New York City’s $4.9 billion budget gap for the fiscal year that starts July 1 is not an isolated problem due solely to the destruction of the World Trade Center. While the terrorist attack was followed by a steep drop in business activity and tax revenues, more than half the city budget gap stems from a growing imbalance between spending and revenues that is rooted in the budgetary policies of the previous mayoral administration. Chief among these policies was the expansion of the city’s employee headcount to near-record levels, with no offsetting increase in labor productivity or reduction in labor costs.

Wages and benefits for city employees—which make up more than half the budget—were growing more than twice as fast as projected city revenues even before last Sept. 11. Mayor Michael Bloomberg would have found it impossible to maintain this growth pace in any event.

The Mayor’s proposed Executive Budget for fiscal 2003 is only tenuously balanced, and budget gaps of $2.7 billion to $3.6 billion are projected for subsequent years. Bad as they look, these numbers assume that still-unsettled labor contracts will be settled retroactively on the city’s preferred terms, and that unions receive no wage increases after fiscal 2003. If these assumptions prove overly optimistic, the city’s 2003 budget will be knocked out of balance, and budget gaps in subsequent years will grow by another $1 billion or more.

Thus the collective bargaining table will be the most important field of action for Mayor Bloomberg over the next 18 months. As this analysis will illustrate, the mayor cannot keep his pledge to hold the line on taxes while bringing the city’s budget back under control unless he wins significant concessions from municipal unions—and reduces the employee headcount in the process.

Anatomy of the problem

The city has reached an impasse in its negotiations with two major unions—the Patrolmen’s Benevolent Association (PBA) and the United Federation of Teachers (UFT). Members of a third major union, the United Firefighters Association, also are working without a contract.[1]  The PBA, UFT and UFA contracts expired in 2000 in July, November and May, respectively, so their members will be owed retroactive pay increases once settlements are reached.

The PBA and UFT have asked for large wage and benefit hikes to bring their members’ pay more in line with that of their suburban counterparts. However, the current city budget and the Mayor’s preliminary fiscal plan set aside reserve funds sufficient to pay only half as much as each union is seeking. Any raises in excess of these reserves will drive the City’s payroll costs above the budgeted amounts for this fiscal year and every future fiscal year.

Meanwhile, unions representing most of the city’s clerical employees, sanitation workers, corrections officers and police sergeants, lieutenants, captains and detectives are covered by contracts that expire at different times over a six-month period beginning June 30, the end of the current fiscal year. In normal times, these employees would expect another round of raises in their next contracts. And so will the teachers and police officers.

However, the new mayor’s preliminary fiscal plan provides for no net increase in wages for city employees from fiscal year 2003 through 2006.[2]  This can be accomplished only if the municipal unions agree to an unprecedented three-year pay freeze—or if modest wage hikes over the next few years are coupled with a much larger reduction in the employee headcount than the mayor has yet proposed.[3]

In other words, even if the city emerges from the UFT and PBA talks with retroactive settlements it can digest in its current fiscal plan, Bloomberg will need to almost immediately begin a new round of contract talks with the ambitious goal of holding net compensation costs for all unions to zero over the next four years. And even in that case, the city will still face big budget problems.

The path to the problem

Faced with a large budget gap upon taking office in 1994, Mayor Giuliani initially was able to hold the line on spending by entering into labor contracts of roughly five years’ duration[4]  that called for no base salary increases for the first two years—the “double zeroes” that would later be loudly bemoaned by union leaders. However, in the final three years of the agreements, union members were granted across-the-board wage and benefit increases ranging between 13 percent and 15 percent. As it turned out, these raises roughly equaled the actual increase in the regional cost-of-living index over the life of the contracts.

The 1995-96 round of labor agreements was expected to add roughly $2 billion to the budget by fiscal 2001—but this estimate didn’t fully reckon with subsequent steep increases in benefit costs or growth in the size of the workforce, which drove personal service expenses even higher. The total increase in personal service costs since 1995 has been about twice as large—$4 billion, or 34 percent, as of fiscal 2001.[5]

Starting in fiscal 1996, the city accumulated budget surpluses totaling $3 billion by fiscal 2000. But as the costs of the labor contracts kicked in, expenses began to catch up with the city’s surging revenues. In the current city budget, planned spending actually exceeded revenues by more than $2 billion, requiring Giuliani to deplete more than more than two thirds of the accumulated surplus to prevent the city from running an illegal operating deficit.

