Mayor Bloomberg announced his budget this afternoon for the fiscal year that starts in July. The mayor expects that a combination of federal stimulus, state funds, tax hikes, spending cuts, and labor givebacks will close a $4 billion budget gap that represents 10 percent of the city’s spending. Even after $1 billion in previously planned spending cuts, the projected gap had nearly doubled in the past seven months as tax revenues have fallen.
First, the good (with caveats):
1. The mayor is finally asking city workers to pay 10 percent of their own healthcare premiums, saving $350 million annually starting in July. (Right now, workers pay nothing on the two most common plans.)
This development is welcome. However, it may be more difficult for the mayor to get the unions to open up their contracts after having just given them generous raises a few months back. (About those raises, the mayor said that “today, if you were to negotiate labor contracts, you would not make the kind of settlements we’ve made in the past.” But the mayor made these last settlements after Lehman Brothers collapsed.)
2. The mayor is finally asking for very modest pension reforms. He’s asking the unions to allow future workers to contribute to their own pensions after 10 years of work and to vest their pensions after 10 years instead of the current five years. Future uniformed workers would have to work 25 years before retirement, instead of 20, and would have to reach the age of 50 first.
However, it’s important that the mayor be clear that this is just a stopgap step to generate savings immediately through the higher contributions. It doesn’t represent the next generation’s worth of pension reform in New York City.
3. The mayor has acknowledged that across-the-board budget cuts aren’t sustainable in this environment. Unlike last year, and part of the year before, the mayor will protect all-important parts of the budget like police and sanitation, relative to other parts of the budget like social services. To wit: between this year and next year, the uniformed budget will increase by nearly half a percentage point, while social services will shrink by 6.5 percent.
But, the mayor is taking only the tiniest cut to local spending on education, and assumes a 10 percent increase in such spending starting 16 months from now. It’s unsustainable to leave the education budget relatively alone, given that it’s grown so much in recent years.
4. The mayor acknowledged that Wall Street isn’t coming back anytime soon, if ever. When explaining his chart of Wall Street profits (or lack thereof), Bloomberg pointed back to the much smaller profits of a generation ago relative to the recent boom. He said of surviving Wall Street firms that “they could go back to this level of profits” when they recover.
The mayor should be even clearer, though, that the $1 billion in federal stimulus money that the city is expecting for Medicaid (plus more dollars indirectly from the state) for the next fiscal year is a bridge loan to a drastically different future.
1. The mayor proposes that the City Council and Albany hike the city’s sales tax from 8.375 percent to 8.625 percent. That’s what it was after the tech bubble burst, except that back then, the increase was split between the city and the state. Such a rate would be the fifth-highest city-state sales tax in the nation and the highest city-only tax.
The biggest problem here, though, is that the mayor made it clear that he picked the sales tax because he expects Albany to “dramatically” hike the state income tax. This hike, too, would disproportionately fall on city residents.
2. The capital plan — investments in the city’s physical assets — is taking a 30 percent hit, after a 20 percent hit announced last year.
3. The budget still assumes that the city’s pension investments for workers and retirees will earn an 8 percent gain annually starting, well, right now. If they don’t, the city will have to make contributions to the pensions that are even higher than more than $7 billion needed annually by the middle of next summer.
Tax revenues are just vanishing into the ether. For the next fiscal year, “economically sensitive” taxes like income taxes likely will be down by 13.2 percent, or $2.7 billion, after a 16.5 percent, $4 billion drop this year.
Worse, the mayor assumes, seemingly inexplicably, that starting in the summer of 2010, these taxes will increase by 10.5 percent, or $1.9 billion.
If they don’t, a big deficit for that 2011 fiscal year — today projected optimistically to be $3.2 billion — will be even bigger.
Anything that makes that gap seem smaller than it will actually be is bad. It will lull unions and other groups into complacency, figuring that they can just ride out one bad year and everything then will return to “normal.”
In fact, it’s just as likely that tax revenues are getting back to “normal” now.
If so, in a year’s time, we’ll be worse off than it looks now, plus, federal stimulus money will be drying up by then.