels. It's creating the most new low-end jobs and entrepreneurial small business jobs in the city. That's something we have to think about how to reinforce

And in 2004-2005 there was a 4.9 percent increase in employment in the science and research sector, which is important to think about.

The threat in terms of the economy comes if we were to say, things are going well, so we'll institute new taxes to pay for additional spending. A threat right now beyond our control is the federal deficit. To the extent that the federal government has to cut back because of their huge deficit, that is going to flow into the city, leave us with some hard choices as the city budget has to pick up the essential services that we rely upon the federal government for.

The second issue is debt. The key to our economic growth is continued reinvestment and upgrading of basic infrastructure. Those are expenditures we have to make. Construction costs in the city have gone up 40 percent in the last two years. This is the challenge facing the redevelopment of lower Manhattan. This is why the Javits Center has got to be designed or refinanced, because the budget that we put together less than two years ago is no longer sufficient to build out the expansion of the Javits Center. So we have got a huge problem in terms of construction costs.

And finally anti-terrorism. The work that was done after 9/11 -- [Police Commissioner] Ray Kelly deserves a huge amount of credit -- really restored confidence. We have made an investment in security. But New York City remains by far the highest risk terrorist target in the United States.

Kathryn Wylde is president and CEO of the New York City Partnership

Next: How to Spend School Money, by Randi Weingarten

 

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. 

The year is ending with good news for the city’s budget from two public officials. Mayor Michael Bloomberg is reporting both new revenue and new savings, and thus a projected deficit much lower than originally expected. City Comptroller William Thompson offers a generally encouraging view of the city’s economy in his annual financial report. The comptroller’s report also offers a useful review of the ways in which Bloomberg crafted balanced budgets despite daunting challenges.

But the report also hints at some of the management problems facing Bloomberg’s second term.

BLOOMBERG’S BUDGET, AS OF NOW

Bloomberg’s recent budget modification of the 2006 city budget promises a budget surplus for this year of at least $1.7 billion. The surplus is largely the result of nearly $2 billion of additional tax revenues, based primarily on the continuing boom in housing-market transactions. On the expense side, there are some $450 million of new Medicaid savings.

Add this projected surplus to additional tax revenues expected for 2007, and what once threatened to be a $4.2 billion deficit in 2007 is now looking to be $2.3 billion. This is still a lot of money to be in the hole, of course, but it is quite an improvement in less than five months.

But the good news in revenues obscured, at least temporarily, a big change in expenses for the future. Union contract settlements have added $661 million of labor costs to this year’s personnel budget and $1.1 billion to the 2007 budget.

THE AUDITOR VIEWS THE CITY’S PERFORMANCE

The comptroller’s comprehensive annual financial report, required by the city charter, offers a necessary independent view of both the city budget and an assessment of the city’s management performance.

The report notes that the 2005 budget marked the 25th year of balanced budgets for the city, an impressive rebound after the fiscal problems of the 1970s. The economy has improved, with the city’s gross city product increasing by 3.3 percent in fiscal 2005, after three years of decline. The unemployment rate dropped from 7.9 percent in 2004 to 6.1 percent in 2005. Moreover, the comptroller suggests that the city’s economy is healthier than the nation’s.

But the report makes clear that many problems remain in city agencies. The comptroller has, for instance, challenged the documentation and “fiscal clarity” of education department policy and practices. He suggests that budget reporting in the department has “not kept pace with [its] structural changes.”

In his role as city contract administrator, the comptroller found that the department of homeless services had “falsified an annual inspection report” on a 800-bed homeless facility in upstate New York. Sanitation department contracts were rescinded because of altered scoring sheets during the contract-selection process.

Contracts – 15 Percent Of The Total Budget

The report underscores the importance of city contracting. Contracted services (not including capital budget contracts) totaled $7.84 billion in 2005, nearly 15 percent of the total city budget. The dollar value of contracts was up six percent from the previous year. The biggest contract areas include $690 million for school transportation, $895 million for non-public school handicapped children services, and $625 million for mental hygiene services. The scope of these privatized, publicly funded services may deserve much closer mayoral and legislative oversight.

Yankee Deadbeats

In another role, the comptroller’s 81 audits and special reports provided further oversight of mayoral agencies. The comptroller found – not for the first time – that the New York Yankees, who lease the stadium from the city, shortchanged the city. They underreported over $9 million in revenues and overstated deductions against revenues by $34.5 million. The Yankees, who stand to receive hundreds of millions of dollars in future city and state subsidies for a new stadium, owed (and subsequently paid) an additional $3.6 million in fees.

Problems In Human Resources, Finance, Fire, Etc

The audit unit also found problems in the human resources administration (questionable vendor payments), the department of finance (weaknesses in the administration of the commercial incentive and abatement programs), and the fire department (inadequate controls over EMS ambulance transport fees). Audits also revealed major problems in implementing information technology at HRA and the department of city administrative services.