In April 2001, the Giuliani Administration announced a contract agreement with District Council 37 of the American Federation of State, County and Municipal Employees, whose affiliates represent 100,000 mostly clerical city workers. This contract granted wage and benefit increases totaling 9.26 percent—nearly double inflation—over 27 months ending with the current fiscal year on June 30, 2002. Giuliani’s last budget included a collective bargaining reserve reflecting his hope that all city unions would accept a similar deal, with an annualized cost of $1.7 billion in city funds.

But at roughly the same time the DC37 pact was settled, Giuliani was projecting that city fund revenues from fiscal years 2000 through 2003 (the period covered by the latest, unfinished round of collective bargaining) would increase by only $698 million—less than half the amount needed to finance citywide labor agreements based on the DC37 standard. Moreover, three months after the DC37 agreement, the Mayor reached a somewhat more generous deal with the Uniformed Forces Coalition, which included unions representing sanitation workers and correction officers. The coalition members were granted wage and benefit increases totaling 11.9 percent over 30 months.[6]

Since then, of course, New York’s overall fiscal picture has deteriorated. Mayor Bloomberg’s preliminary budget projects that city fund revenues in fiscal 2003 will be $59 million below the 2000 total, not counting $1.5 billion in long-term bonds he plans to issue next year to make up for the revenue loss blamed on 9/11. Including bond proceeds, city fund revenues still will not have risen sufficiently to cover even half of Giuliani’s projected cost for the last round of contract talks—not to mention the much larger cost implications of the current UFT and PBA wage demands, or expected demands from other unions once their current contracts expire.

Fiscal implications of union demands

Before contract talks broke off last year, teachers reportedly were seeking a 22 percent pay raise, while police are now formally seeking a wage and benefit package worth 34 percent[7]. Every additional percentage point increase in wages above the amount already reserved in the budget will cost the city $56 million a year for teachers and $19 million a year for police officers, according the city comptroller’s office.[8]  The current city budget, as noted, contains a labor reserve to grant teachers and police officers retroactive increases of about 9.26 percent and 11.9 percent respectively, patterned after the DC37 and Uniformed Coalition deals.

The UFT’s requested pay raise would cost $582 million a year more than than the city has budgeted and the PBA’s requested pay hike would cost $420 million more—a total of more than $1 billion above the amount now budgeted to cover wage increases for these unions from their previous contract expiration dates in 2000 into fiscal 2003. Thus, if the UFT and PBA get just half the additional wages and benefits they are seeking above and beyond what the city has already offered, Bloomberg would have to find another $500 million to cover largely retroactive payments—and that same $500 million would become part of the recurring base after fiscal 2003, adding that amount to projected budget gaps for future years.

Even if teachers and police settle on the city’s preferred terms for retroactive increases—costing not a penny more than what is already budgeted—a pay raise in future years for all employees geared to the currently projected inflation rate would cost $227 million in fiscal 2003—mushrooming to $1.7 billion by 2006, according to the city comptroller’s office.[9]

It’s important to note that these figures are all based on the current city workforce of just over 300,000 full-time equivalent employees. To the extent the size of the workforce is reduced, the cost of any pay increase also will be reduced.

Current status of talks

Teachers declared an impasse in their talks with the city last year and took their demands to a state Public Employment Relations Board (PERB) fact-finding panel. On April 8, that panel produced a non-binding recommendation that called on the city to provide teachers with the same “pattern” wage increase as other civilian workers—the 9 percent already included in the budget. However, the PERB fact-finders also recommended an additional 6 percent pay hike in exchange for the teachers’ agreement to extend their workday by 20 minutes, which would bring the total value of the increase to 15 percent over 27 months. Significantly, the fact-finders stipulated that the extra 6 percent—which would cost the city an additional $336 million a year—should only be awarded “assuming monies are made available from another funding source.”[10]

Ultimately, Bloomberg has the leverage to prod the teachers to either settle or strike,[11]  which would subject them to stiff penalties under the state Taylor Law. The final contract is also expected to reflect the degree to which the UFT’s cooperates with Bloomberg’s effort to abolish the Board of Education and assert mayoral control of the school system.

The PBA contract is the wild card in the budget game. The union realized a long-standing priority in late 1998 when the state enacted a law giving New York City police the right to seek binding arbitration of their contract disputes before PERB, which can consider salaries and benefits in neighboring jurisdictions as a basis for a city settlement. The law was strongly opposed by former Mayor Giuliani, on the grounds that a large arbitration award to police would create added pressure for comparable settlements with other unions. In fact, PERB has been known for imposing generous police wage settlements in other jurisdictions, often seeming oblivious to local fiscal concerns.[12]  On the other hand, some labor analysts have suggested that the new arbitration route might not immediately result in the large wage increases police are seeking.[13]

The city and the PBA began formal hearings before the PERB arbitrator in mid-March, with more hearings to follow in April. Under state law, Bloomberg will have little choice but to accept the arbitrator’s ruling, which will be handed down in late spring or summer.

