Honorable Michael R. Bloomberg
Mayor
City
of New York
City
Hall
New York, NY 10007
Dear
Mayor Bloomberg:
The
Executive Budget you will present next month is a critical juncture for New York City and for your mayoralty. This is the last budget you will propose and
administer, and one of the last two you will formulate. With term limits forcing
your tenure into its final period, this Executive Budget provides a key
opportunity to build on your previous achievements and to address the fiscal
challenges ahead. We offer specific
recommendations for improving the City’s fiscal health that we hope you will
follow, and that will further shape your legacy as a mayor committed to sound
fiscal policy.
Fiscal Policy Achievements
You
have already accomplished a great deal. Many
of the strategies and policies you have adopted demonstrate your commitment to
the long-term prosperity and fiscal security of the City, and have been advocated
or supported by CBC. For example:
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Upon entering
office, you closed a $6 billion budget gap and helped steward the city’s
economic recovery after the tragedy of September 11, 2001. Since
then, the City has achieved record-high bond ratings.
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You have used
surplus resources in ways that yield long-term benefits, such as retiring $1.25
billion in debt in fiscal year 2007, beginning to pay for capital improvements with
operating expenditures (“pay-go” capital), and creating and depositing $2.5
billion into the Retiree Health Care Trust Fund.
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In collective
bargaining with public employee unions, you have pursued and achieved productivity-based
settlements and other innovative arrangements, including productivity-linked
compensation for sanitation workers, merit pay for teachers, performance
bonuses for principals, and greater civilianization in the Police Department.
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You have
integrated new technologies, such as 311 and ACCESSNYC (both of which were
awarded the CBC Prize for Innovation), and performance data into agency management
to promote more effective and efficient municipal service delivery. You have
also worked with the City Council to begin organizing the budget programmatically
and to link the budget with performance data.
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You have
rezoned a large portion of the City, laying the groundwork for continued growth
throughout the city and economic development in underdeveloped areas, such as
Hudson Yards.
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You have put
forward a plan to expand and rehabilitate New York City’s infrastructure for the next generation in
PLANYC. As you know, we share your commitment to long-term planning for the City’s
infrastructure needs, which we addressed in a report released at a December event
where you delivered the keynote address.
The Challenges Ahead
These
are important achievements, but the City faces formidable challenges in both the short- and long-term. While the January plan for fiscal year 2009 is in balance thanks to the transfer of surplus revenues from the current fiscal year, economic indicators are being revised downward daily and threaten to undo this balance. Looking past 2009, the long-term challenges to the City's fiscal health are starkly apparent in the large looming out-year budget gaps. To confront these challenges, this budget should launch a larger agenda of fiscal reform that moves the City toward long-term fiscal health. This agenda should focus on:
Better Expenditure Control. Based on the January
Financial Plan projections for the next fiscal year, municipal operating
expenditures will have increased from $43.6 billion to $65.3 billion under your
tenure, a total increase of 50 percent or 5.2 percent annually on average. At
the same time, inflation has averaged 2.9 percent annually and Gross City
Product has increased about 1.9 percent annually on average.
This relatively rapid growth is sometimes justified
by distinguishing between so-called “uncontrollable” spending and
“discretionary” spending, with the former category including items like pensions, fringe benefits and medical
assistance. According to this distinction,
“uncontrollable” spending has increased about 10.2 percent annually, while
discretionary spending has grown just 4.4 percent annually. This, however, is a false dichotomy; the
mayoral term provides opportunity to control all forms of spending through
collective bargaining, advocacy for changes in state laws, as well as annual
budget proposals. The State-mandated local Medicaid obligation provides a clear
example: once considered “uncontrollable” with double-digit growth rates,
advocacy efforts by you and county executives statewide (and the CBC) succeeded
in enacting State legislation to cap local liability for increases to no more
than 3 percent annually. As this successful effort demonstrates, there should
be a counter strategy for contending with these so-called “uncontrollables”
– instead of continuing to allow them to rise at rapid rates.
The
items deemed discretionary could be better controlled also. One item clearly
subject to annual control through the budget is the number of people on the
City payroll. From the start of your
first term to December 2007, the number of full time and full-time equivalent
municipal workers increased by 3,000. Better
deployment of police officers has allowed for the reduction of both the number
of unformed police officers and crime, but similar efficiencies have not been
recognized in other service areas; in fact, most agencies have expanded their
workforce. Of the 70 agencies identified in the budget, fully 37 have more workers
now than at the start of your term.
