Chicken Little Was Right.
City, State, USA Budgets
$how Enormous Deficits.

By Henry J. Stern
November 19, 2004

There is something you should know, if you do not know it already. The message is clear and specific, stark in its simplicity.
 
The city, state and federal governments are spending beyond their means, and face a three billion dollar deficit. Much of this is due to factors called uncontrollable: interest on the public debt, rising pension costs and, the largest threat to the budget, the sharply increasing cost of Medicaid.
 
With regard to the city, there are several reasons for this condition:

1) The city's tax revenues rise and fall, dependent on the business cycle. When revenues rise, the city spends every penny. When revenues fall, the city is forced to cut services, raise taxes or borrow money. The first two are politically unpalatable; the third is the easy way. Of course, the money the city borrows results in increased debt service costs next year, making it even more difficult to balance the budget.
 
2) Costs are imposed on the city by the state. Our country is called the United States of America. It is a federation of fifty states, plus a few other small areas. Cities are legally creatures of the state, authorized by the states to perform certain governmental functions with powers granted to them by the state Constitution. When the state wishes to pass a bill increasing pensions for city employees, even though those pensions have already been negotiated by the city with the unions through the collective bargaining process, the state is free to do that, and it frequently does. That is a reason municipal unions regularly contribute to the re-election campaigns of senators in both parties.
 
3) Medicaid is a health care program that was initiated by Congress in 1965, a cornerstone of President Lyndon B. Johnson's Great Society. It provides for sharing the health care costs of poor and uninsured Americans between the federal government and the states. Under the law, states pay varying percentages of the total case, ranging from 21% for states considered poorest to 50% for states considered wealthy. New York State is, and has always been, in the 50% category. In the 1960's, liberal senators from the Northeast wanted the bill passed. To get the votes of Southern states, they agreed that the Northeast would pay a much higher percentage of the cost of Medicaid than the South. Most state governments assume the full state share of the costs, but New York State divides the costs equally — 25% paid by state government, and 25% by cities and counties. This places a financial burden on cities and counties that is not imposed in any other state.
 
The cost of Medicaid is relatively beyond control, because it is user-based, and depends on how many older people use the services, and how expensive they are. As life is prolonged by science, the number of elderly will rise, and so will the cost of caring for them — in doctors' offices, their own homes, or nursing homes. In no way will the revenues of the states, cities or countries rise proportionately. The squeeze on budgets will tighten over the years unless the reimbursement system is changed, and no one dares to even attempt that. Remember the 27 million members of AARP (formerly the American Association of Retired Persons).

This is a brief overview of some of a few of the city's financial problems. Mayor Bloomberg is doing his best to reduce costs. He put through a major increase in the real estate tax. He tries to nibble away at the payroll. But difficult as the city's fiscal outlook is, the state's budget picture is far worse. Albany faces a shortfall of six billion dollars this year, roughly twice the city's gap.

New York is already one of the highest-taxed states in the union, and higher taxes will drive more people, and more businesses, out of the state into other jurisdictions just a few miles away. State government is tripartite and dysfunctional; our Legislature has been described as the worst in the country, and the governor, majority leader and speaker are chronically at odds, personally and politically.
 
The same financial problems apply to the Metropolitan Transportation Authority, which is paying its debt service out of its operating budget. Overwhelmed by rising costs which the current MTA leadership is unable to control (although others might), the authority will come back every year to ask for higher fares. In addition, they have a $27 billion capital construction program which they are almost totally unable to finance.

Nonetheless, the MTA will spend billions on unnecessary extravagances, such as a new South Ferry subway station to replace an existing station which is a bit less conveniently constructed, and an over-engineered billion-dollar Fulton Street subway station which will provide no increased service, just somewhat better connections, which are certainly not worth a fortune to build. Not to be outdone, the Port Authority is building a lavish new subway station at what remains of the World Trade Center, demolishing a station which has just been rebuilt at a cost of hundreds of millions of dollars. Nor have they done anything about their administrative fat, as pointed out by the mayor and comptroller.
 
We must at least glide by the Department of Education, which spends more per pupil than other large cities, and will now seek additional billions as a result of a reckless Court of Appeals decision which does not consider ability to pay or level of performance. The financial impact of this decision will be enormous, and it will be fascinating to watch how the learned justices attempt to implement it.
 
A panel of three senior lawyers appointed by trial judge Leland DeGrasse is now pondering how many billions of additional dollars will be required to be appropriated to an inefficient and mismanaged school system. Of course, the three wise men have no responsibility to determine where these billions might be secured, or who it is who will pay the new taxes that would be required. Coming on top of New York State's existing six billion dollar deficit, these new financial demands are impossible to meet. Perhaps the four judges (out of seven who constituted the majority) will now insert themselves into the appropriation process. It will be fascinating in the next few years to watch this bizarre drama play out.
 
Impartial observers know that what we describe here is essentially true (although necessarily abbreviated). But unions and contractors have an economic interest in building things, whether or not they are useful. Politicians want their support, and want to show construction taking place in their administrations (the edifice complex).

No single person has the authority to change all this; the most likely change agent would be Governor Pataki, but he is so preoccupied with power and privilege, distracted by his delusional presidential ambitions for 2008, and temperamentally unsuited to study serious matters sufficiently to recognize the state of our finances, and the relatively useless schemes that will burden our taxpayers even further. To the governor's credit, however, he was right in opposing on the Mac borrowing, where the Legislature and the city showed themselves to be even less responsible than the governor.
 
The reason for the excessive borrowing and financial irresponsibility easy to fathom: no one wants to meet the problem of the deficit today. Officials hope they will get by the next election without the house of cards collapsing. Of course, the longer they procrastinate and delay, the more difficult the issue will be to resolve, but what do they care? Their personal goal is political survival, and that depends on not giving offense to other people, which would occur if there were serious spending cuts.
 
What we have written here is not a great revelation or a unique insight. The problem is that although many people know that what we say is true, none of them has the power to do much about it (except for the principals, and they are part of the conspiracy to ignore the future). If the city, God forbid, should endure another 9/11 or worse, none of this will matter that much. But we should not base public policy so that only great tragedy will extricate us from the deep hole our leaders and ourselves are so shamelessly digging.
 
Let us make clear that the federal government is just as bad. They have increased the national debt to over seven trillion, four hundred forty-eight billion dollars. Congress has just approved an $800 billion increase in the debt limit. At the same time, the president and Congress have been reducing taxes substantially. The first President Bush once said, wisely, when he was competing with President Reagan for the Republican nomination in 1980, that Reagan's economic policy was "voodoo economics." If Ronald Reagan pursued 'voodoo economics,' as defined by Bush 41, what phrase is adequate to describe the more extravagant and far less responsible economic policy of Bush 43?
 
To conclude: the city's budget is not supported by current or predicted future revenues, the state's budget is substantially less responsible than the city's, and the federal budget is worst of all, cushioned only by a so far unlimited ability to borrow money, which will last until the Europeans and Asians who buy our debt become concerned and take action to protect their savings from the declining dollar. We may learn how low our currency can go.
 
In the tradition of bloggers' search for truth, we invite you to send in your views on these issues and show us where you either agree or believe we are mistaken. Rational responses will be published on our website, igned initialed or anonymously, depending on your freedom of speech.