It’s official: According to Mayor Giuliani’s latest fiscal plan, the next mayor will face a budget gap of $2.7 billion – which, if it actually materializes, will be $400 million more than the one Giuliani inherited from David Dinkins.

So much for the long term. Unfortunately, the short term doesn’t look so hot, either.

New York’s budget is still balanced, technically. But subtract last year’s leftover surplus, and the city would be running an operating deficit of $400 million, growing to $2.4 billion in the fiscal year that begins July 1. By the time Giuliani’s successor puts together his first fiscal plan, there won’t be much surplus left to work with.

The main culprit: city operations spending, which is up roughly 25 percent over the last four years and would grow another 4 percent next year under Giuliani’s plan.

These numbers are never carved in stone. Before this fiscal year ends on June 30, the mayor and City Council can be expected to “find” more money – perhaps enough to fix this year’s imbalance and roll more of last year’s surplus cash into fiscal 2002. The City Council’s staff, for example, thinks the 2003 gap will be a lot smaller than Giuliani projects.

But, as the city’s fiscal monitors have been pointing out, New York’s budget picture now looks darker than it has in years. While budget gaps melted away in a red-hot economy from 1996 through 2000, it’s the surplus that’s now rapidly melting.

Here, starting with the worst, are some downside risks that could make the post-Giuliani fiscal outlook even darker:

Collective bargaining: Giuliani’s budget assumes that last month’s tentative settlement with District Council 37, the umbrella for 125,000 city workers, will serve as a pattern for other unresolved contracts. That would mean a base pay hike of 8 percent over 27 months, plus assorted sweeteners, in exchange for a mayoral right to dole out merit pay in unspecified circumstances.

But teachers and uniformed workers (egged on by mayoral candidates) will be looking for something more like the city librarians’ settlement – a 16 percent pay hike. The teachers have commanded the biggest headlines, but the biggest wild card may be the Police Benevolent Association, which has won the right to seek arbitration by the labor-friendly state Public Employment Relations Board.

The economy: The mayor’s revenue projections are appropriately pessimistic about Wall Street profitability and stock prices in the near future. The revenue side of the budget assumes the nation will experience a soft landing this year, to be followed by a relatively brisk takeoff next year, persisting at least until 2005.

But skyrocketing fuel prices could hurt tourism more than expected, and there’s growing concern that New York City could face a California-style electricity shortage if the weather gets hot enough this summer.

The school-funding decision: The Board of Education’s total budget has risen a whopping 36 percent, or $3.3 billion, in the last four years alone. Under Giuliani, the public schools have added 14,000 pedagogical employees, and the city has spent billions more on school construction. But state Judge Leland DeGrasse has ruled, in effect, that it’s not nearly enough.

His decision was aimed squarely at Albany, but the state’s response could have the paradoxical effect of further ratcheting up city education spending – without any improvement in pupil performance.

Health and Welfare: The shift to managed care put a brake on the Medicaid cost spiral in the late 1990s, but now the $3 billion program is back to growing 5 to 6 percent a year. The city’s Health and Hospitals Corp. is facing potential deficits again after five straight years of budget surpluses and productivity improvements. And last but not least, the first recipients covered by the 1996 welfare reform law will exhaust their five-year eligibility for federally funded benefits this year. Some, inevitably, will fall back on state and city funded benefits.

This much is clear: The city has maxed out on savings from the welfare and Medicaid reforms of the 1990s. Costs in this area probably have nowhere to go but up.

It’s possible (if unlikely) that none of these factors will add much more than anyone already expects to the city budget in the near future. At an absolute minimum, New York will still be locked into a trend of spending a half-billion or so more dollars than it collects in revenue every year – despite imposing the heaviest tax burden of any major city in the country.

And at some point, perhaps the men who would be mayor will get around to explaining what they intend to do about it.

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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