Despite a continuing economic slump and the most serious municipal fiscal crisis in a quarter-century, the New York City budget is growing at nearly twice the inflation rate.
Excluding state and federal aid, and adjusting for the effects 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 than 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 Mayor 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.
In Bloomberg’s first budget, which covered fiscal 2003, the cost of wages and salaries for municipal employees was still rising because the city was entering the final year of multi-year union contracts that dated back to 2000. In fiscal 2004, however, almost all of the projected city funds spending increase can be attributed to the rising cost of pension fund contributions and debt service.
Excluding pensions and debt service, all other city-funded expenditures are slated to increase in fiscal 2004 by $47 million, or a fraction of a percentage point. There are two main reasons why this measure of spending growth has come to a near-halt: (1) labor agreements requiring annual salary increases have expired, and (2) the adopted budget calls for a 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. As shown in the chart below, 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.
The trend lines on this chart 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 city has 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 still won’t be sufficient to keep pace with spending.
A longer view
In percentage terms, the projected fiscal 2004 increase is the fourth largest in the last 10 years, as shown in the table below:
As part of his November budget modification, Bloomberg also announced a “Program to Eliminate the Gap,” or PEG, that included $719 million in agency spending cuts for fiscal 2003. Nonetheless, some major agencies, such as the Police and Fire Departments, actually ended up spending more than was originally estimated in the adopted budget. As a result, the net city-funded spending increase in fiscal 2003 was virtually unchanged from the original July 2002 projection.
In fiscal 2004, as shown below, agencies in most major service areas are expected to experience year-to-year reductions in spending. A few departments, such as Education and Sanitation, will continue to spend more than they did when Bloomberg took office two years ago, however. (The seemingly large reduction in Social Services spending since 2002 is mainly the result of a $232 million, onetime increase in federal Medicaid reimbursements.)
The Mayor frequently has taken credit for reducing the cost of government by over $2.5 billion, but this figure refers to the difference between the increases allowed in his budgets and the much larger increases that had been projected for fiscal 2003 and 2004. In effect, when Bloomberg makes this claim, he is saying he has prevented city funds from growing by another 8.5 percent.
Will the Wall Street rebound help?
The recent turnaround in stock prices is already having a positive effect on the New York City budget, improving the pension fund’s performance sufficiently to reduce the city’s anticipated pension contribution by $100 million in 2004, which is reflected in the budget figures cited here.
Even under the rosiest of scenarios, however, the city cannot hope to simply grow its way out of its future budget gaps. For example, if New York’s economy suddenly and unexpectedly returns to the peak boom conditions of the late 1990s, Bloomberg’s projected increase in city spending over the next four years would still be sufficient to outrun revenues by billions of dollars.
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 more than $3 billion in city tax increases effective this year, not to mention state income and sales tax increases that will fall disproportionately on the metropolitan region. 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.
To be sure, the economic impact of higher state and city taxes will be mitigated to some extent by the pro-growth effects of accelerated federal income tax cuts. The added reduction in capital gains tax rates, along with a partial exemption for corporate dividends, will directly benefit New York’s exceptionally large investor class and generate new business for the Wall Street-based securities industry. During the early 1990s, by contrast, the city and state tax hikes were compounded by a series of federal income tax increases targeted at high-income households concentrated in states such as New York.
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 expanding by an estimated 1.4 percent.
Bloomberg can argue that his ability to control the factors driving budgetary growth—particularly pension and debt service costs—is limited. But that just means the Mayor and the City Council will need to do more to reduce the spending they do control.
Originally Published: FISCALWATCH MEMO
- Taxes, fees, fines, special “non-categorical” grants and borrowing.
- Based on Consumer Price Index for 2004 as forecast in the Mayor’s Executive Budget Message, April 2003.
- Debt service is defined here to include both general city debt obligations and payments on Municipal Assistance Corp. (MAC) bonds, which are supposed to be paid off in 2004 under a complicated refinancing deal financed by a pledge of state sales tax revenues.
- Between Dec. 31, 2001 and Feb. 28, 2003, the total city work force of full- and part-time employees had been reduced by 10,560 positions, or about 3.4 percent, according to the Mayor’s executive Budget. That budget projected a further decrease of 6,000 positions by the end of fiscal 2004, but many of those job cuts were reversed in the final budget approved by the City Council.
- Not counting recent tax rate increases, most of which are supposed to “sunset” after 2005, the mayor’s financial plan for 2004 through 2007 forecasts that revenues from the most economically sensitive portion of the city tax base—sales, business and personal income taxes – will grow by 20 percent over the next four years. When the city’s economy was enjoying its fastest sustained growth during the recent boom, from fiscal year 1995 through 1998, revenues from the same taxes grew by 36 percent. A return to that faster growth rate over the next four years would yield additional revenues of $1.6 billion—enough to close only half the projected $3.2 billion gap by 2007. The same exercise, conducted on an annual basis, yields a similar result: Assuming that sales, business and personal income taxes grow in fiscal 2005 at rates comparable to the peak years of the late 1990s, the projected budget gap for next year will be cut by a little more than half, from $2 billion to $900 million. The budget gap projections assume no increase in wages and salaries for city employees over the next four years. Moreover, the revenue growth already projected by the mayor for the period of fiscal 2004 through 2007 is relatively strong by historical standards; adjusting for inflation, the forecast for the next four years envisions revenue growth on a par with what the city experienced during the economic expansion of the 1980s.
- According to the Manhattan Institute’s NYC-STAMP model, the impact of tax increases enacted since the start of 2002 is now approaching 91,000 lost jobs. For details, see http://www.empirecenter.org/publications/new-city-tax-hikes-raise-likely-job-loss-toll
- For details, see city Comptroller William Thompson’s July 2 economic report at http://www.comptroller.nyc.gov/.