Mayor Bloomberg’s Preliminary Budget – Praise and Some Questions
On Thursday Mayor Michael Bloomberg released his preliminary budget and financial plan for fiscal years 2010 through 2014. Most of the attention has focused on how he plans to close a $4.1 billion gap in the budget for fiscal year 2010-11, which begins on July 1.
In brief, his plan for next year involves: (1) generating a surplus of nearly $2.9 billion in the current year, and using that money to pay for expenses in fiscal year 2010-11; (2) adding just under $1.0 billion to next year's revenues through a combination of more optimistic economic projections and $241 million in new taxes; and (3) lowering operating expenses by a net amount of about $200 million beyond the cuts taken this year that help generate the surplus.
While the package includes unpopular measures, it involves far less pain than many expected given the formidable size of the budget gap. The sources of this welcome news are:
Good luck. About $2.6 billion of the newly identified revenues in the current and coming year come from increases in the expected yield from existing taxes and other sources. This new money is flowing into the City's coffers because the national economic downturn appears to be less severe than was previously projected, and particularly because local financial institutions are making more money and paying bigger bonuses than was thought possible just six months ago. Of course the expected revenue is not yet all in hand; how much of the new money actually materializes will be known in the coming days as Wall Street firms reveal the size of their bonuses and the extent to which they take the form of deferred payments. From the City's perspective, this may yet turn out to be an example of "easy come, easy go"
Another piece of good fortune is what budget jargon labels "prior year payables." This obscure item is contributing $500 million to the current year surplus. The term refers to money set aside at the end of each fiscal year to pay for bills generated in that year but not yet paid on the last day of the fiscal year. Since some of the bills have not yet even been received, the amount required involves some guess work. The City's budgeteers have a history of being highly (some might say overly) prudent in estimating the sum needed, and "prior year payables" has become a recurring source of “new” money during the course of the fiscal year because not all the funds set aside are actually needed. Whether the current $500 million is a function of good luck or bad estimates, the sum identified Thursday is unusually high.
Seeking a better bargain with the unions.The Mayor is seeking to save money by changing the way in which he bargains with public employee unions. The contract with the teachers expired in October 2009; the contract with most civilian employees expires at the end of March 2010, and the contracts with uniformed workers including police officers and firefighters expire in the summer of 2010. The raises given in these contracts have a big impact on City expenditures.
Until Thursday the Mayor had budgeted for two annual 4 percent increases for teachers retroactive to October and 1.25 percent annual increases for other workers in each future year. The costs of these raises get larger and larger each year, growing from about $150 million this fiscal year to about $500 million next fiscal year and far larger sums down the road. In exchange, the Mayor sought (and included in the previous budget) changes in the pension benefits for future workers that would save $200 million annually starting next year and changes to the employee and retiree health insurance program that would save $357 million starting next year.
The new financial plan follows an altered strategy. The budget now provides funds only for 2 percent annual raises for teachers, and it provides no money for raises for other workers in the next two years. However, the budget also no longer counts on the savings from the pension and health insurance changes. The net gain in this and next fiscal year is modest, but the expectation is that a new bargain can be struck that both saves money in the short run and secures longer run commitments on the pension and health insurance items that yield sizable savings in the future.
A dose of bitter medicine.Since it became clear that the national and local economies were headed for a downturn, the Mayor and the City Council have repeatedly agreed on actions to curb growth in City spending. The new plan accelerates this process with a package of measures proposed by each agency (and labeled the "Agency Program") designed to yield savings of $371 million in the current year and growing to $799 million next year. The measures require eliminating 4,286 jobs (from a total of 305,000) by the end of fiscal year 2011 with the largest cuts among police officers (1,292), correction officers (477), library workers (434), firefighters (400) and parks workers (377). Most of the reductions are to be implemented through attrition (not replacing those who leave voluntarily), but 834 civilian workers will be laid off. Some of the losses among police and correction officers are offset by added civilian positions and other cuts represent efficiency gains, but the staff losses sometimes translate into service reductions. For example, the Parks Department will close four pools and shorten its pool season.
The only agency effectively exempt from taking a dose of bitter medicine is the Department of Education. The Mayor is counting the savings from the reduced allocation for teacher pay raises as the DOE's contribution to the Agency Program (we did not count it in the figures in the previous paragraph). The DOE is not reducing its staff levels among teachers or any other workers.
