Even as the economic outlook brightens, New York City’s long-term budget picture is deteriorating. And, aside from pointing fingers at Albany, Mayor Bloomberg seems to have few new ideas for dealing with the problem.

Bloomberg presented his proposed 2004-05 city budget yesterday. As expected, it features increased revenue estimates based on the nation’s strong GDP growth, Wall Street’s rebound and recent up-ticks in the city’s private-sector job count.

The good news: The mayor now expects taxes over the next two years to come in $867 million above his January estimate.

The bad news: City government expenses during the same period are now projected to rise by another $3.2 billion – roughly three times as fast as the adjustment in revenues.

The result: While next year’s proposed budget is balanced, New York’s budget shortfall for the fiscal year after next – 2005-06 – is now projected at $3.8 billion, well over double the $1.4 billion gap Bloomberg had forecast just a year ago (see chart).

Looking back to the late ’90s, City Hall cynics are tempted to take these future gap numbers with a grain of salt. After all, Mayor Rudolph Giuliani’s annual budgets forecast some pretty big out-year deficits, all of which ultimately disappeared in a flood of surplus tax receipts. But, as Bloomberg pointed out yesterday, even a return to the red-hot city revenue growth of 1998-2000 would erase just a quarter of the projected 2005-06 budget shortfall.

What’s driving these spending numbers? Bloomberg focused his presentation on “non-discretionary” expenses such as Medicaid, the cost of which is slated to rise another $475 million over the next two years, above and beyond January’s already steep estimate.

But much of the added spending is well within the city’s control – starting with collective-bargaining settlements.

After pushing through a record tax hike in late 2002, Bloomberg started pressing municipal labor leaders for concessions to help balance the budget. His budget last year outlined a series of options for meeting the mayor’s $600 mllion savings target – starting with the simple requirement that more city employees work a 40-hour week.

The mayor reasserted his objective in his January financial plan: “Future collective-bargaining agreements can only be funded through increased productivity and other labor savings.”

That all changed last week, when Bloomberg announced the “great news” that he had agreed on a retroactive three-year deal with the city’s largest union, District Council 37 of the American Federation of State, County and Municipal Workers.

Assuming they ratify it, D.C. 37 members will get a $1,000 up-front cash bonus and permanent wage increases of 3 percent for the second year and 2 percent for the third and final year of the agreement. The pay hike in the third year will be at least partially subsidized by a 15 percent pay cut and reduced benefits for newly hired union members during their first two years on the payroll. An added 1 percent pay hike will hinge on the union’s agreement to additional productivity enhancements. But there will be no change in current work rules affecting any current D.C. 37 member.

Although it falls far short of the mayor’s original goals, the D.C. 37 contract is a bargain by most standards. Yet if the entire city workforce settled for similar terms, even this relatively modest deal would add nearly $1.2 billion to the budget over the next two years – accounting for more than one-third of the projected increase in city spending during that period.

Once a state arbitration board dictates a new contract settlement for police, the final number is only likely to grow larger. Teachers, too, quickly signaled their determination to hold out for much more.

Bloomberg obviously hopes the court rulings in the Campaign for Fiscal Equity (CFE) school-funding case will generate a windfall of new state aid, although he has wisely refrained from budgeting CFE money for operating purposes. But even if Gov. Pataki and the Legislature resolve their deadlock over the issue, new money from Albany rarely comes without costly strings attached. Ironically, the end result could further ratchet up city spending as well.

Ten years ago, in the opening sentence of his first budget message, Rudy Giuliani declared: “New York City government is too large; it has grown beyond our ability to afford it.”

Today – thanks in part to the relaxing of fiscal constraints during Giuliani’s last few years in office – that’s still true. Despite more than $2 billion in permanent tax hikes since 2001, the structural budget gap is growing again. Bloomberg will need to do much more to cut government down to size – and he’ll need to do it with an election approaching.

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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