After a winter and spring filled with budgetary “doomsday” talk in City Hall, New York’s latest fiscal crisis has been interrupted by an eerie, eye-of-the-storm calm. In the space of two months, Mayor Bloomberg’s demands for union concessions and program cuts gave way to unilateral budget restorations and celebratory photo ops with City Council leaders.

To the extent they pay attention to this stuff, most New Yorkers probably feel like the elderly Queens resident quoted in a recent Times story: “They haven’t got the money, and then all of a sudden they’ve got it?” she asked. “What is that?”

The short answer: Due to massive tax increases and windfalls from Albany and Washington, the city has entered a new fiscal year with much more money than it had expected. But that cash will rapidly be spent, and the fiscal crisis will reassert itself soon enough probably soon after City Council elections are over with in the fall.

Excluding state and federal aid, and adjusting for the use of prior-year surpluses, the portion of the budget financed by the city’s own revenues is up nearly $1.4 billion for the fiscal year that began July 1. This represents a growth rate of 4.5 percent at a time when the regional cost-of-living index is rising by just 2.3 percent. The newly adopted budget will bring the total city-funded spending increase under Bloomberg to nearly $2.2 billion, or 7.3 percent, since he took office in 2002. The inflation rate for this period is less than 5 percent.

Bloomberg has not actually reduced the cost of city government. However, beneath the inflation-plus growth trend are signs that, for the time being at least, he has clamped a lid on core operational expenses.

In fiscal 2004, almost all of the projected increase in city-funds spending can be attributed to the rising cost of pension-fund contributions and debt service. The former is driven by the pension fund’s sagging investment values and costly benefit increases approved by the state in the late 1990s; the latter is driven by past capital spending (much of it poorly managed and wasteful, especially in the school-construction area) and by the 10-year deficit notes that Bloomberg used to help balance last year’s budget.

Exclude pension and debt costs, and all other city-funded expenditures are slated to increase by just $47 million, a fraction of a percentage point. This measure of spending growth has come to a near-halt for two reasons:

Union contracts requiring annual across-the-board salary increases have expired.

The budget calls for a slow, continuing reduction in the headcount of city employees.

But holding the line on wages and salaries will not be nearly enough to permanently balance the city’s budget in the long term. City spending is projected by the city to continue growing at twice the rate of inflation over the next four years. Pensions and debt service alone are projected to rise by another $2.9 billion in fiscal years 2005-2007, accounting for virtually the entire projected budget increase above inflation during that period.

These trend lines help explain why Bloomberg is projecting a budget gap of $2 billion for fiscal year 2005, growing to $3.3 billion by 2007. Although the mayor and council have enacted more than $3 billion in tax and fee increases since the start of 2002, and tax-revenue growth over the next four years is projected to keep pace with inflation, revenues in the nation’s richest and most heavily taxed big city still won’t be sufficient to keep pace with spending.

Furthermore, the revenue projections that form the basis of the city’s budget gap projections assume, improbably, that there will be no negative economic fallout from city and state tax increases. In fact, the last round of major city and state tax increases in early 1990s helped exacerbate a recession in which New York lost more than 300,000 jobs, just as tax cuts boosted the roaring comeback of the late 1990s.

To be sure, the economic impact of higher state and city taxes will be mitigated by the pro-growth effects of federal tax cuts, especially cuts targeted to Wall Street investors. But the city continues to lose private-sector jobs, and its economic outlook remains uncertain at best. New York City’s economy shrank by another 2.7 percent in the first quarter of 2003, even as the national economy was slowly expanding, according to the city comptroller’s office.

Bloomberg can argue with some justification that his ability to control the main factors driving budgetary growth – particularly pension costs, and Medicaid as well – is limited. But that just means the mayor should be loudly, insistently and consistently pounding on Albany to deliver reforms in these areas.

In the meantime, he and the council must do more to reduce the spending they can control.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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