• One measure will require the imprudent use of surplus funds.
• A second will encourage more spending to be placed "off budget."
• A third will make it relatively easier to raise property taxes that already discourage job growth.

Background

On November 2, voters in New York City will approve or reject an amendment to the City Charter recommended by a Charter Revision Commission. The amendment consists of 14 measures affecting seven areas of government: the budget, civil rights, elections, government reorganization, immigrant affairs, procurement, and public safety. Three of the 14 affect the budget.

The Citizens Budget Commission has focused its attention on the three budget-related items and opposes them. While the measures are well-intended, their effect will be counter-productive and will discourage budgetary reform rather than advance it.

A discussion of each of the proposed budget measures, and its likely effect, follows. The measures relate to three concerns: prudent use of surplus funds, controlling growth in expenditures, and restricting tax increases.

Measures relating to surplus funds

One of the proposed measures would require that at least 50 percent of surplus funds recognized during a fiscal year be used to prepay a future years' debt service. In recent years the City has used virtually all surplus funds for prepaying debt service, so putting at least half of those funds to that use is not new. What is new is the requirement that surplus funds, to any extent, be put to a use that is not prudent.

Surplus funds are by definition one-time windfalls. To be prudent, therefore, those funds should be used only to pay for one-time expenses, such as reducing the principal on long-term debt or funding capital projects on a "pay as you go" basis. One-time savings should not be used to pay for recurring expenses, such as debt service. Such a practice only serves to paper over and perpetuate a structural imbalance.

The proposed measure would, therefore, require by Charter that surplus funds be spent imprudently. It is bad enough that the City currently uses surplus funds in that manner; it is even worse to institutionalize the practice.

While it could be argued that the proposed measure would discourage using surpluses to increase current year spending, it offers no real protection from that practice. The proposal does not define what a "surplus" is, so funds could in fact be allocated to new spending before the size of the surplus is established. In addition, once the surplus is established and the funds are allocated to a specific purpose, the funds can still be tr ansferred to another purpose (such as additional current year spending) with the joint approval of the Mayor and Council. The proposal permits up to 10 percent of the amount recognized as surplus funds to be spent on "pay as you go" capital projects. However, there is no requirement to spend surplus funds in this way, and the 10 percent limit may discourage larger "pay as you go" programs.

Measures relating to expenditure growth

Another of the proposed measures seeks to limit growth in the budget to the rate of inflation. It would apply to the total amount of City-funded spending (financed from local revenues as opposed to categorical intergovernmental aid) in both the Executive Budget and the Adopted Budget. In order to exceed the limit, the Mayor and Council must agree upon an alternate cap for that year.

The intent of this measure is to provide a deterrent to excessive expenditure increases and to cause public officials to justify any expenditure increases beyond inflation.

Unfortunately, the requirement is more likely to lead to budgetary behavior that circumvents the requirement and thereby reduces accountability and transparency in the budgetary process. Such behavior includes classification of spending as "off budget" (and hence outside the limit). Even without the Charter provision this has occurred with the shifting, beginning in fiscal year 1998, of debt service paid by the Transitional Financing Authority ($275 million this year) to outside the budget in order to reduce the rate of spendi ng increase acknowledged in the Executive Budget.

In addition, since the recommended measure applies only to the Executive and Adopted Budgets, it would provide an incentive for the Mayor and Council to increase spending later in the year through budget modifications without an equivalent level of public information and attention. Overall, the proposed measure offers little new of value because it is unlikely to deter spending growth, and it is likely to make it harder, rather than easier, to understand how the taxpayer's money is being spent.

Measures relating to tax increases

A third proposal seeks to discourage tax increases by requiring that any local legislation calling for a new tax or increasing an existing tax (other than the property tax) would have to be passed by a two-thirds majority of the Council. If the measure were vetoed by the Mayor, a four-fifths majority vote would then be required to override the veto. These provisions do not apply to renewal of an existing tax that expires.

The intent of this measure is to make it politically more difficult to raise taxes. The property tax is exempt so that it can be relied upon to balance the budget in the event of unforeseen events during the year, and because limiting the property tax might jeopardize bond ratings.

Unfortunately the likely effect of this measure is that it will distort tax policy in a way that would be economically harmful. The measure would create a bias in favor of the property tax for needed revenues, at a time when the City's property tax is already applied in a way that puts an excessive burden on job-creating uses. Currently, the effective tax rate on commercial property is more than five times the rate for one- and two-family homes. Drawing more revenue from this source without reforming it will deter economic expansion.

Other concerns with this proposal are that (a) it represents a shift in the balance of power between the Council and the Mayor by diminishing the authority of the Council; and (b) it can be circumvented by asking the State legislature to impose the new taxes. The Council could pass a home rule measure by a simple majority, and the new tax could be imposed by a majority of the State legislature, whose approval would be required in any case.