Reflections on a Golden Calf:
The Mayor's Budget

By Henry J. Stern
May 10, 2005
 
No responsible civic organization can allow a Mayoral Executive Budget to be issued without offering its comments, which usually take the form of exposition as to what the budget really should have been, as well as lamentation that, although the budget is too large, important programs were nonetheless omitted.

In the past three years, New York Civic has written on numerous occasions, perhaps to the point of mild obsession, over the city's ongoing fiscal crisis.  Disaster first struck in 1974-75, under Mayor Beame, although it had been brewing over years of excessive spending and short-term borrowing. We likened the city's fisc (a word Senator Moynihan popularized in his annual reports which described how New York was shortchanged by the federal government) to a vessel headed northward from Lake Erie to Lake Ontario, without using the Welland Canal.  That means that at some point on Niagara River, the ship would go over the Falls, and presumably be wrecked on the rocks below.
 
Fiscal Crisis II struck in 1991, during the Dinkins administration and required tens of thousands of employee layoffs.  Both crises caused unhappiness and hardship for many New Yorkers, those who lost their jobs, and those for whom services were reduced.  Both mayors who were in office at the time of these explosions went into history as one-termers.  Mayor Koch, whose three terms in office (between Beame and Dinkins) were bracketed by crises, was able to restore the city's credit rating with assistance from the federal government.  The second crisis was more the result of an economic downturn than particularly irresponsible spending. Although the city suffered severe financial losses, and is still feeling the after-effects of 9/11, it has made a steady recovery over the last three years, reflecting the upturn in national economic conditions, which may or may not be the result of tax reductions which have ballooned the national debt.  

For the past four years, Mayor Bloomberg, the first businessman-mayor in recent memory, has avoided fiscal meltdown through an adroit combination of cost reductions, borrowing and one-shots (funds that come in for one year but are non-recurring).  If there is a different one-shot every year, you can keep the carousel spinning, but they are harder to discover as revenue sources are exploited and exhausted.  
 
For his first budget (FY 2003), the mayor secured the consent of the State to allow the city to borrow $1.5 billion on a one time basis.  This is similar to what Governor Arnold Schwarzenegger of California did in his first year, except that the California borrowing was ten times New York City's, or $15 billion.  That brought California's state debt above New York's, now the second largest state debt in the U.S.  Of course, per capita, we exceed the Golden State, because they have about twice as many capitas as we do.  After such a substantial borrowing by the city, which will add to debt service costs which already burden the expense budget, the question becomes: what can one do for an encore, because the budget is an annual Houdini-like exercise?
 
In New York City, the answer for FY 2004 was an 18 1/2 per cent increase in the real estate tax, which brought in a billion dollars in its first year.  The next year, we were fortunate to receive $744 million from the Port Authority for back rent for our airports, and $621 million as a result of the refinancing of MAC (Municipal Assistance Corporation) bonds.  The airport money was splendid, but the MAC windfall came as a result of extending bonds for thirty years, so in the end the state will have to pay billions of dollars in interest.  This was passed over Governor Pataki's veto, and upheld by the courts.  It makes sense if you are willing to pay two dollars tomorrow to get one dollar today.  That would be sensible if you were about to starve to death and needed the dollar for a life-saving meal.  Although the city is financially beleaguered, it cannot be described as on the brink of bankruptcy, so we believe the MAC deal was unwise. 
 
This year it has been the booming real estate market that has come to the rescue.  In addition to taxing real estate ownership, the city also taxes real estate transactions.  The upward surge is symbolized by Manhattan's million-dollar closets but it is taking place in all five boroughs with the revival of neighborhoods previously redlined and subject to wholesale abandonment by owners.  Sound short-term economic strategy at the time consisted of walking away from one's dilapidated or burned out buildings, and letting the city pick them up in rem.  That phrase, in rem, deals with a legal action against a property, not against a person, in which the city acquires the property in question, usually for non-payment of taxes.
 
The Mayor deserves credit, however, which he has not widely received, for the actions he has taken over the last three and one-half years to reduce the expense budget.  The Police Department has shrunk through attrition, yet crime continues to fall.  Six firehouses were closed, despite the political cost the mayor incurred.  City Hall estimates the budget reductions they initiated total $3,900,000.000.   As the late Senator Everett McKinley Dirksen (R-Ill.) is known for having said, "A billion here, a billion there, pretty soon it adds up to real money."
 
Salutary as they may be, cuts are not something one usually boasts about, because every cut is more acutely remembered by the people it may adversely affect than by the general public which benefits when money is saved.  And while it is easy to demand savings, and we do, those demands should be accompanied by an enumeration of the places or programs one wants cut.  Actually, percentage cuts are imposed on most agencies each year, but somehow, like Old Man River, they just keep rolling along, usually at whatever pace they previously kept.
 
The city's financial issues are recounted in popular, easy to read language in an article by Mark Berkey-Gerard which appeared in Friday's Gotham Gazette.  The catechism is entitled: "Frequently Unasked Questions About the Budget."  There is no question that the budget could be trimmed, but as usual those who would cut it rarely say precisely just what they would remove.  This year, the mayor did not make the usual cuts and count on Speaker Gifford Miller to restore them.  But assuming that all of Mayor Bloomberg's initiatives were removed from the budget, its structural imbalance would still be billions of dollars, papered over by an economic boom that may or may not be starting to deflate.
 
The one-shots have been widely criticized as not being a responsible way to balance a budget.  But as long as there is a different one-shot each year, the predicted meltdown may be evitable.  The presumed expert on these matters is Deputy Mayor Marc Shaw, who was the second of Mayor Giuliani's five budget directors (the sequence, in chronological order, was Abe Lachman, Shaw, Joseph Lhota, Robert Harding and Adam Barsky). Shaw is known for his reputed ability to pull financial rabbits from hats, although there is always skepticism as to where he will find the next rabbit.
 
