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De Blasio’s Budget: Putting Off the Tough Decisions

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issue brief

De Blasio’s Budget: Putting Off the Tough Decisions

April 30, 2020
Urban PolicyTax & BudgetNYC

Executive Summary

New York City mayor Bill de Blasio’s proposed spending plan for next year, called the Executive Budget Fiscal Year 2021,* has been met with considerable skepticism for its lack of aggressive measures to restore the city’s fiscal balance in the wake of the coronavirus-induced economic downturn. In particular, the mayor’s modest spending cuts may leave the city vulnerable to adverse economic shocks in the future. This paper compares de Blasio’s proposed budget with the lower revenue projections of the city’s Independent Budget Office and with Michael Bloomberg’s budget proposal in 2009, which was made under a similarly adverse and uncertain economic outlook. The comparison indicates that a more conservative approach to estimating revenues and a more aggressive approach to cutting spending might put the city in a better fiscal position not only in the upcoming fiscal year but in succeeding years. 

Notwithstanding the mayor’s choices, the city is constrained by law to keep its budget in balance. It is thus likely that, even with additional federal aid, the city is in for a period of austerity. The New York City Council will now consider the mayor’s budget proposal. Contrary to its usual inclinations, the council needs to cut spending more, comparable in percentage terms with the decisions that the mayor and council made in the last recession. 

For his part, de Blasio can help by negotiating labor concessions, proposing an early retirement program, delaying capital commitments, and selling assets. However, given the political difficulty of many of these measures, layoffs may be unavoidable. One way to mitigate the effects of staff reductions is to use technology and evolving cloud-based business services to make city operations more efficient. However, if steeper cuts than the ones the mayor has proposed are not made in the upcoming budget, much deeper and more harmful cuts may be necessary in subsequent years.

* New York City fiscal years run from July 1 to June 30, so FY 2021 begins on July 1, 2020.

Introduction

At a press conference on April 16, the date his proposed budget for FY 2021 was released, New York mayor Bill de Blasio projected falling revenues and called for federal aid. Without such aid, he said, the city would be forced to make “horrible choices,” including city employee layoffs as a “last resort.”[1] However, he did not specify such drastic measures in his budget. As a Daily News editorial commented, “de Blasio would have been in a far better position asking for help if he’d demanded more shared sacrifice in his just-unveiled executive budget revision.”[2]

Certainly, state and local governments across the nation are facing a financial catastrophe due to a national emergency, not of their own making. The Center on Budget and Policy Priorities estimates that the states collectively may face a budget shortfall of as much as $360 billion in the current and next two fiscal years, not including added expenses due to the coronavirus epidemic.[3] Local government shortfalls are harder to estimate. States vary in the allocation of responsibilities between municipal and county governments, special taxing districts, and public authorities. Tax sources also vary, with many cities relying primarily on the more stable property tax, while states are more affected by drops in income-, sales-, and business-tax revenues. However, the collective shortfall of local governments must also be in the tens, if not hundreds, of billions.[4]

New York City is unusual among American cities for the breadth of its responsibilities and its diversified tax base. It is both a municipal government and five county governments; New York counties, moreover, partially fund the state share of services, such as Medicaid and public assistance, that are wholly state-funded in other states. New York City raises revenue not only from property taxes but also from city income, sales, and business taxes. This exposes the city to the revenue volatility over the economic cycle of booms and recessions that is more typical of states. 

New York has strengths and weaknesses compared with other American cities. It is an economic colossus, with 4.5% of U.S. GDP in 2018, the most recent year available.[5] However, the city has a history of maximizing the revenue-raising capacity of this economic base in good times, leaving it vulnerable to steep cuts in downturns for which it never seems to be prepared. After the city’s catastrophic fiscal crisis of the 1970s, a state law subjected the city to budgetary reforms, including the requirement to follow Generally Accepted Accounting Principles (GAAP). These reforms have prevented the city from returning to the bad practices of the past, but they did not prevent sharp budget cuts in the recessions of the early 1990s, following the 9/11 attacks in 2001, and after the financial markets crash of 2008.