More
Disciplined Debt Policy.
The City’s extensive and increasingly diversified debt has not been
well-targeted. To finance an ever-growing capital program, debt has grown
tremendously: 40 percent since fiscal year 2002. This has resulted in a debt service burden
that has also grown consistently and quickly, 5.4 percent annually on average
since you entered office, and which will continue to grow at a pace faster than
other expenditures in the financial plan.
As
troubling as the rapid growth of debt are its forms and uses. Gone are the days when most, if not all, of
the City’s debt was general obligation debt used to finance capital
projects. Today, City debt has morphed
into a variety of forms, including some used to provide operating budget relief.
This includes $2 billion in borrowing by the Transitional Finance Authority for
operating purposes made necessary after September 11th, but also the
refinancing of the debt of the Municipal Assistance Corporation into the
30-year debt of the Sales Tax Asset Receivable Corporation.
The
City now finances substantial portions of its capital program through the
Municipal Water Finance Authority and the Transitional Finance Authority
(TFA). The TFA originated under Mayor
Rudolph Giuliani to bypass the City’s debt limits, and is an off-budget
entity. Since then, reliance on it has
increased, even though the City is now well below its debt limits. This dependence is apparent not just in the
repeated increase of the debt cap on the TFA, but also by the new TFA Building
Aid Revenue Bonds (BARBs) that are financing school
construction with dedicated State aid.
When all forms of local debt are accounted for, the CBC projects that
total debt outstanding will be over $100 billion by fiscal year 2012, compared
to $56 billion when you assumed office.
What
this debt burden is achieving for the City is questionable. The Asset Information Management System
(AIMS) report released by the Office of Management and Budget in January
discloses $5.3 billion in state of good repair and maintenance needs for the
assets covered by the report – and this estimate excludes housing, the water
and sewer system, and the East
River bridges, among
others. Agencies are not required to
fund AIMS recommendations, and if the past few years are any guide, they will
not: total citywide funding will be less than half the total recommendation –
leaving a shortfall of $2.7 billion.
This
suggests that the City’s capital investment priorities are misdirected. The
Ten-Year Capital Strategy released last year plans for $83.6 billion– $86.6
billion when including Hudson Yards – in capital improvements; however, less
than half of that will be directed towards state of good repair work. A
substantial portion, close to $23 billion, will be dedicated toward expansion
projects. Some of these projects, particularly in environmental protection, are
necessary and justified; for most other projects, however, it is unclear what
the City will be gaining from its investment in terms of improved services. Particularly for economic development
projects, there is little attempt to justify investments with rigorous analysis
that demonstrates benefits or a rate of return.
Better
Tax Policy. New York City’s tax burden remains too high and discourages
economic development. At the beginning
of your administration, in fiscal year 2002, the City tax burden was $71 for
every $1,000 of personal income. At that
time, the City was unsettled by the events of September 11th and
faced enormous budget gaps; to close these gaps, you enacted several tax
increases, the largest of which was an 18.5 percent increase in the citywide
property tax rate. Most of the others were temporary measures that aided the
City’s recovery and have already expired.
Nevertheless, at the end of fiscal year 2007, the City’s tax burden
surpassed $100 for every $1,000 of personal income. New Yorkers pay local taxes
that are more than double the national average.
Last
year, you enacted tax cuts worth $1.5 billion in their first year. These measures included a 7 percent property
tax rate cut, the elimination of the sales tax on clothing and footwear,
various tax cuts for small businesses, a child care credit, and the extension
of the $400 annual rebate for owners of one- to three-family homes, condominiums
and cooperatives. According to current
forecasts, these measures will assist in lowering the City tax burden to $90
for every $1,000 of City personal income.
This is a move in the right direction, and one that CBC supported, but
New Yorkers still have a higher tax burden than at the start of your
administration.
The
structure of local taxes, especially the property tax, is harmful to economic
investment and job growth. Due to
numerous protections for small residential property in New York property tax law, the effective tax rate for
small residential property was $0.52 per $100 of market value in fiscal year
2007. In contrast, the effective tax
rates for larger rental buildings and commercial properties are $3.29 and
$3.97, respectively. The commercial rate was lower – $3.65 per $100 of market
value – at the start of your administration, and the disparity between
commercial and small residential property grew in this period from a ratio of
5.6:1 to the current 7.6:1.
