Mayor Michael Bloomberg has had a terrific budget year. New tax revenues keep rolling in, driving the budget toward a record-setting surplus. The City Comptroller reported in late May that the surplus may exceed $5.8 billion by the end of June. The fiscal monitors are pleased with the surplus and what the mayor has done with it. But some interesting questions about what to do with that surplus remain as the mayor and the City Council enter into the last weeks of negotiations over the fiscal year 2008 budget.

The mayor always holds the upper hand at this point in the budget year because he controls the revenue estimates that dictate how much city government can and cannot spend. Because the city must have a balanced budget, any money the council adds to the mayor’s executive budget must be paid for by adding revenues and/or cutting other expenses. Nevertheless, in a $60 billion budget there is always some wiggle room.

Tax Cuts for Low Income New Yorkers

With such good budget news, the budget negotiations have been fairly low key. But the mayor has yet to react to the council’s proposal for several relatively inexpensive, progressive tax cuts that would benefit renters, seniors and the disabled.

The proposals, outlined in the council’s response to the mayor’s preliminary budget, would benefit well over a million city households that would not see any savings from the mayor’s generous tax-cut package. That plan – endorsed by the council -- gives residential and commercial property owners $1 billion in savings through an across-the-board (5 percent) cut in the property rate tax cut and a $400 rebate to home owners, who represent only one third of New Yorkers. These savings are proposed to continue through 2011.

The council’s $300 tax credit for renters is progressive in that it only would go to some 1.1 million lower- and middle-income households – families earning less than $75,000, and individuals earning less than $43,000. If enacted, it would cost the city $261 million in lost revenues -- almost exactly what the homeowner rebates cost.

The council’s proposed expansion of the city’s earned-income-tax-credit – from 5 percent of the federal credit to 10 percent – is also targeted, in this case to working households earning less than $38,348. The total benefit would then range from $42 to $454 for eligible residents. Over 75 percent of the benefit would go to working households with incomes under $20,000. Combined with the $300 renter’s rebate, the council says, many working families would be raised above the poverty level, at a cost to the city of $62 million.

Council proposals for increased tax relief for seniors and the disabled would cost only $6 million in 2008, rising to $24 million in 2010. The council combines this with a proposal to eliminate the $12 million annual tax exemption for Madison Square Garden. This 25-year old political deal originally intended to keep the New York Knicks and Rangers from fleeing the city, has cost the city almost $300 million in inflation-adjusted tax revenues.

Money for Council Programs

On the expenditure side of the budget, the council has had some success in getting the mayor to include council priorities in the executive budget, including $12.9 million for district attorneys and support (for one year anyway) for 10 primary care clinics in high need communities.

The preliminary and executive budgets also “base-lined” some favorite council programs. These are programs that mayors traditionally fund for only one year at a time, resulting in a so-called budget dance as the mayor cuts the programs from the budget every year, and the council tries to bring back funding for them. Now these items will be included in the four-year plan, so they don’t need to be “restored” every year. Nevertheless, the council in its preliminary budget response noted that $266 million of council programs still are not base-lined and need to be restored in the negotiations this year – minimizing the council’s ability to fund new programs.

A Rainy Day Fund

The council’s comments on both the mayor’s preliminary and executive budgets include strong pleas for a rainy day fund, a city savings account for surplus funds from happy budget years like the current one. The money would then be available in tougher years to help stabilize city budgets.

Such an account would require approval by the state legislature and governor. Under current state law, the city cannot end the fiscal year with a surplus of more than $5 million and so cannot, the council has said, “carry forward funds from one fiscal year to the next.”

As a result, mayors spend down any surplus before the fiscal year ends. Generally, the city has pre-paid expenses, especially for debt service, that would otherwise be due the next year. This is called “rolling the surplus forward.” (In fact, Bloomberg has rolled part of the surplus into both the 2009 and 2010 budgets as well as 2008!)

Fiscal monitors say that, in effect, this technique works as a kind of rainy day fund. According to the council, “The problem with using the ‘roll’ as a rainy day fund, however, is its lack of planning and transparency. The techniques used to move funds from one year to the next make it difficult for the council and the public to determine how much funding is available, how much was added in a given year, and how much would be subtracted, if applicable from it in the following year.”

The release of the executive budget pointed up this concern. In it, the mayor, faced with another $1 billion in unanticipated tax revenues, introduced a new way to spend down the expanding surplus, retiring $1.2 billion of debt (thus saving future debt retirement costs, mostly in 2009 and 2010). But the stated 2007 “surplus” of $4.4 billion doesn’t include that debt retirement, thus understating the resources available in 2007.

The confusion is apparent in reports by fiscal monitors. The state comptroller and the Independent Budget Office both say in their May reports on the executive budget that the 2007 surplus is $4.4 billion, but a third monitor, the city comptroller, includes the $1.2 billion debt retirement and says it’s $5.6 billion.

Of course, the issues here go beyond the numbers and the question of transparency to political concerns surrounding who makes the decisions on budget surpluses – the mayor, the council, or both. At the moment, the mayor seems to have total control. For instance, the May Independent Budget Office report notes that the mayor’s debt retirement “serves to take $1.2 billion ‘off the table’ so it cannot be used for recurring expenditures or tax reductions that could be difficult to sustain.” So much for the council’s role.

A state-authorized rainy day fund, crafted by the mayor and council, would presumably give council a stronger role in decision-making about budgets than it has now. It would establish procedures – probably involving City Council in some way -- for determining how much money would be put aside and how that money could be used. Mayor Bloomberg, like his predecessors, would presumably prefer to keep things just as they are.

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