New York City’s spending always rises and falls with the economic cycle, and de Blasio took advantage of good economic times to restore many of the cuts that his predecessor had made in the post-2008 Great Recession. However, a comparison of peak-to-peak spending indicates that de Blasio went well beyond the restoration of past cuts. In FY 2008, the peak year of the last business cycle, New York City’s total spending on operating costs was about $62 billion, according to the city comptroller’s annual financial report.[6] By FY 2019, total spending in this category, known as the Expense Budget, was $91.8 billion, an increase in inflation-adjusted terms of 24%. In FY 2008, the city had 280,649 full-time employees, according to the comptroller’s annual financial report, itself a big jump from 250,856 at the peak of the previous economic cycle in 2000. By FY 2019, the number of employees was still higher, at 300,442. Even after implementing a hiring freeze late in the current fiscal year (FY 2020), de Blasio’s budget anticipates the city having 306,457 full-time employees at the end of June 2020.[7]

FY 2021 Executive Expense Budget

The mayor proposed an expense budget in FY 2021 of $89.3 billion.[8] The budget forecasts[9] a drop in tax revenues from FY 2020 to FY 2021 of $1.9 billion, from $62.1 billion to $60.2 billion, with FY 2020 tax revenues already reduced[10] by $2.2 billion from the original plan because of the recession. The property tax is anticipated to grow by 4.1%, while other taxes are expected to decline by nearly 10%. Other revenues are forecast to drop by $6.2 billion from the current fiscal year to the next. These include nonrecurring federal relief from the three bills enacted thus far to address the coronavirus emergency.

As is discussed below, these revenue losses may not fully reflect the severity of the city’s revenue outlook. Notwithstanding even the reductions that it acknowledges, the budget anticipates increasing spending on Personal Services (wages and salaries, pensions, and fringe benefits) by $473 million and balances the budget through the liberal drawdown of reserves[11] and a modest “Citywide Savings Program”[12] that includes a hiring freeze and many expenditures rendered unnecessary or infeasible by the mild winter and the public-health emergency. In all, the savings program cuts spending by $1.8 billion in FY 2020 and $2 billion in FY 2021 and, because many of the savings are nonrecurring, by smaller sums in subsequent years. 

Because the city relies largely on nonrecurring revenues and the drawdown of reserves to balance the budget in FY 2020 and FY 2021, the outlook is bleak for the following years. The city’s financial plan anticipates funding gaps of $5 billion in FY 2022, $4.5 billion in FY 2023, and $4.9 billion in FY 2024.[13] These projected gaps exist despite the expectation that the city’s tax revenues will recover robustly as early as FY 2022, beginning July 1, 2021. The financial plan has tax revenues rising to $64.6 billion in FY 2022 and $68.6 billion in FY 2024.

The mayor’s relative optimism about the city’s future tax revenues at a time of great uncertainty contrasts, in some cases, with the analysis of the city’s Independent Budget Office (IBO).[14] Working off a more pessimistic economic scenario, IBO forecasts a larger drop in sales taxes and hotel occupancy taxes, based on the assumption that sports and entertainment, accommodations, bars and restaurants, and retail sales will continue to be severely curtailed in FY 2021. IBO is, however, more optimistic than the mayor about property taxes and a recovery in personal income taxes in FY 2021 (Table 1). The mayor and IBO do not differ substantially in forecasting other tax revenues. 

The uncertainty about what will happen in the most heavily affected sectors of the city’s economy will be resolved only as more data become available. However, the mayor has forgone a strategy of estimating revenues more conservatively and identifying deeper cuts in FY 2021. Such a strategy would have better clarified the consequences of a failure to secure additional federal aid and would have reduced pressure for deeper cuts in the following fiscal year, FY 2022, if revenues do not recover. 

FY 2021 Executive Capital Budget

The capital budget pays for long-term investments in infrastructure, such as streets and sewers, and equipment, such as fire trucks. Because the investments are long term, the city issues bonds to pay for them over time. The city’s capital program terminology is confusing. Over the four fiscal years 2021–2024, the mayor proposes $67.2 billion in “capital commitments.” These include new appropriations and available balances from previous years. The “commitment plan” over the four years amounts to $63.3 billion; it deducts a “reserve for unattained commitments.” The commitment plan represents a substantial increase over the FY 2016–19 period, in which actual commitments were $43.9 billion. FY 2020 commitments are expected to be $11.8 billion. The four-year, $67.2 billion program includes $14.6 billion for school construction and rehabilitation; $5.3 billion for the design and construction of new borough-based jail facilities; $4.9 billion for the preservation and construction of affordable housing; and $4.1 billion for bridge rehabilitation and construction. [15]

