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Wall Street Journal

 

Taking New York Back To The Bad Old Days

May 21, 2014

By Nicole Gelinas, Fred Siegel

For the first time since the near-bankruptcy of the 1970s, the city will borrow to pay for new obligations.


Who should worry the most about New York Mayor Bill de Blasio's inaugural budget? Liberals and progressives. Mr. de Blasio is the first New York mayor in two decades to hail from the left, which makes him the face of a new progressivism in America. If the public sees that the mayor's new $73.9 billion budget for fiscal 2015, which starts in July, is not only imprudent but improper from an accounting perspective, voters' fears about unbridled liberalism will be ratified.

Since the city's recovery from the 1975 fiscal crisis, mayors and the media have treated the city's budget-day announcement as a sober technocratic event. Mayor de Blasio, by contrast, used his annual unveiling of the city's revenue and spending blueprint on May 8 as a campaign-style opportunity to push what he himself called a "progressive" agenda. The budget adds money to enforce the city's new mandated sick-leave law for private employers, and it spends more for public housing and education. But the most controversial and fiscally explosive portion offers retroactive pay raises to the city's teachers and, later, raises for other city employees at a projected added cost of $9 billion over four years.

The mayor calls his budget "historic" and "transcendent." Indeed, for the first time since New York recovered from its near-bankruptcy of the 1970s, the city is willing explicitly to spend beyond its means to buy labor peace. The new teachers' contract, including $4.3 billion in retroactive pay raises back to 2009, is the acute example.

The United Federation of Teachers did well financially under Mayor Mike Bloomberg, with average pay up 43% over the first eight years of his tenure, beginning in 2002. But after Lehman Brothers collapsed in 2008, Mr. Bloomberg made clear that New York, facing multibillion-dollar deficits, could not afford to give teachers 4% raises in 2009 and 2010, as the city had already given to the rest of the workforce.

The mayor told the truth. New York has since barely balanced its budgets and has used up the $8 billion pre-Lehman surplus. Mr. Bloomberg said after 2008 that teachers could have raises, but only if they agreed to pay for their health-care premiums and to work more "productively." The teachers refused.

That the city could not afford raises without equivalent savings is obvious from the de Blasio budget. Mr. de Blasio was able to balance the budget for fiscal 2015 thanks largely to revenue coming in $1.2 billion higher than Mr. Bloomberg's conservative projections. But the $9 billion net cost of the labor blowout over the next four years—including the cost of similar deals Mr. de Blaiso expects to do with the rest of the city workforce—has shot holes in future budgets. The projected budget deficit for fiscal 2016 has doubled to $2.2 billion. The budget gap for fiscal 2018 has gone up eightfold, to $3.2 billion.

To make the numbers work, Mr. de Blasio is taking New York City's budgeting practices way back—before Mayors Rudy Giuliani, David Dinkins and Ed Koch —to before 1975. To pay teachers retroactive annual 4% raises for 2009 and 2010, Mr. de Blasio will do something the city hasn't done since it recovered from its near-bankruptcy in 1975: borrow to pay for new obligations. Mr. de Blasio begins paying teachers the promised $4.3 billion in back pay in 2015, and he won't finish paying this bill until 2020.

The city will have to borrow well into the next mayoral term to account for and pay a current operating expense for a new debt that the city has freely chosen to incur. Generally accepted accounting principles, which the city has adhered to since the 1970s crisis, dictate that the city account for an operating expense when it is incurred, not a half-decade into the future. Yet such a proposed delay could again be policy.

Mr. de Blasio also has invoked another ghost of New York's grim fiscal past: simple incompetence. On May 8, the mayor painstakingly explained to the media exactly how he had balanced the budget. Two business days later, his budget staff had to convene an emergency teleconference—to tell reporters that the budget wasn't balanced after all.

The city's independently elected comptroller, Scott Stringer, had flagged Mr. de Blasio's most obvious sin: the delayed accounting for $725 million in retroactive raises to teachers who retire soon. That fiscal obligation had been moved far beyond that period, which is an accounting no-no. But forcing Mr. de Blasio to move the sum to this year's budget fixes only one-sixth of the $4.3 billion monster in the pipeline—that is, the future cost of past raises for all teachers, not only those who are soon to retire.

Mr. de Blasio is not the last word on the budget. After the fiscal crisis of the '70s, New York state and city set up institutional checks and balances to make sure that no mayor can ruin the city again. Mr. Stringer and State Comptroller Thomas DiNapoli serve on the state's Financial Control Board, ultimately controlled by Gov. Andrew Cuomo.

The board can take over if it finds an operating deficit of more than $100 million, or if it finds the city is borrowing for operating expenses. Proper accounting for the teachers' deal would expose the city as committing both of those sins. The deal should be accounted for as a current expense, and not paying for it now thus opens up a multibillion-dollar deficit for fiscal 2015. The control board also should make clear that the city needs to account for and pay for all past and current operating expenses now, not just the portion that Mr. Stringer has already fixed.

It's easy for the Financial Control Board to step in when there's an emergency—that is, when it's too late. It's not so easy, politically, for Messrs. Cuomo, DiNapoli and Stringer to step in when things appear, however misleadingly, to be going well.

Yet if for no other reason, these Democratic politicians should act out of self-interest. A year after Ronald Reagan left the White House, observers hailed David Dinkins's ascension to the New York mayoralty as "historic," and a foretaste of liberal victories to come. Instead, after the voters' experience under Mr. Dinkins, New York got two decades of Republican and Independent rule.

Original Source: http://online.wsj.com/news/articles/SB20001424052702303908804579564360055081976

 

 
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