Budget Up 31 Percent, Taxes Up 33 Percent

One of the most useful sections of the comptroller’s report is a series of 10-year statistical tables. Those tables are a handy way to see what happened during the first Bloomberg term. Comparing fiscal years 2001 and 2005 (which ended June 30, 2001 and 2005, respectively), for example (not adjusting for inflation):

· The city budget grew 31 percent, from $40.2 billion to $52.8 billion.
· City taxes were up 33 percent, from $23.2 billion to $30.9 billion.
· City real property taxes rose 41 percent, from $8.2 billion to $11.6 billion.
· Property-transaction taxes grew 161 percent, from $900 million to $2.3 billion.
· The personal income tax was up nearly 16 percent
· The sales tax, 19 percent
· Business income taxes, up 27 percent.

The mayor’s $1.50 per pack increase on cigarettes (split with the state) jumped receipts by over 350 percent, from $28 million to $127 million.

IBloomberg’s18.5 percent property tax rate increase and the explosion in property transactions (resulting in the huge property-transfer and mortgage-recording tax gains) have been key to the 31 percent increase in the city budget. The mayor’s November modification says that those property tax transactions continue at an unexpectedly high level.

During the same four years, the size of the city workforce increased by nearly six percent, from 249,824 to 264,061.

And Non-Mayoral Parts Of City Government

Given the expansive nature of budget-building over the past four years, there is a touch of irony in the fact that the comptroller’s own budget has declined during that period by over 2.5 percent, to $51.3 million.

The other citywide office, the public advocate, which had a tiny budget to begin with, did see a 17 percent increase in its budget, to $3.1 million.

The borough presidents, who lost most of their budget and land use powers with the elimination of the Board of Estimate in 1989, have also seen their offices cut back dramatically. The combined offices lost 26 percent of their budgets from 2001 to 2005, dropping to $23.1 million.

The city council, which determines its own budget under the charter, has been very conservative in budget terms. Its budget increased only 4.4 percent from 2001 to 2005, from $44.4 million to $46.3 million.

Perhaps there is a case to be made that in a city so dominated by the structural powers of its mayors that the city’s countervailing institutions – the comptroller and city council in particular – should be given more resources.

The Mayor’s Optimistic Number

The mayor’s budget numbers are optimistic. But let’s not forget that, very soon, the city and state comptrollers, the state Financial Control Board, and the Independent Budget Office will all be weighing in with their own analyses of the mayor’s optimistic forecasts.

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

When Mayor Michael Bloomberg said in his victory speech that he believed his re-election sent a message “that you can make the tough decisions and be re-elected, as long as they are the right decisions," it seems clear what tough/right decisions he was talking about. At the top of the list has to be his tax hikes.

The boldest move of his first term was proposing and selling a $3 billion tax package, the key to resolving a $6 billion budget deficit. The package was a burden for most New Yorkers, but the public seems to have accepted his argument that this is an expensive city, and taxes are basic to essential services.

That is why there is hope among fiscal experts of both liberal and conservative perspectives that Bloomberg will devote his second term to reforming the city’s tax system, particularly its incomprehensible property tax, its roller-coaster personal income tax rates, and its mostly hidden corporate tax breaks.

In New York’s think-tank world, the conservative Manhattan Institute’s E. J. McMahon’s new study, “Pricing the ‘Luxury Product’: NYC Taxes Under Mayor Bloomberg,” urges restraint on city personal income tax rates and calls for a city/state commission to reform the city’s property tax system.

The progressive Fiscal Policy Institute’s James Parrott, in a new study, “Hudson Yards Tax Breaks, Unwarranted and Fiscally Irresponsible,” analyzes an acceleration of corporate tax abatement and argues against long-term tax breaks for West Side developers. (Juan Gonzalez provided a short review of the study in the Daily News.)

The Property Tax

E. J. McMahon believes reform should begin with, if not end with, the city’ s property tax system, which produces nearly 40 percent of all city tax revenues. At a Baruch College School of Public Affairs seminar on the property tax held October 31, Independent Budget Office Deputy Director George Sweeting released new data that underscore the inequities and what McMahon calls the “Byzantine” complexities of the current system.

The current problems began with 1981 state legislation that set up the current system, which essentially protects city homeowners. But one kind of owner (1-, 2- and 3-family house owners) has a lower burden than most coop and condo owners. Commercial owners have a much higher burden, and renters, who pay a substantial share of their landlords’ property tax in their rent, have almost as high a burden as commercial owners.