Many of the capital commitments take years to result in actual expenditures. Spending is thus expected to ramp up less rapidly, rising from $10.8 billion in FY 2019 to $11.1 billion in FY 2021 and $14.5 billion in FY 2024. Most of the capital program is financed by bonds; the city expects to borrow $45.5 billion over the FY 2021−24 period. The city’s debt service expense will rise from $6.9 billion in FY 2020 to $9.2 billion in FY 2024. In FY 2008, at the peak of the last business cycle, debt service was about 8.6% of total expenditures; in FY 2021, it is projected to be 8.3%; and in FY 2024, 8.8%.[16

A Tale of Two Recession Budgets: FY 2010 vs. FY 2021

One way to approach the question of whether the mayor has moved aggressively enough to cut spending in the wake of a sharp economic downturn is to examine the response of his predecessor, Michael Bloomberg, to the financial crisis in his executive budget proposal of May 2009 for FY 2010.[17]  Like de Blasio in FY 2021, Bloomberg did not know how long the recession would last or how badly the city’s revenues would fare. 

For FY 2010, Bloomberg proposed an executive budget of $59.4 billion, a reduction of $1.8 billion from FY 2009. The budget forecast a drop in tax revenues from the previous year of $1.5 billion, or 4.4%. (In FY 2021, de Blasio projects a drop of about 3%.) The FY 2010 budget included a projected 11.9% increase in property-tax revenues and a decrease of $3.2 billion, or about 16%, in other taxes.

Other revenues were down by about $600 million. Bloomberg offset these reductions with a proposed sales-tax increase, as well as a plastic-bag fee, both of which needed to be approved by the state legislature.[18] This increase would ultimately raise about $1 billion in revenue, rising to $1.2 billion in FY 2013.

The proposed FY 2010 budget included about $2.9 billion in expenditure reductions, 3,759 layoffs, and the loss of 9,782 positions through attrition. Bloomberg nonetheless anticipated that Personal Services expenditures would rise by $1.3 billion. He proposed to offset $400 million of this increase with labor actions, including changes to health benefits and a new pension tier.[19] Savings would increase to $800 million in FY 2013.

Like de Blasio in FY 2021, Bloomberg also drew down reserves to balance the FY 2010 budget. The cumulative effect of these measures—to raise revenues and hold down spending, with the use of one-time reserve funds—was to create anticipated budget deficits of $4.6 billion in FY 2011, $5.2 billion in FY 2012, and $5.4 billion in FY 2013.

Unlike de Blasio’s approach in FY 2021, Bloomberg’s capital program reduced the capital commitment plan from a peak of $13 billion in FY 2009 to $11.1 billion in FY 2010, and it hit a low point of $5.9 billion in FY 2012—a 55% reduction in planned capital commitments over three years. Debt service expense would rise from $4.3 billion in FY 2010 to $5.4 billion in FY 2013.

In summary, Bloomberg in the pre-2009 period, like de Blasio in the first six years of his mayoralty, ramped up spending and headcount as the good times rolled. However, faced with a deteriorating economic picture, Bloomberg anticipated a larger-percentage drop in non-property taxes in FY 2010 than de Blasio did in FY 2021. He proposed a more aggressive savings program that included layoffs, labor concessions, and revenue increases, and he reduced capital spending to hold down debt service. While he anticipated large deficits in future years, the more conservative revenue estimates, larger spending cuts, and proposed revenue increases would make the city more likely to exceed projected revenues, if worst-case scenarios failed to occur.

We can see how this played out in reality. When Bloomberg proposed his FY 2011 executive budget, he had $3.3 billion of surplus funds to roll from FY 2010 to FY 2011 and help balance the new budget.[20] This was perhaps a more realistic posture in managing the city’s course through an economic crisis. 

Table 2 compares the Bloomberg FY 2010−13 and de Blasio FY 2021–24 savings programs. The value of each year’s savings, as a percentage of the last prerecession fiscal year’s spending, was far higher in the FY 2010 proposed plan, and more of the FY 2010 savings were recurring.

Analysis and Conclusions

De Blasio’s proposed budget now goes to the city council for (virtual) public hearings and a vote, typically in June, to adopt or modify. Because of term limits, few council members have experienced budget cutting. The council is more used to adding spending to the mayor’s plans and rescinding cuts, but this year requires a different response. The city—indeed, the world—has no experience of how to model the revenue effects of a global economic deep freeze to ward off a pandemic. 

As IBO points out, there are considerable downside risks to estimates of tax revenue. Some of these risks may be offset by additional federal aid; but as of this writing, that has not been forthcoming. Given the size of the revenue shock, not only to the city but also to the state, the Metropolitan Transportation Authority, and the Port Authority, it’s unlikely that any additional federal aid to New York will fully offset the loss of tax revenue. State and local governments are probably in for a significant round of fiscal austerity. New York City needs to come to terms with what that means.

