Brian Pascus

As New York begins to reopen from the Covid-19 lockdown, the city and the state face multibillion-dollar holes in their budgets.

The city expects a $9 billion shortfall in revenue in the next two years.

“We’re going to be in a horrible budget situation for years,” Mayor Bill de Blasio has said.

Albany’s fiscal house is in no better order. State revenues are projected to be $8.1 billion less than they were in 2019, and Gov. Andrew Cuomo said state tax revenues would not return to their March level until 2024.

But to city and state budget experts, even these grim projections seem optimistic.

“I don’t think it’s unreasonable to say we are going to lose $15 billion in projected tax revenue and even closer to $20 billion,” Nicole Gelinas, an urban economics and finance expert at the Manhattan Institute, said of the city’s budget.

Unchecked, the financial crisis will get worse, said E.J. McMahon, research director at the Empire Center for public policy.

“The government spending side, left alone, increases every year. Spending is not stationary,” McMahon said. “Everything goes up. Everything is designed to increase.”

Slow return

The state has built-in spending obligations to health insurance for its employees, pension contributions, debt service, school aid, Medicaid and mental health programs.

Even before the pandemic, the state was facing a $6 billion budget gap because of Medicaid expenditures. Cuomo had closed the gap by cutting expenditures under the government-subsidized health program. But by delaying cuts until the pandemic is over, the problem looms down the road.

It is optimistic, the experts say, to think the financial picture will be rosier by then.

“Things are not coming back the same way as before this started,” said Stephen Berger, an investment banker who helped steer the city through the late-1970s fiscal crisis.

Commercial real estate, a major source of tax revenue for the city, will take a massive hit, because the work-from-home environment has led companies to rethink their office needs, Berger said.

The retail sector, already in trouble before the outbreak, will experience a death spiral for years as stores shutter and consumers continue to order online, Berger predicted.

Many out-of-work New Yorkers have left the city, he noted, an exodus that could create chaos throughout all sectors of the economy.

“It won’t happen all at once, but it will have a major impact on city activities and an enormous impact on revenues,” Berger said.

Borrowing options

The mayor and the governor have pressed the federal government for aid. But the divided Congress and the Trump administration have yet to come to the rescue.

As the city waits for help, de Blasio has asked the state to grant him as much as $7 billion in borrowing authority to meet operating expenses. So far Albany has refused.

Borrowing would be irresponsible, said Berger, who was appointed executive director of the Financial Control Board in 1976.

“You understand that debt has to be paid for, and who is going to pay for it? The future,” he said. “There is nobody who is going to pay for it who has a voice or a vote in that borrowing.”

The experts say that before the city starts taking on debt or makes the case for federal aid, de Blasio, who has increased his budget by $20 billion since taking office, must take an ax to spending.

“I would like to see a hard-ass budget that shows how much can be taken out of present spending,” Berger said before getting in a dig at the mayor’s well-documented fitness routine: “If you can’t take $4 billion or $5 billion from the city budget, then you should stay in the gym in Brooklyn.”

A full-service wage freeze across the city’s union workforce, caps on all executive salaries and furloughs of nonessential municipal employees are in order, the Manhattan Institute’s Gelinas said.

“We really have to go down to the bone in terms of efficiency before we can cut frontline services,” she said.

At the state level, the Empire Center’s McMahon recommends, all public-sector salaries should be frozen for two years. He advocates for cutting school aid to the wealthiest districts and laying off or furloughing workers who are nonessential.

“You have to reduce the workforce,” he said. “It’s not pleasant, but you have to do it.”

© 2020 Crain’s New York

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The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.