It's Still 'Borrow and Spend' in New York

THE TWO New Yorks - city and state - were the nation's twin towers of public indebtedness long before the tragic events of Sept. 11 placed extraordinary new strains on their budgets.

Unfortunately, Gov. George Pataki and Mayor Michael Bloomberg are to differing degrees using the World Trade Center attack and the national economic downturn as a pretext for borrowing more while failing to deal adequately with the same fundamental problem - fast-rising government spending.

From 1997 through their current fiscal years, city and state spending increased by 32 percent and 35 percent, respectively - over double the inflation rate. But the New York economy grew so fast during the same period (spurred in part by city and state tax cuts) that Gov. Pataki and then-Mayor Rudolph Giuliani were able to pile up record surpluses - more than $3 billion on both the city and state levels.

But while revenues can spike upwards in a hot economy, only to fall quickly in a recession, spending commitments tend to grow inexorably. The faster the budgetary train rolls down the tracks, the more difficult it becomes to slow down or stop when the economy cools off. The question is not whether but when the brakes will have to be applied. "When" arrived in New York with a shocking and unpredictable suddenness on Sept. 11.

Bloomberg's budget challenge in the year ahead is bigger than Pataki's because the city's reserves from the boom years were already in the process of being rapidly depleted before Sept. 11. In fact, Mayor Giuliani's last budget effectively incorporated a $2-billion operating deficit, which was papered over with prior-year surpluses. Bloomberg's latest estimates indicate that the World Trade Center attack increased the budget gap from $2.8 billion to $4.8 billion, which is the difference between a fairly big problem and an incipient crisis.

But for all his talk of "pain" and pledges to spare no sacred cows, the new mayor's preliminary budget was a disappointingly limited effort to close the gap with a maximum of financial gimmickry and a minimum of politically difficult but necessary spending reductions. For example, it would barely put a dent in the city's workforce.

Bloomberg's $1.3 billion in proposed recurring spending reductions were outweighed by $1.5 billion in new long-term borrowing to meet operating expenses - the very practice that, repeated for years on end, led to the city's near-bankruptcy and fiscal crisis of the 1970s. Because most of the mayor's gap-closing package for fiscal 2003 consists of temporary measures, the city would be left to deal with a $2.6-billion gap the year after next, unless the economy grows faster than expected.

Meanwhile, Pataki before Sept. 11 had been carefully hoarding his somewhat larger surplus in advance of the state's 2002-3 election-year budget, and thus has had a relatively easier time cushioning the economic and fiscal effects of the terrorist attack. Although the governor's proposed 2002-3 budget closes a $5.8-billion gap without deferring modest scheduled tax cuts, it, too, points to big budget gaps in future years. And these shortfalls don't necessarily reflect the full impact of Pataki's massive expansion of state health-care spending, which generates some short-term budget relief in exchange for mounting future costs.

Moreover, the governor's budget also features a five-year capital plan that will increase the state's outstanding debt by about $5 billion (or roughly 14 percent) by 2006-7, driving up debt service costs in the process. The added borrowing in his plan includes $750 million in new bonds to finance what amounts to an economic development slush fund of matching grants for local public works (read: pork barrel) projects.

Bloomberg will need a lot of help from Albany to deal with his fiscal problems in the year ahead, but the biggest tangible benefit to the city in Pataki's initial budget proposal is a distinctly double-edged sword. Under his plan, the state would authorize new borrowing to pay off $204 million in unsettled prior-year school aid claims by the city - but the debt-service costs on the bonds would be deducted from the city's future school aid.

Both the governor and the mayor have emphasized that, after the immense human tragedy of Sept. 11, they wanted to minimize shocks associated with their budgetary responses to the attack and its economic consequences. But by failing to make more tough choices in the short term, each in his own way could be sowing the seeds of worse budget problems for the future.