De Blasio and the council need to consider additional cuts that bring the FY 2021–24 savings program closer—in relative terms, at least—to the levels proposed by Bloomberg in FY 2010. A freeze on pay for government employees seems to be a sensible first step.[21] Raises are usually justified by anticipated increases in the cost of living. However, price inflation in the next year, and probably for some time after that, is likely to be negligible. Actual price deflation is a real possibility.[22] Private-sector workers are unlikely to be getting raises. 

Clearly, it is undesirable to cut staff in the face of a steep economic downturn. Laid-off employees are not easily absorbed into the private economy under such conditions. But with the specter of layoffs looming, pay freezes and deferrals are ways to avoid trimming staff rolls. A pay freeze could be negotiated with city unions or mandated by state law. One could even go beyond a pay freeze to the deferral of current salaries; the deferrals could be tied to negative rates of price inflation, should these occur.

Another way to avoid layoffs is an offer of enhanced benefits (credit for additional years of service) if employees retire immediately. This device was employed by previous mayors (including Rudy Giuliani and Bloomberg) to close budget gaps. The city does not have a mandatory retirement age, and many employees continue working although eligible to retire. Early retirement programs encourage employees to leave the payroll. Such programs are most effective if targeted to job titles in which retiring employees need not be replaced, at least on a one-for-one basis. The city saves future pension contributions for the affected employees, and all or a portion of the underlying salary if the position is not refilled or is refilled with a lower-paid employee. These savings are offset by the cost of the retirement incentive.

An additional means to achieve savings is to reduce the capital program, which has the effect of lowering debt service costs. De Blasio has not proposed to emulate Bloomberg’s reductions in FY 2010. Yet the city has proposed major capital commitments that are not, in fact, for maintenance or rehabilitation of infrastructure and could be deferred. Such deferrals would meet opposition from the public and the city council; but in hard times, the city needs to consider its priorities carefully. The proposed major spending categories that could be deferred include the construction of affordable housing—the mayor’s proposal does reduce new housing capital commitments, but for only one year—and the construction of four new borough-based jails.

In the final analysis, however, the city may not be able to avoid layoffs, in order to achieve a sufficient level of recurring savings. This is particularly likely to be the case if the alternatives discussed above are considered unpalatable. The city payroll has expanded in the past several years even as advances in technology and the increased availability of cloud-based services should have made existing staff more, not less, productive. The shift of public services online during the public-health emergency has revealed obsolete paper-based practices and unnecessarily labor-intensive rules and procedures. In many cases, the city or state has used emergency powers to override legal restrictions on more efficient online practices. For example, the widespread adoption of the Zoom platform for meetings allows not only for the government to operate under emergency conditions but to use staff time more efficiently under normal conditions. Meetings need no longer involve travel. Similarly, staff may, in some cases, prefer working from home, even when they could go to the office—if the city’s personnel rules allow it. This will enable workstation-sharing and reduce the amount of office space needed. These emergency overrides need to be made permanent. 

The city needs to deploy labor-saving technology and employ best practices in administration. For example, many private businesses and nonprofits now contract out the administration of health and pension benefits to cloud-based contractors. Where these efficiencies mean that agencies can operate with less staff, headcounts should be reduced, even by layoffs. Ideally, employees who are laid off would be retrained for vacant positions that are still essential, inside or outside government. However, in the final analysis, the city does not have the luxury in the current straitened economic environment of operating as a low-productivity employment program.

To help close large budget gaps in the short term, the city should consider asset sales. For example, the city owns a stock of obsolete and inefficient office buildings in lower Manhattan and other civic hubs. With the economic downturn, favorable lease terms may be available on modern and efficient space, allowing the city to move staff into better offices, cut operating costs, and consolidate back-office functions. The older buildings may be more valuable in private ownership as modernized Class B office space, or as residential conversions. 

Tax increases are difficult in the current environment. Bloomberg proposed a sales-tax increase in FY 2010, but retail sales are currently in free fall.[23] De Blasio should rely more on cutting costs.

New York City will get through this recession, as it has gotten through others, but the mayor and the council, as well as the governor, legislature, and labor leaders will be called upon to make tough decisions. Looming over the mayor and council is the possibility of a reimposition of special oversight powers by the New York State Financial Control Board, a body that was set up in the wake of the city’s 1975 fiscal crisis.[24] No mayor and council would want to repeat the experience of Mayor Abraham Beame, who lost control of the city government to Governor Hugh Carey and his unelected appointees. Thus, the city budget will stay balanced. However, by running down reserves and failing to plan for longer periods of austerity, the current administration may force more painful cuts on the next mayor, who takes office midway through FY 2022, than would otherwise have been necessary. This is an undesirable outcome for the city’s workers and citizens who depend on its services, and steps should be taken now to avoid it.