Two new taxes.In the past the Mayor and the City Council have agreed on tax increases that played a major role in keeping the City's budget balanced. Notably property taxes were increased last January and the sales tax was expanded beginning early in the current fiscal year. During his re-election campaign the Mayor indicated a strong desire to avoid additional increases in such broad taxes. The new plan includes two new taxes with far narrower bases. Applying the mortgage recording tax to co-op transactions is expected to raise $50 million in fiscal year 2011 and including aviation fuel in the sale tax base yields an estimated $169 million next year.
Overall, the Mayor's plan deserves praise and support. It avoids broad tax increases, makes significant progress in curbing expenditure growth by seeking to sustain most services with fewer workers, and makes a commitment to get a better deal for taxpayers from public employee unions.
But the financial plan also raises three important questions that should be addressed as it is considered by the City Council and public over the next few months.
1. Should the City be planning more realistically for the prospect of reduced State aid? In the current fiscal year the City expects $11.9 billion in aid from the State, about one-fifth its total revenues. The Mayor's plan anticipates that sum will grow to over $12.3 billion next year.
Although it is standard practice to assume aid increases in the baseline budget, this assumption is unrealistic. The State faces a $6.7 billion budget gap, and the Governor proposed in his Executive Budget released on January 19 substantial cuts in most forms of aid to all localities including the City of New York.
The Mayor chose to deal with the difficult situation by preparing a separate "Contingency Plan for Proposed State Budget Reductions." This plan is best interpreted as an advocacy piece intended to fight for reversal of the Governor's proposed cuts. The Contingency Plan estimates the fiscal year 2011 impact of the Executive Budget as a loss of nearly $1.3 billion; this figure is disputed by State officials, and the "real" number is hard to define given the lack of correspondence in State and City fiscal years, the use of different accounting systems by each entity, and the State's inclusion of measures it views as benefiting the City. The Contingency Plan also assumes (a) that the only possible response to the loss in aid is to eliminate jobs, and (b) the reduction in positions will inevitably lead to service reductions rather than efficiency gains. Accordingly, the plan anticipates a loss of 19,000 jobs of which 17,484 require layoffs. Included in the layoffs are more than 7,000 teachers and 3,150 police officers. The resulting service reductions noted include larger class sizes, less frequent refuse collection and recycling collection, closing of 15 senior centers, and cuts in the Parks Department "equal to the total cost of all pools, beach lifeguards and recreation centers citywide."
The Mayor would not be doing his job if he did not fight hard for more State aid, but the situation also requires realistic planning. Some cuts in State aid seem inevitable, and the City needs a realistic plan for how to deal with them.
2. Is the highly favored status of teachers and the DOE justified? Since his inauguration in 2001 Mayor Bloomberg has made educational improvements a high priority. This has led to pay increases for teachers that exceed those for other municipal workers, expansion of the number of pedagogical positions at the DOE, and major new capital investments in public school facilities.
The new plan continues this priority. Teachers are assured 2 percent annual raises while all other union workers have no guaranteed increase; all other agencies face staff reductions while the DOE continues its current (and recently enlarged) staff levels. In the current difficult fiscal situation, it may be appropriate to ask if there ought to be such a "sacred cow."
3. Given the upturn in the revenue outlook, should the planned draw down of funds from the Retiree Health Benefits Trust (RHBT) fund be avoided? In fiscal years 2006 and 2007, when the local economy was booming, the City put a total of $2.5 billion into the newly created RHBT. The move was widely praised by fiscal monitors including the Citizens Budget Commission (CBC) as a prudent use of the unexpected surpluses and a sound step toward dealing with otherwise unfunded obligations to future retirees.
When the fiscal situation worsened the Mayor and the Council agreed to divert money from the fund to help balance current operating budgets; a total of $1,149 million is scheduled to be used in fiscal years 2010 thru 2012. During deliberations over the budget last year, the CBC cautioned the Mayor and Council Speaker against this move arguing: "Instead of using this money as a de facto rainy day fund, you should adopt a policy for its future use that links withdrawals to growth in the current year liability for retiree health insurance premiums." It is time to reconsider the decision to reject this advice.
By Charles Brecher