So, for example, according to the new data from the Independent Budget Office, on a piece of property worth $300,000 – if the property is a one-family house, the typical 2005 property taxes would be $1,602; if it’s a co-op, the typical property taxes would be $2,772; but if it's a rental property, even though it's worth exactly the same amount as the private home or the coop, the typical property taxes would be nearly eight or five times higher, $13,050.

These inequities are, in large part, created by a bizarre assessment process. In most localities, a property assessment is based on a property’s market value, and the tax bill is determined by simply multiplying that assessment by the current tax rate. Not in New York City.

Here assessments are only a fraction of market value. Assessments of houses, for instance, are targeted at six percent of market value. Thus a $300,000 house would be assessed at $18,000. Assessments of commercial and rental apartment buildings, on the other hand, are set at 45 percent of market value. A building with a $10 million market value would have an assessment of $4.5 million. Co-ops and condos are assessed as if they were rental apartment buildings, creating even more confusion.

To further protect homeowners, there are caps on annual assessments -- no more than six percent for house owners in one year, or 20 percent over five years. There are slightly higher caps for co-op and condo owners.

Recent data from the city’s finance department show the effects. A house with a market value of $350,000 saw its market value rise by 76 percent from fiscal year 2001 to 2006, but the assessed value rose by only 20 percent. The effect of the residential caps is that much of the increase in market value in owner-units is never “captured” in the assessment, thus reducing owner tax bills over the long run as well as short run.

The McMahon report says, “While all cities have real property taxes, few if any could rival the complexity, inequity, and opacity of New York’s system.”

Absent the overall reform that McMahon urges, attempts to fix property tax inequities have only created new problems. For instance, in order to lower the burdens of coop and condo owners, the mayor and city council in 1997 introduced a property tax abatement for them (since extended to 2008). The abatement ranges from 17.5 to 25 percent of the property tax bill.

The new Independent Budget Office data show that because of the convoluted assessment practices, over 78,000 co-op and condo units actually had lower tax burdens than the typical house owner before the abatement. And the abatement has moved several thousand more units into this privileged house owner tax status. In dollar terms, it means that nearly $100 million of the annual abatement is a “waste,” because it goes beyond the original equalizing goal.

Personal Income Tax

The second most important city tax – now representing about 22 percent of city tax revenues – is the personal income tax.

Looking to Bloomberg’s second term, McMahon and the Manhattan Institute fear an extension of the city’s temporary top personal income tax rates for the city’s highest earners (over $150,000), which under current law expire December 31, 2005. They fear many of the city’s millionaires will flee the city to avoid the 4.45 percent top tax rate – which if extended beyond the end of this year would bring in approximately $500 million.

But a similar top 4.45 percent personal income tax rate was in effect through most of the 1990s, after being introduced by former Mayor David Dinkins and Council Speaker Peter Vallone during a recession and fiscal crisis in 1990. The fear of high-end earners flight seems exaggerated, since that rate apparently had no negative impact on the booming city economy of the late 1990s, and in fact, helped create huge Rudy Giuliani budget surpluses.

A city tax commission could take a look at the roller-coaster changes in personal income tax rates over the last 15 years and test McMahon’s dubious claim that the early 1990s tax increases triggered the loss of 300,000 jobs in the city. As McMahon suggests, personal income tax revenues can be volatile because of economic ups and downs, but that does not mean the rates can’t be set efficiently and progressively.

Commercial Tax Breaks

James Parrott’s study of commercial tax breaks – which mayoral administrations sell as “economic development” -- is revealing: In the four years after 2000, these increased over 72 percent, from $334 million to over $575 million. Parrott argues for a review of the rationales for these breaks, many of which were arguably unnecessary, especially in Manhattan; the developments would have gone ahead without deep city subsidies.

Parrott also pulls the curtain on what’s happening in Manhattan’s West Side (Hudson Yards) development area. The city’s financing of the infrastructure that will support this development – the extension of the #7 subway line is the biggest piece – is not yet completely clear. The mayor and the city council agreed last winter to use city funds for the start-up of the financing, but long-term financing is based on using new property tax revenues generated from the development area.

The problem is that the mayor wants to use a pre-determined PILOT – a payment-in-lieu-of-taxes – for the whole development period. A PILOT is usually determined by a negotiation on a specific property between the city and a developer that sets a less-than-full-property tax payment. (The Port Authority, for instance, paid the city a PILOT for the World Trade Center that was about 25 percent of what it would have been had the property been fully taxed.)

But here, the city proposes, through its obscure Industrial Development Agency, to establish what is called a Hudson Yards Uniform Tax Exemption Policy that Parrott says “will likely permanently institutionalize the granting of across-the-board tax breaks for any commercial development in New York City.” The immediate Hudson Yards effect would be to grant a “uniform” break for all Yards developers through at least the year 2040.