In the four year political cycle, we are now in the bell lap.  At this time, horses and athletes try harder, although we are told by an experienced coach that they do not run faster.  Certainly, budgets swell as a mayor prepares to face the people. Fiscal bad news usually comes in the first or second year of an administration, when a new mayor suddenly discovers that he has much less money to spend than he thought he had. Surprise.  Raising taxes or cutting services early in the term leaves time for wounds to heal and people to feel better about what has happened to them. 
 
There is no question that good things have happened to New York City in the last four years - for one thing the real estate boom, whose effect depends on whether you are an owner or a renter.  We have made a substantial recovery from 9/11, with new construction under way in all boroughs, except at the site of the World Trade Center.  There has been a continuing drop in crime, and relative honesty and integrity in local government, which contrasts sharply with the direct bribery of state officials, and the pervasive and pernicious influence of lobbyists and contributors to both state legislators and procurement officers, as well as other Albany decision makers in the executive branch.  
 
If the mayor is re-elected, he will have to make critical choices in 2006.  There are hard issues to resolve, not in the sense that the problems are particularly complex, but in the fact that their consequences will be damaging to many individuals and families, whichever path he chooses.  The current leitmotif is that if business is good and the economy grows, the natural increase in tax revenues will pay for the rising cost of government.   The stock market has an additional role in public prosperity: the higher that stock prices rise, the less the city is required to contribute to its defined-benefit pension plans.
 
That is why the Campaign for Fiscal Equity (CFE) decision by the New York State Court of Appeals, requiring billions of dollars in additional spending for education, appears more likely to have been made by the Supreme Court of Mars.  New York is one of the most heavily taxed jurisdictions in the United States..  If you live in New York City, the tax burden is even greater.  New York's per capita expenses for education exceed those of every other state but New Jersey.  Even its taxes on cell phones, as disclosed Sunday, are either the highest or second highest of the 50 states (It depends on which chart you read).
 
What is unfortunately clear is that there is substantial structural imbalance in the budgets of all three levels of government: the United States, the State of New York and the City of New York.   The federal imbalance is gigantic, enormous, colossal and immense although not immeasurable.   However, they can print money, which is a metaphor for borrowing trillions of dollars, which adds to the national debt.  If and when the Chinese and other creditor nations decide not to continue buying our paper, there could be a crisis comparable to the Great Depression of the 1930's.  But there is always hope that the gnomes will find a way to manipulate reality so that the debt can be controlled.  After all, if our country went broke, who would buy Chinese goods, even if they are cheap and plentiful.
 
The State of New York has a constitutional debt limit, which it has circumvented by creating over 700 public authorities and allowing them to borrow enormous sums, backed by the credit of the state.  The Dormitory Authority (which builds far more than dormitories, and is said to be well run),  the Empire State Development Corporation, the Metropolitan Transportation Authority (MTA), and
all their brothers, sisters and cousins have credit cards whose maximum balances are whatever sums Wall Street bankers are willing to lend.  And why should they be any more careful with the State than they were with Enron, Global Crossing, WorldCom or any other firms favored by men trying to get their daughters into the right nursery school?
 
Considering the amount of financial irresponsibility that has been discovered over the last few years in American corporations, banks and insurance companies, it is too much to ask the capital markets to get real and restrain public borrowing.  Indeed underwriters and law firms contribute large sums to political campaigns, often through subterfuges such as gifts by their employees and executives, first and trophy wives, sons and daughters, etc. in order to be selected to handle public borrowing.   The resulting lack of confidence in the financial machinations of the private sector shows that, whatever the sins of government, the public sector is not alone in its misjudgments.
 
At this time, the City of New York has the smallest structural imbalance of the three levels, but rising pension, debt service and labor costs rapidly increase the gap between receipts and expenditures.  (Not to mention the cost of medicaid, which Governor Pataki is trying to control.)   We gamble on continuing good times, but in the event of an economic downturn or a terror attack, the city will be hit severely.  In framing budgets, we must anticipate bad times as well as continuing prosperity.
 
The test of the mayor and the budget will come next year, say January 2006, when the preliminary budget for the 2007-2008 fiscal year must be presented.  Watching the budget process is like watching Evel Knievel drive his motorcycle over a row of parked trucks.  It is remarkable that he does it, year after year, but is there a day of reckoning ahead?

And, if you spend less on health and social programs, what will the result be in terms of human suffering and dislocation?  The consequences of such reductions could be either larger or smaller than people predict.  But such decisions are best made in the first year of a mayoral term, rather than in the last year, in the midst of a campaign.  It may be that a mayor who no longer has to face the voters may be more responsible than someone who is already campaigning for re-election. What matters is who has the best long-term view of what the city should be, while remaining acutely aware of what it can afford to be.  Any mayor should keep in mind that greater expenditures do not necessarily secure better results - how things are done is equally important.  All of this must be done, however, while one is being both exalted and excoriated.
 
The primaries are 126 days away, the elections will be held in 182 days. Those numbers have had a significant impact on the budget process in 2005.  They have already informed the executive budget, which was intended to pre-empt the Council's ritual of restorations, which was performed for the last three years. An election-year budget tests the limits of restraint and responsibility by public officials.  The month of June will show us whether these limits have been breached.

(I hope you were not distressed by our foray into the misdeeds and misjudgments of the private sector.   We mostly criticize public officials, but we thought it was appropriate to point out here that people who are paid many times more, plus stock options, and need not face or raise funds for elections, are equally susceptible to avarice and folly, whose consequences they often personally  escape, whilst leaving their employees' 401(k)s to vanish like the morning dew.)