Endnotes

  1. Noah Higgins-Dunn, “NYC Mayor Seeks Federal Aid as Coronavirus Costs New York $7.4 Billion in Lost Tax Revenue,” CNBC.com, Apr. 16, 2020.
  2. "Billing Washington: De Blasio’s Request for a Bailout Is Weakened by the Limits of His Own Budget Cuts,” New York Daily News (editorial), Apr. 17, 2020.
  3. Elizabeth McNichol, Michael Leachman, and Joshuah Marshall, “States Need Significantly More Fiscal Relief to Slow the Emerging Deep Recession,” Center on Budget and Policy Priorities, Apr. 14, 2020.
  4. The recently enacted CARES Act provides $150 billion in relief for state and local governments. As of this writing, calls for additional, much larger, amounts of aid continue to be discussed by congressional leaders and the White House. See Allan Smith and Julie Tsirkin, “McConnell Taps Brakes on Next Round of Coronavirus Aid as State, Local Governments Plead for Help,” nbcnews.com, Apr. 22, 2020.
  5. U.S. Department of Commerce, Bureau of Economic Analysis, “Local Area Gross Domestic Product, 2018.”
  6. Office of New York City Comptroller, “Comprehensive Annual Financial Reports for the Fiscal Years Ended June 30, 2008 and June 30, 2019.”
  7. The Financial Plan of the City of New York, Executive 2021 Financial Plan, “Fiscal Years 2020–2024: Full-Time and Full-Time Equivalent Staffing Levels.”
  8. Office of the Mayor, New York City, “Facing Unprecedented Crisis, Mayor de Blasio Unveils Budget Plan That Protects New Yorkers by Prioritizing Health, Safety, Shelter and Access to Food,” Apr. 16, 2020.
  9. The City of New York, Mayor’s Office of Management and Budget, Executive Budget Fiscal Year 2021, “Message of the Mayor,” Apr. 16, 2020.
  10. The City of New York, Mayor’s Office of Management and Budget, “Modification No. 20-3 to the Financial Plan for the City and Covered Organizations for Fiscal Years 2020–2024,” Apr. 16, 2020.
  11. Citizens Budget Commission, “The City’s Fiscal Year 2021 Executive Budget: Slower But Still Growing,” Apr. 17, 2020.
  12. The City of New York, Executive Budget Fiscal Year 2021, “Citywide Savings Program,” April 2020.
  13. The City of New York, April 2020 Financial Plan.
  14. New York City Independent Budget Office (IBO), Fiscal Brief, “Covid-19’s Toll on the Local Economy: A Preliminary Estimate of Job Losses & Tax Revenue Declines,” April 2020.
  15. The City of New York, Mayor’s Office of Management and Budget, Executive Budget Fiscal Year 2021, “Message of the Mayor,” Apr. 16, 2020.
  16. Ibid., and The City of New York, Office of Management and Budget, Executive Budget Fiscal Year 2009,“Message of the Mayor,” May 1, 2008.
  17. The City of New York, Office of Management and Budget, Executive Budget Fiscal Year 2010, “Message of the Mayor,” May 1, 2009.
  18. The City of New York, Office of Management and Budget, Financial Plan Summary: Fiscal Years 2009–2013, May 1, 2009.
  19. A pension tier is based on the date of employment, and tiers determine such factors as when an employee is eligible for benefits, how the benefits are calculated, and whether the employee must contribute toward benefits.
  20. The City of New York, Office of Management and Budget, Executive Budget Fiscal Year 2011,“Message of the Mayor,” May 6, 2010.
  21. E. J. McMahon, “Why New York Needs to Freeze Pay Now for All Government Workers,” New York Post, Mar. 20, 2020.
  22. Neil Irwin, “What the Negative Price of Oil Is Telling Us,” New York Times, Apr. 21, 2020.
  23. Alina Selyukh, “Retail Spending Just Fell Off a Cliff,” npr.org, Apr. 15, 2020.
  24. State of New York, Financial Control Board. The Control Board makes an annual determination, usually in July, whether to recommend to the state legislature that its special powers to supervise New York City’s finances be reimposed.

Photo by spyarm/iStock

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