Public economic development investments provide incentives for private development. Why assume decades in advance that further incentives will be needed at all, let alone at some arbitrary and uniform tax-cut level set in 2005? Parrott argues that what “gets locked in with this ill-advised economic policy are the inequities that result when large companies receive sizable property and other tax breaks that shift the city’s tax burden to smaller businesses and other taxpayers.”

The Industrial Development Agency will, according to Good Jobs New York (a joint venture of the Fiscal Policy Institute and Good Jobs First which monitors the secretive processes of New York’s public authorities), in the near future hold a hearing to determine just what this important uniform exemption will be. Will it be a 50 percent discount? A 20 percent discount? The long-term costs – through lost property tax revenues – could be in the hundreds of millions of dollars.

Another obscure public authority – the Hudson Yards Infrastructure Corporation – is the financing mechanism that controls the borrowing that will pay for the Hudson Yards infrastructure. It has a mayoral-dominated six-member board: the city comptroller, the speaker of the city council, three mayoral appointees, and one independent member, appointed by the mayor. They will have to approve any financial plan.

A City Tax Commission?

Before the city goes ahead with this dubious financing mechanism, there ought to be a serious public review of its long-term economic, revenue, and equity consequences. A city tax commission would be the perfect vehicle.

A city tax commission could take the long, comprehensive view. It could examine the overall impact of all revenue policies and recommend changes that would -- among other goals -- make the property tax fairer, simpler, and more efficient; stabilize and make more progressive the personal income tax; and analyze the revenue as well as economic impact of current economic development policy.

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

 

Michael Bloomberg released his mayor’s management report for fiscal year 2005 on September 12, one day before the Democratic primary election, a preemptive strike against his political opponents. Fair enough: The report is required by the city charter in order to give voters a useful measure of mayoral accountability.

In this latest report, the mayor says that his administration has achieved “high levels of service delivery [and] in some cases, historic progress.”

But much like last year’s report, this one gives voters little help. It includes too many insignificant indicators, lacks any overview or sense of priorities, and says little or nothing about such major (and problematic) policies as the reorganization of city schools, big changes in homeless services, the costs of school construction, and high levels of overtime among the city’s uniformed services.

And a number of recent surveys and independent management studies challenge the mayor’s rosy assessment, identifying some real problems and providing an alternative view of mayoral accountability.

SMALLER, BUT BETTER?

The printed version of the 2005 Mayor’s Management Report is much smaller than the ones put out during the administration of former Mayor Rudolph Giuliani (276 pages in 2005, compared to 1,162 pages in 2001). Many observers admire this change, including most participants at an expert panel sponsored by the mayor’s charter revision commission on April 4. But one dissenter on that panel, deputy city comptroller Greg Brooks, pointed out that smaller is not necessarily better.

Brooks noted a net reduction of 1,087 indicators (from 2,606 in 2002 to 1,519 in 2004), a 42 percent cut. He also noted that 16 percent of the 1,519 remaining indicators are related to 311, creating what he characterized as a “soft indicator of the quality of city services [that] could in fact skew results.”

The good news is that the mayor’s management report does have a number of useful statistics, if not many performance indicators. It provides glimpses of current city demographics and some social conditions. The basic problem is that the report does not connect the dots between those facts and city policy.

Some of the more glaring examples include:

Graduation Rates
• Between 2001 and 2004, the percentage of students graduating from high school within four years increased, from 51.0 to 54.3 percent.
• But in the same period, the percentage of students graduating from high school within seven years declined, from 69.5 percent to 68.0 percent.

Issue to connect the dots: What improves/impedes graduation rates?

Special Education
• From 2001 to 2005, NYC student enrollment has decreased by nearly 30,000, to 1,075,300.
• But in the same period, the number of special education students has increased by 5.5 percent, from 167,800 to 177,100.

Issue to connect the dots: Is a higher percentage of students in special education good or bad?

Homeless Families
• Between 2001 and 2005, the average number of homeless families in shelters per day has increased by 55 percent, to 8,623 (including 14,849 children).
• In the same period, in spite of a focus on “prevention,” there’s been a 46 percent increase in families entering the shelter system for the first time (6,618 in 2005).

Issue to connect the dots: What’s the actual impact of prevention work?

Crime
• Since 2001, major felony crimes have decreased by 21 percent (murders by 15 percent, rapes by 11 percent), from 172,646 to 136,491.
• But the number of uniformed officers has decreased in the past four years by 3,141, or eight percent.
• And in the same period, police overtime has increased by 20 percent, from $338 million to $406 million.
• And over four years civilian complaints against police officers increased by 46 percent, to 6,358 in 2005.

Issue to connect the dots: Are officer levels, overtime, crime statistics, and civilian complaints related?

