Crisis—What Crisis?
Spending Up $800 Million in New Fiscal Year
FISCALWATCH MEMO
July 10, 2002

For all the hue and cry about the ”cuts” needed to close New York City’s $4.9 billion budget gap, a funny thing happened on the way to the 2003 fiscal year: the first adopted budget of the Bloomberg era does not reduce overall city spending.

In fact, after adjusting for rollovers of prior-year surpluses and excluding state and federal grants, the portion of the budget financed by the city’s own revenues and borrowing[1]  is up nearly $800 million for the fiscal year that began July 1. This 2.7 percent increase—well above the projected inflation rate[2]—is the key to understanding why New York City continues to face massive budget gaps for as far as the eye can see.

Topping the list of new city-funded spending for fiscal 2003 is an additional $285 million for the Board of Education—along with $206 million to be financed by special state loan.[3] These increases, plus another $194 million in state aid, will bring the total public school operating budget to about $12.4 billion, up 6 percent (more than triple the inflation rate) from 2002. Virtually all of the new spending reflects the cost of the new teachers’ contract and other labor agreements.

Pension contributions for city employees will rise by 24 percent, or $324 million, largely as a result of three factors: the fall of the stock market, the rise in city workers’ salaries under recent contract agreements, and various pension benefit increases enacted by the State Legislature since 2000. And this is just the start: Pension costs are projected to rise by another $500 million to $600 million a year in each of the next three fiscal years.

During the roughly two and a half months between the Mayor’s April proposal and his final deal with the City Council last month, the 2003 budget grew by more than a half-billion dollars—at least two-thirds of which could be attributed to the teachers’ contract settlement. The compounding effect of this added spending in future years is the primary reason why the Mayor’s officially projected 2004 budget gap has grown in the last three months by $1 billion, to a new total of $3.7 billion.[4

A tale of two mayors

Bloomberg’s first spending plan presents a stark contrast with the first budget adopted under Rudolph Giuliani. Consider the following table of city funds spending since 1994, adjusted to smooth the distortions caused by bookkeeping transactions involving budget surpluses.[5

Adjusted City Funds Spending**
Fiscal Years 1994-2003

 

 

Change

Fiscal Year*

Adjusted city funds
 ($ millions)

Total ($ millions)

Percent

1994

22,063

 

 

1995

21,383

(680)

(3.1)

1996

21,880

497

2.3

1997

22,446

566

2.6

1998

23,791

1,345

6.0

1999

24,673

882

3.7

2000

26,068

1,395

5.7

2001

28,436

2,368

9.1

2002

29,316

880

3.1

2003

30,098**

782

2.7

* fiscal years begin July 1
** includes all expenditures classified as “other categorical” except for $206 million in 2003 education spending that will be financed by a loan from the New York State Municipal Bond Bank and secured by a pledge of future state aid revenues.

Source: Manhattan Institute calculations based on data from City Comptroller’s and the Mayor’s Office of Management and Budget

Faced with a budget gap of $2.3 billion upon taking office in 1994, Giuliani reduced spending by nearly $700 million. This was the first (and is still the only) year-to-year cut in total city spending since the 1970s. As shown in the table, Giuliani continued to hold down spending through his third year in office, laying the groundwork for a series of surpluses that grew to over $3 billion as the economy finally rebounded in the late 1990s. Since 2000, however, city spending has grown much faster than city revenue, rapidly depleting the accumulated surplus and creating much of the problem Bloomberg inherited.

Differing mayoral philosophies

Giuliani’s first-term fiscal restraint stemmed from an outspoken commitment to reducing the size of city government, which he said had grown far beyond affordable levels. He adopted an adversarial stance towards city unions and used the threat of layoffs and of competitive contracting for city services as leverage to achieve his savings targets (although, in the end, he actually increased the payroll).

Bloomberg, however, has described the city’s large workforce and heavy spending as evidence of New York’s “compassionate” philosophy of government. His preliminary budget, issued in January, ruled out layoffs and called for minimal staff reductions to be accomplished entirely through attrition and early retirement. The Mayor’s subsequent Executive Budget actually called for a net increase in the total number of full-time city workers, although that seems highly unlikely to actually occur even under the increased spending levels in the updated financial plan.

The city-funded portion of the adopted 2003 budget does call for significant nominal spending decreases in a handful of large agencies, particularly the Police Department (down $113 million, or 3.4 percent), the Fire Department (down $53 million, or 4.7 percent) and the Department of Parks and Recreation (down $12 million, or 6.3 percent). Most of the remaining budget “cuts” actually represent reductions in baseline projections—i.e., spending increases that would have taken place this year if there had been no change in prior-year budget policies and programs. In fact, city-funded spending on everything other than schools and pensions will still increase about $300 million this year.

If the new mayor had duplicated Giuliani’s first-year achievement and reduced city-funded spending by 3 percent (instead of increasing it by nearly 3 percent), he wouldn’t have needed to borrow $1.5 billion to close to close his 2003 budget gap—and next year’s gap would far smaller and more manageable. Instead, the city’s failure to significantly curb spending this year means that next year’s problem will be that much worse.

Notes

  1. Specifically, this passage refers to “city and other categorical funds,” as reported in the financial plan reconciliation documents filed with the state.
  2. The regional Consumer Price Index for 2002 is projected at 1.8 percent in the Mayor’s Executive Budget (“Message of the Mayor,” p. 39).
  3. The state Legislature authorized a total of $435 million in payments to the city to be financed by “special purpose school bonds” issued by the state Municipal Bond Bank as reimbursement of the city’s prior-year school aid claims. Aside from the $206 million that will be spent on school operations in 2003, another $229 million will serve to write off a “receivable” that has been carried on the city’s books for several years. Debt service payments on the bonds—which could range from $40 million to $55 million a year, depending on the interest rate—will be secured by state school aid payments. In effect, the state has granted the city a 10-year loan to cover a portion of recurring annual school expenses.  After the borrowed money is spent this year, how will the city plug the $206 million hole in future budgets? This question remains unanswered.
  4. The city and state comptrollers and the staff of the state Financial Control Board have consistently predicted even higher out-year gaps than the Mayor, so it is reasonable to assume their updated budget gap projections for 2004 will reach or exceed $4 billion.
  5. The city is technically prohibited from carrying a forward a surplus from one year to the next, but it effectively accomplishes the same thing by depositing excess funds in its budget stabilization account and then drawing on this account to “pre-pay” some expenses, mainly debt service and mass transit subsidies, just before the beginning of each fiscal years. Over the past nine years this practice has had the effect of alternately inflating or deflating bottom-line expenditures, depending on the year in question. The estimates in this table were arrived at by reversing these annual pre-payments. In fiscal 2001, for example, the city drew on $2.3 billion in surplus funds to make debt service and other payments that wouldn’t actually be due until early fiscal 2002. Subtracting that $2.3 billion from the 2001 spending and adding it to 2002 provides a clearer picture of the city’s actual spending obligations in the latter year.

POSTED: JULY 10, 2002

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