The Boy Cries "Wolf" Again,
But Lobo May Be at the Door

By Henry J. Stern
July 16, 2004

One of the themes of this column over the past two and a half years has been that New York City is in more fiscal trouble than it is willing to admit. By scanning the articles we have written, you can see how often, back to 2002, we have warned about unresolved structural financial problems that confront the city. More specific and well-informed expressions of concern have come from the Citizens Budget Commission and the Independent Budget Office. The CBC is funded privately, and the IBO is a public but non-mayoral agency. Both have seven-figure budgets, strong leadership, and competent analysts. They enjoy reputations for sound judgment and objectivity.
 
For the three Bloomberg years, fiscal years 2003, 2004, and 2005, the city budget as adopted has balanced its budget. Since the Koch administration, the city budget has been balanced. State law requires it. In this administration, services to the public have not diminished substantially. Wages are increasing modestly, with 130,000 city employees now under agreements negotiated by the administration with employee unions. The police, firefighters, and teachers will not, however, settle on the terms agreed to by District Council 37. Their wage disputes will probably end in binding arbitration for the uniformed services and nonbinding mediation for the teachers, as the law requires. This is because no union leader who agrees to a reasonable settlement is likely to be re-elected by the members. Their fate would be analogous to that met by Anwar Sadat after he courageously signed a peace treaty with Israel in 1979.

The Financial Control Board, whose report I cited and linked to Wednesday in Q-16, approved this year’s city budget — FY 2005 — but it forecasts a $3.7 billion deficit next year and similar deficits to come.Yet there appears to be no sense of alarm over this dire forecast. Mayor Bloomberg, testifying before the FCB, reported by Jennifer Steinhauer in today's Times, praised the fiscal management of the last three years, but warned that difficult times lie ahead.

So why aren’t alarm bells ringing over this impending fiscal disaster? The answer: No one really believes it will happen. We have had similar doomsday predictions for as long as I have been involved with city budgets, and yet, by the time the budget is adopted in late June, the yawning gaps are always closed. So people yawn at the gaps. Several years ago, I compared city finances to a ship approaching Niagara Falls from the south. Somehow, each year the ship survives the falls, navigates the Welland Canal to return to Lake Erie, and resumes its perilous course.
 
Not to drown you with comparisons, but the perennial annual — both words fit — budget gap reminds one of the weapons of mass destruction issue. They were there, everyone says, but when we looked for them, we couldn’t find them. But they will be there next year — $3.7 billion worth — and we have documents, statistics, and projections from the best authorities to prove it. I do not deny the existence of the budget gap; it is not an unidentified flying object. But the public is not truly alarmed by a bogeyman that disappears every June like snow on a mountaintop.

That is part of the reason — deep skepticism based on experience — that the city cannot achieve the structural reform that experts say is needed for its financial health.

In 2004, for example, the mayor submitted the executive budget as required by law. That budget contained $200 million in reductions, mostly in popular services directly affecting the public. The City Council held open hearings, listened to its complaining constituents, and restored in June the $200 million that the mayor had cut in April. The mayor agreed to the restoration, and at the announcement of the adoption of the budget the mayor and speaker shook hands and exchanged kind words.

In politics, you shake hands a lot with people you don’t like, even people who want to destroy you. If you don’t, the public thinks less of you. We learned this over 40 years ago when a young Democratic district leader in Greenwich Village, Edward Koch, would not shake hands with the Tammany chief who was his opponent for district leader, Carmine DeSapio. After their 1963 race, which Mr. Koch won by a mere 41 votes, Mr. DeSapio charged in a local newspaper that Mr. Koch had “opened up the graves.” That refers to the old practice by political machines of casting ballots in the names of registered voters who had died.

When they met at a taping for Gabe Pressman of NBC and Mr. DeSapio offered his hand, Mr. Koch refused and asked how Mr. DeSapio could accuse him of grave-opening on Thursday and shake hands with him on Friday. When Mr. DeSapio went on the air, he recounted Mr. Koch’s behavior and called it un-American. This was an earlier, far more genteel version of Cheney-Leahy. Nonetheless, Mr. Koch was criticized for his action, which was considered rude and unsportsmanlike. After all, even boxers touch gloves before they come out fighting. Since then, Mr. Koch has shaken people’s hands when they are offered. Mr. DeSapio, a historic figure in Democratic Party politics, born in 1908, is ill but still lives in Greenwich Village. He and Mr. Koch have long since made up.

As I have tried to show, with some digressions, people do not believe that local fiscal disaster is imminent. They have been misled too often. The mayor and speaker, rivals though they be, may both wish the issue will not emerge for some time because no one likes to make unpopular decisions like raising taxes or reducing services so close to what for city elected officials is Judgment Day, November 8, 2005. We foresee interesting gyrations during the next year in the effort to avoid the day of fiscal reckoning. Look for debt-limit exemptions and off-budget items — the Enron solution. Look for small reductions to demonstrate resolve. Look for a search for new sources of revenue — higher license fees and user fees for city services. A transfer or flip tax on appreciating co-ops or condos is a possibility, but would ruffle the feathers, and pockets, of voters and contributors. The $400 homeowners’ rebate on the property tax that the mayor initiated would be difficult to repeal.

The city’s hope is for an expanding economy, aided by the billions of dollars in New Yorkers’ pockets as the results of the Bush tax cuts, which enrich wealthy taxpayers, of whom we have many. We would benefit from increased activity on Wall Street, which accompanies a rising market. That means bigger bonuses, which leads to more spending. It would also help not to have snow this winter, and to defer costly labor settlements until after next year’s budget is adopted.
 
In terms of dollars, what the city needs most is mandate relief from the state, particularly in Medicaid costs. Billions of dollars are spent each year on programs that, in other states, either do not exist or are state-funded. The rapid increases in these costs have plagued not only New York City but counties and cities across the state, some of which are in more trouble than we are because their real estate tax-base is much smaller. The fact that upstaters have the same problem as we do could help in finding a bipartisan solution. But cost reductions in Medicaid could tread on the toes of Dennis Rivera, the highly effective leader of the hospital workers who supported Governor Pataki in 2002. Any relief of these problems will depend on the state Legislature, which we have described at length in the past months as dysfunctional, gerrymandered, secretive, and undemocratic, with all power in the hands of one man in each house. Even though the legislators are not up for re-election in 2005, and will be 98% certain of re-election in 2006, most of them have long since lost the initiative bone, if they ever had one. Their districts are so stacked in their favor that legislators are more likely to be removed by prosecutors than by voters, especially if they become careless in the conduct of their affairs.

May the looming shadow of an immense deficit lead to remedial measures early this year by the authorities that oversee city and state spending. The sooner action is taken, the less severe it will have to be. But that mantra has never been heeded by procrastinating politicians who are only induced to implement initiatives by the imminent, indeed, immediate indication of impending insolvency.

Happy New Fiscal Year.