THE VIEW OUTSIDE CITY HALL

What The Customers/Constituents Say On Education

One performance indicator that would improve the mayor’s management report in many agencies is the constituent/customer survey. In June the city council’s education committee published an education oversight report card, based on a survey of 689 parents and 30 teachers. Using a state-based grading system (1=Not Proficient, 2=Basic, 3=Proficient, 4=Advanced):

• Three of 14 categories – class size, teacher and principal morale, special education, and operations -- got the lowest score of 1.
• High school admissions got a 3, and competition and choice a 4.
• All other categories (including instruction, communication, and parent involvement) received 2’s.

The Quinnipiac University September 22 poll of 1,504 NYC registered voters reported mixed public judgments of school performance: Some 66 percent of voters are dissatisfied with the public schools (an improvement from earlier polls over the past three years that showed dissatisfaction ranging as high as 78 percent). But the mayor got a 52 /33 percent approval/disapproval rating for his public education role, and chancellor Joel Klein a 40/33 percent rating.

Overall, 12 percent of voters were “very satisfied” with the ways things are going in the city, with 51 percent “somewhat satisfied,” 22 percent “somewhat dissatisfied,” and 13 percent “very dissatisfied.”

What The Independent Monitors Say

The city comptroller’s office and the NYC Independent Budget Office, like the the city council, serve as alternative governmental sources of accountability measures, particularly in data and technology areas. For instance, the comptroller’s May 2 audit of "the paperless office system" of the Human Resources Administration showed that a system that has cost $47 million and was (according to the 1996 Mayor’s Management Report) to be completed by April 1998, has yet to be finished.

Furthermore, HRA did not provide complete documentation of the many contracts associated with this project, and gave “the false impression” that the paperless office system “was progressing smoothly.”

The Independent Budget Office’s September fiscal brief, "Follow the Money: Were School Construction Dollars Spent as Planned?” (in pdf format) identified major problems with reporting systems: “Determining how successful the education department was in implementing its $6.9 billion 2000-2004 capital plan was a difficult task, plagued by inconsistent and missing data….The lack of detail linking the spending to individual projects limits the comparison between plan and actual.” (This is just what the mayor’s management reports are supposed to do, but don’t.)

In spite of the data restrictions, the IBO doggedly pursued a projected vs. actual cost study of a small part of the total capital plan -- 14 new elementary and four new high schools. The study found that actual spending was 22.0 percent and 38.1 percent higher per square foot in the elementary and high schools, respectively, than projected in the original plan. (The study suggests those percentages may be understated.)

SPECIAL EXAMPLE: SPECIAL EDUCATION

For decades 110 Livingston Street, the city Board of Education’s central office in Brooklyn, was a notorious symbol of the modern bureaucracy – distant, unresponsive, ineffective. Mayor Bloomberg, newly in charge of public education and sensitive to the symbol, moved central headquarters to the Giuliani-renovated Tweed building, next door to City Hall (although the $100 million cost of its renovations and the building’s association with the city’s most famous crook raised some eyebrows).

But has the mayor simply created a different monster? A new management study of Bloomberg ’s reorganization of special education describes an eerily familiar structure -– “a bureaucratically-driven” agency that has continued bad old policies and created a new set of dubious policies and procedures. Written in a polite and technical academic style, the study lays out an astonishing range of management problems, from complex and confusing infrastructure and ineffective data systems to a central-office reliance on an old “medical model of treatment” that the researchers say contradicts current best practices.

“Comprehensive Management Review and Evaluation of Special Education” was written by a team of seven researchers, headed by Thomas Hehir, a lecturer at the Harvard Graduate School of Education. Contracted by the city’s department of education, its purpose was “to critically assess the recent reorganization of…special education evaluation and placement processes and special education oversight in light of the Jose P. litigation.”

The study is independent of both the department and the plaintiffs in that litigation, which has been in place since 1979, when the city was found in violation of the federal Education for All Handicapped Children Act (now the Individuals with Disabilities Education Improvement Act of 2004).

The report is also the first significant study of the core element of the mayor’s overall reform of education -– a highly centralized operation that has created 10 regions out of 32 community school districts and re-structured special education in those 10 regions.

The study says, in sum, no, the department does not yet have an effective management structure. Of 14 findings, nine are negative. Five positive findings applaud the commitment of the agency’s many teachers and specialists to their work. But six of the nine negative findings show structural and management problems:

• “The complex …infrastructure…leads to confusion with respect to roles and responsibilities and does not provide sufficient support to principals and school staff.”
• “The management of special education…is not sufficiently data-driven.”
• Policies and procedures “are not being communicated to personnel in an effective manner.”
• Pre-referral measures “are implemented inconsistently and are often duplicative.”
• “[A]n effective [due process] system is still not in place.”
• Staff development efforts “are insufficient.”