Those consequences could be quite costly. For example, even if the arbitrator merely splits the difference between the PBA’s formal demand and the city’s last offer, the cost of the retroactive settlement would exceed the mayor’s budgeted labor reserve by $209 million.

If the city emerges from the UFT and PBA talks with settlements it can digest in its current fiscal plan, Bloomberg will need to almost immediately begin a new round of contract talks with the ambitious goal of holding net compensation costs for all unions to zero over the next four years.

Looking ahead

It’s obvious the city lacks the money to agree even to inflation-level wage settlements over the next few years. On the other hand, in previous New York City fiscal crises, unions have strongly resisted permanent givebacks. In the most dire fiscal situations, they have grudgingly accepted temporary wage restraint—as in the case of the two-year freezes under Giuliani—only at the price of pushing larger increases into future years.

In light of New York current budget gap—the largest since the mid-1970s—it’s clear that city workers (with the possible exception of the arbitration-assisted PBA) cannot hope for further wage increases in the near future unless they agree to improve their productivity, which would allow Bloomberg to more significantly reduce the city’s payroll without affecting vital services. Here the mayor has some grounds for optimism—because, union objections aside, clearly there is much that can be done to realize the elusive goal of doing more with less in city government.

Originally Published: FISCALWATCH MEMO


  1. The firefighters had tentatively agreed last summer to same terms as other uniformed workers including corrections officrs and sanitation workers, but their ratification vote was indefinitely postponed after Sept. 11
  2. While the absence of additional reserves for wage increases after 2003 is not explicitly acknowledged in the mayor’s fiscal plan, it is readily apparent from the financial plan tables and confirmed in budget analyses by watchdogs including the Independent Budget Office and the state and city comptrollers.
  3. Assuming all currently unresolved contracts are settled on the city’s terms with no improvements in productivity, total wage costs over the next four years can be held level if roughly 3,000 positions are permanently eliminated for every percentage point increase in wages. Thus, for example, an increase equal to the projected inflation rate of 5 percent over the next two years would require the elimination of 15,000 jobs. This calculation is based on the city funds cost of a one percent for all employees increase as estimated by the Office of Management and Budget based on the 1999 payroll, grown to reflect the average pay increase reflected in the city’s budgeted collective bargaining reserve. Bloomberg’s preliminary fiscal plan calls for the elimination of 5,000 to 7,000 jobs through a combination of attrition and early retirement incentives.
  4. The actual contractual periods were 61 months for the UFT, 64 months for the PBA, and 60 months for DC-37 and most other unions, with differing start dates mostly in 1995.
  5. The workforce growth was enough all by itself to account for almost $1 billion in additional costs not anticipated when the contracts were signed. Another added cost factor was the compounding effect of annual salary increases and pay raises based on seniority—which are especially frequent in the early years for newly hired police and teachers. For example, as of 2000, police officers were eligible for a 57 percent pay increase during their first five years on the force, merely by moving up the seniority ladder. A contract that awards a pay increase of 16 percent over five years can end up costing much more when thousands of newly added employees are simultaneously receiving annual, seniority-based increments, a common feature of public employee contracts throughout New York State.
  6. The coalition initially included the UFA as well, but the understandably distracted members of the firefighters’ union postponed their pending ratification vote in the wake of Sept. 11.
  7. As reported on the informational telephone hotline for PBA members as of March 25.
  8. These sums represent additions to the total cost of the package, which becomes recurring annual expense going forward.
  9. “The Comptrollers Comments on the Preliminary Budget for Fiscal Year 2003 and the Financial Plan for Fiscal Years 2002-06,” pp. 39-40.
  10. New York State Public Employment Relations Board, “In the Matter of the Impasse Between UFT and The Board of Education,” Case Nos. M201-003—M201-015, p. 137.
  11. The UFT tentatively scheduled a strike vote for May 8.
  12. In Suffolk County, for example, a state arbitrator in 2000 awarded the county police union a four-year, 20 percent pay hike that will boost the average officer’s salary to $105,000 by 2003. The state Taylor Law allows unions to justify their demands based on contracts in neighboring jurisdictions. High police salaries on Long Island, where many New York City officers live, are thus being cited as the standard in the PBA’s arbitration hearings.
  13. See, for example, “State Panel May Disappoint Police on Pay, Experts Say,” in The New York Times, Dec. 5, 1998, page B2.

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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