Last
year’s 7 percent property tax rate cut benefits all property taxpayers, but the
$400 rebate program in effect since 2005 exacerbates the disparate tax burden
between small residential property and commercial and rental property. High property taxes for commercial and rental
property detract from the City’s ability to attract and retain business and
place undue burden on the two-thirds of City residents who are renters.
Priority Action for the Executive
Budget
Tackling
these challenges requires immediate and sustained effort. In the Executive Budget, you should build on
the momentum of your prior efforts and make the tough decisions that are necessary
to leave the City in a position of fiscal strength.
The CBC recommends the following actions as a
priority for the Executive Budget:
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Use surplus revenues prudently. In
recent years, the City has benefited from extraordinary surplus revenues, and
despite an economic slowdown, this year is no exception: the surplus is
estimated to be over $4 billion dollars.
The January plan calls for using nearly all these resources to cover
operating expenses in fiscal year 2009.
In the past, you have wisely devoted significant portions of any surplus
revenues to purposes with long-term benefits; you should continue that practice
in this year’s budget by retiring more debt, retaining pay-go capital payments,
or contributing to the retiree health insurance trust fund. Although this would create a gap in the
fiscal year 2009 budget, it is more responsible to address this gap now – and
not to postpone action for when the problem is even greater in fiscal years
2010 and 2011, when gaps are now projected to be $4.2 billion and $5.6 billion,
respectively.
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Promote efficiency in city services. City agencies should be working to optimize their
efficiency. A few weeks ago, targets for the agency program to eliminate the gap
were increased by 3 percent. It should
be made clear to agencies that they should be identifying cuts, especially in
headcount, that will produce recurring savings.
Headcount for the rest of the fiscal year is projected to grow to 312,571
positions from 307,956 in December 2007.
This growth should be reversed; in fiscal year 2009, the municipal
workforce should be lowered by an additional 1.5 percent, or 4,500 positions, to
return the size of the workforce to one comparable to that which you
inherited. It should be kept at that
level, or lower, for subsequent years with a goal of sustaining planned
services with fewer workers.
In addition, you recently announced a Charter
Revision Commission to conduct a top-to-bottom review of city government and
recommend ways to make city operations more efficient and transparent. CBC
supports this aim, and urges it be made concrete by identifying an overall
savings target– perhaps $1 billion annually– that can guide the Commission’s
agenda. One area ripe for reform that
will also generate savings is procurement.
More extensive implementation of the recommendations in the CBC’s 2002 report, No
Small Change: Opportunities for Streamlining Procurement in New York City,
which you endorsed at the start of your administration, should be a meaningful
part of this program.
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Renew efforts to control employee fringe benefit
costs. In years past, you identified
a new tier in the pension system for new employees as a way to control the
growth in pension expenses. You should
renew that call and work with State leaders toward that goal. Similarly, you
should continue current negotiations with the municipal employee unions to change
health insurance arrangements to achieve larger savings than indicated in the January
Financial Plan and even greater long-term savings. Such a restructuring will be critical as part
of a long-term strategy to address the projected $58.7 billion liability the
City faces for retiree health insurance and other post-employment benefits.
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Trim and reshape the capital budget. As
detailed in the CBC’s December 2007 report Capital Budgeting for 2030: Achieving the
Goals of PLANYC, the City’s capital planning and budgeting should be
improved. More
should be done to assess the condition of the City’s assets and to develop a
comprehensive plan for achieving a state of good repair citywide. The City also
should better justify expansion projects, particularly those in economic
development. Finally, capital spending
for the regular replacement of assets should be gradually shifted to the
operating budget; this could begin in the next budget by designating some
surplus revenues for pay-go capital investments as part of a regular
replacement cycle program.
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Restructure the property tax. Last
year’s 7 percent reduction in the property tax rate eased the burden for all
property tax payers, but the property tax rebates exacerbate the drastic
inequity in the effective tax burden between small residential property and all
other classes. The $256 million annual homeowner rebate program should be repealed,
or, if economic conditions allow, reconfigured; redirecting these savings would
allow a cut in the citywide property tax rate by another 2 percent, or would
allow more targeted tax relief to renters or business that bear the brunt of
this tax.
We commend you for all you have accomplished in
the past 75 months, and look forward to helping to promote actions that will
enhance your legacy even further over the remaining 21 months. Our suggestions are
made in this context; we hope they are helpful as you prepare the Executive
Budget. We would be pleased to discuss them with you and your staff.
Sincerely,
James L. Lipscomb
Chairman