The other negative findings are more conceptual in nature. The authors question the special education medical model that the mayor and chancellor have inherited but also seem to have adopted. The report argues that the model leads to “treatments” by specialists and therefore unnecessary segregation of services. They suggest shifting to a more comprehensive, integrated, and local set of services.

The 2005 Mayor’s Management Report says nothing about these significant management and policy questions (special education in the 2003-2004 school year represented nearly 25 percent of the education budget, or $3.4 billion). The department press release accompanying the study quotes only its statement that the department is “moving NYC in the right direction.” It ignores the specific litany of structural/ management problems.

The mayor’s recent charter revision commission considered (and ultimately tabled) a mayoral initiative to reduce the number of reports. The thinness of the current mayor’s management report indicates that the problem is not too many reports. The problem is too few that are useful.

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

It was a dramatic time, Felix Rohatyn recalled: “Almost daily crises … heroes and villains; us against them." In short, he said, it was “the most rewarding experience of my professional life."

Few people would sound so nostalgic about the fiscal crisis of 1975, a time that saw massive layoffs, piles of garbage in the street because of cutbacks in the Sanitation Department, and a dangerous decrease in police patrols. But of all the experiences in his long life, Rohatyn takes the most satisfaction from his role in saving New York City from bankruptcy.

At the time, the federal government accused the city of handling its money like a heroin addict, focusing only on its next fix -- relying on deceptive accounting, borrowing excessively, and refusing to plan. This led banks to stop lending the city money.

Now, 30 years later, says Rohatyn, the city’s good financial management is taken for granted. It has honestly balanced its budget for over 25 years, and has rebuilt trust among the banks that refused to lend it money in the 1970s. The Financial Control Board -- a state-ordered budget watchdog that Rohatyn helped form -- is given much of the credit for this turnaround.

But with the law that created the Financial Control Board set to expire in 2008, Rohatyn and others are concerned that the city may relapse.

This November, New Yorkers will vote on whether to put some of the practices that the Financial Control Board requires into the city charter. Most budget experts agree that these requirements are good ones. But some worry that without an external monitor New York City will slide back into the habits that caused it so much trouble in the past.

To see what happens when no discipline is imposed on budget makers, many point to New York State. Albany now regularly engages in the kinds of behaviors that the Financial Control Board has weaned the city from.

The state’s budget is also the subject of a referendum this November. If passed, it will change the roles of the governor and the legislature during budget negotiations. This proposal will not directly address financial mismanagement, but its advocates hope that by increasing accountability and transparency, the new budget process will force state officials away from their worst budgetary tendencies. Opponents of the measure, though, say that the amendment will only make such problems worse.

THE 1975 FISCAL CRISIS

New Yorkers continue to debate what drove the city to the brink of bankruptcy in 1975.

Some argue that New York City’s liberal officials borrowed money freely to spend on social programs, while powerful municipal unions forced them to agree to obscenely generous contracts. Others say that a variety of outside factors were a driving factor -- the city was increasingly tied into a world economy that was in shock from the 1973 Arab oil embargo; it was victimized by the banks upon which it relied to buy bonds; the federal government left the city in the lurch.

Rohatyn saw enough blame to go around (in pdf format):

"The banks had lent too much and checked too little; the unions took more than the city could afford; the city cooked the books, and borrowed; and the state encouraged this whole exercise," he said.

Whether or not they were the root cause of the crisis, New York City’s financial practices were out of control at that time, say experts. The city was relying excessively on debt; by Rohatyn’s account its short-term debt had risen from about zero in 1970 to $6 billion in 1975. The city relied increasingly on budgetary tricks to balance the budget –- reclassifying operating expenses as capital investments; continuously pushing expenditures onto the following year’s budget; or simply not keeping good enough records to know what was really going on.

Ken Auletta writes in his book The Streets Were Paved With Gold –- one of numerous books written on the topic -– that the city acted as if it wasn’t bleeding to death when in fact it was hemorrhaging severely. But when first the banks, and then the federal government, declined to bail the city out (the latter prompting one of the most famous tabloid headlines in New York history: FORD TO CITY: DROP DEAD), it became apparent that something needed to be done.

The answer, in Auletta’s words, was “fiscal martial law.”

THE FINANCIAL CONTROL BOARD

To get the city's fiscal matters in order and convince investors to resume the purchase of the city's bonds, New York State established the New York City Emergency Financial Control Board. The board was comprised of the mayor, the governor, the city and state comptrollers, and three private industry experts. It held veto power over the city’s budget.

The board required the city to adopt accepted accounting practices, to end the most egregious budgetary sleights of hand, and to work towards the type of fiscal responsibility that would convince banks to trust New York. The city was able to avoid declaring bankruptcy, and in 1982, banks resumed buying short and long term municipal bonds.

The board’s veto power over the city budget -– the so-called control period -- ended in 1986. Since then, the board has served a monitoring role, with the ability to resume its active role if the city’s budget deficit exceeded $100 million at the end of a fiscal year.

So far, the city has successfully avoided such action.

"The city of New York today, I believe, is probably the best governed in terms of finances," said state comptroller Alan Hevesi. "Our reporting systems, our financial transparency, are probably the best in the country. And that's because of this law [that created the Financial Control Board]."

The board has had several lasting effects on the way the city's budget process works:

Making the Governor a Partner: One of the primary reasons for establishing the financial control board was to force the governor and the mayor to be partners in making sure the city is healthy financially. Because the governor sits on the board, he is directly responsible for the city’s performance. The board also provides the state with a permanent structure for keeping abreast of the city’s finances without creating the tension that can arise from state investigations of specific city practices.

Political Cover: Something that became clear during the 1975 fiscal crisis was that good financial and budgetary practices sometimes run counter to good politics. City officials have an incentive to put off difficult decisions. By forcing officials to make these decisions, the board becomes a willing scapegoat.

"Whatever those decisions are -- taxes, service cuts -- they are going to be unpopular to some sector of the city," said Jeffrey Summer, executive director of the board. "And if we take the blame for it, that's fine, so long as the city does it."

A Culture of Accountability: The board’s most widely cited accomplishment has been to give an air of credibility to the city's budget numbers. New York City's accounting, which has been suspect in the past, is now trustworthy. Because the board requires the city to have a four-year financial plan, officials must also address future consequences of their actions. Good financial management, said Rohatyn, has become “part of the city’s DNA.”

There is a general acknowledgement there is a culture of discipline among city officials that has not existed in the past. Still, some remain skeptical about the durability of this shift.

"There has been a vast change in what people think they can get away with," said E.J. McMahon of the Manhattan Institute. "But has the culture really profoundly changed? No."

THE END OF THE BOARD?

The control board is scheduled to exist until 2033. But in 2008 it will lose its $3 million in annual funding and its ability to impose a control period over the city.

Some think that the board should be allowed to expire, arguing that the city has earned its independence through its performance since the 1975 fiscal crisis. They argue that the city and state comptrollers, the Independent Budget Office, the Citizens Budget Commission are monitoring the city closely enough to make sure it doesn’t backslide -- despite the fact that all of these organizations except the Independent Budget Office existed before the fiscal crisis.

"I think that [the board] has handled itself very well, and I think that when it expires it did a good job and left a legacy, but there's no reason for it to be in business," said former mayor Ed Koch.

Not everyone agrees. Because the board has the option to impose a control period, it alone has the power to force the city to act responsibly. Taking this away, some say, is dangerous.

"This is like talking about allowing just a little sip of table wine in the house of a raging alcoholic who once almost killed himself," said McMahon.

McMahon argues for a “permanent, semi-mothballed” board that can step in if the city performs badly. Both the state and city comptrollers also say that the law that created the board should be extended in some form. (The board itself has no stance on whether it should continue to exist.)

BALLOT QUESTION 4: PROPOSED REVISION TO THE CITY CHARTER

Seemingly in preparation for the board’s expiration, Mayor Michael Bloomberg has proposed revisions to the city’s charter that voters will decide on in November (in .pdf format). These revisions would require the city to balance its budget using generally accepted accounting standards, create a four-year financial plan, and limit the use of short-term debt – all things the board currently requires.

This would give the city added independence while guaranteeing continued financial responsibility, argue proponents: “As there always has been the sense that the city should have more autonomy in self-government, this proposal would create the ability for the city to monitor itself regarding financial matters,” wrote the Women’s City Club of New York in a statement.

Frank Mauro of the Fiscal Policy Institute, however, argues that the provisions become ineffective when there is no one outside the administration specifically assigned to make sure that the city upholds its responsibilities.

Still, other fans of the board don’t necessarily object to the city charter revisions. Deputy City Comptroller Marcia van Wagner says that the revisions encourage good behavior and should be supported; they should just not be used as justification for eliminating the board itself.

“There's no harm in [the revisions],” she said. “But I think what people feel is that there needs to be some kind of discipline that is imposed externally."

NEW YORK STATE’S FISCAL MISMANAGEMENT

In contrast to New York City, New York’s state government has not been forced to answer to an outside entity. The results, say budget experts, have clearly been destructive.

“I think the behavior of the city and the state, in terms of how they run their budget process, has diverged tremendously to where the city now adheres to very high standards, and the state is not adhering to the low standards it has,” said Diana Fortuna of the Citizens Budget Commission.

Among the behaviors cited as particularly dangerous are:

Borrowing for Operating Expenses: While the city has limits on short-term debt, Albany borrows to pay its operating expenses. State comptroller Alan Hevesi refers to this as the “cardinal sin” of finance, and others have likened it to taking out a mortgage to pay for groceries.

Unbalanced Budgets: Unlike city officials, state budget makers are not required to balance the budget according to general accounting principles. Albany regularly runs large deficits.

Outstanding Debt: The state doesn’t have the debt limits imposed on the city, and total outstanding debt in the state is $48 billion. As a result, credit rating agencies give low marks to New York State’s bonds, making borrowing more expensive.

Abuse of Public Authorities: The state borrows large sums of money through the public authorities, removing this money from the budget process completely. Public authorities, funded by the state but outside of the control of voters, have increased their debt by almost seven-fold over 20 years. The 18 largest authorities now have about $120 billion in outstanding debt.

These practices are symptoms of a culture that discourages good fiscal practices in the name of political expediency, says Fortuna. They affect not only the fiscal health of the state itself, but also local governments that are forced to assume greater responsibilities as Albany increasingly shifts the burden for expensive programs onto them.

The state’s dysfunction has become the subject of much attention in the past year. Good government groups, the press, and lawmakers themselves have called for changes in the way the state’s affairs are run. These reforms have not only dealt with the budget process – everything from the non-competitive nature of elections to how committees work to the way lawmakers vote on bills has come under criticism. But with a string of late budgets 20 years long (broken this year), the budget process ranked high on the list of issues to confront.

BALLOT QUESTION 1: PROPOSED STATE BUDGET ADMENDMENT

To address problems in the state’s budget process, legislators and some good government groups are backing an amendment to the state constitution, which will be put to voters this November. While this does not directly require anything specific in terms of financial management, its proponents hope that it will encourage more responsible practices through transparency and accountability.

The main provision transfers power over the budget from the governor to the legislature. Currently, the governor creates an executive budget that lawmakers have limited powers to change. Under the proposed amendment, if no agreement is reached on the budget by the beginning of the fiscal year, then a contingency budget based on the previous year’s budget would go into effect. This would automatically become the basis for the new budget, and the legislature would have more power to amend it. Other provisions would establish an independent budget office whose members are picked by the legislature, and make expenditures that are currently not part of the regular budget part of general budget negotiations.

Supporters of this proposal (in .pdf format), which include good government groups Common Cause and the New York Public Interest Research Group as well as many legislators, say that this amendment will give the public more information about what officials are doing, making them more accountable. It will also bring the balance of power between the governor and the legislature more in line with that of other states, they say, and make sure the budget is on time. The overall effects, they say, will be modest, but will lay the foundation for future reforms.

Critics of the amendment believe the effect will be more profound (download video clip). Among the opponents of the proposal is Citizens Union, (whose sister organization, Citizens Union Foundation publishes Gotham Gazette), the Citizens Budget Commission, the Manhattan Institute, and the Business Council of New York State.

Instead of guaranteeing an early budget, they say, the amendment gives lawmakers a reason not to negotiate with the governor until after the budget deadline, at which point they will have much more power. Had lawmakers been given such power in 1975, some say, upstate legislators would have kept Governor Carey from funding the Financial Emergency Act. Today, they say, this increased power will encourage lawmakers to spend money freely.

While they question the reform’s potential to make a positive impact, critics of the amendment do not question the need for change itself. Almost no one believes the state is handling its financial affairs sensibly.

“Change is very, very badly needed,” said Fortuna.

THE FISCAL CRISIS OF THE 1970s AND THE FINANCIAL CONTROL BOARD

• The Fall and Rise of New York by Felix Rohatyn
• The Coming Emergency and What Can be Done About It by Felix Rohatyn
• A Coalition from City, State, National Levels is Needed to Help new York Overcome its Fiscal, Social Crisis by Felix Rohatyn (video clip)
• Gotham’s Fiscal Crisis: Lessons Unlearned by Fred Siegel and EJ McMahon

BALLOT PROPOSAL FOUR: PROPOSED CITY CHARTER REVISION

• Charter Revision Proposal
• New York City Charter Revision Commission, Public Meetings and Hearings

NEW YORK STATE’S DYSFUNCTIONAL GOVERNMENT

• Albany’s Dysfunction by Gotham Gazette
• New York State’s Fiscal Condition by State Comptroller Alan Hevesi (in .pdf format)
• The New York State Legislative Process: An Evaluation and Blueprint for Reform by the Brennan Center

BALLOT PROPOSAL ONE: PROPOSED AMENDMENT TO STATE CONSTITUTION

• Text of Ballot Proposal One
• Overview by the Rockefeller Institute
• Vote YES on Budget Reform: The November 2005 Budget Reform Announcement by Common Cause/League of Women Voters/New York Public Interest Research Group(in .pdf format)
• The Runaway Spending Amendment by the Business Council of New York State
• Breaking the Budget in New York State: What’s at Stake in November’s Referendum by Manhattan Institute (video clip)