Citizens Budget Commission Citizens Budget Commission

March 24, 1998

TO: Members, Budget Policy and Priorities Committee

FROM: Dean M. Mead

RE: The City of New York's January 1998 Financial Plan

This memorandum discusses important issues emerging from the four-year financial plan for the City of New York presented by Mayor Rudolph W. Giuliani on January 29, 1998. The memorandum is divided into four parts. The first summarizes developments in the current fiscal year and the sources of a projected surplus of over $1.2 billion. The second section describes the mayor's proposals for fiscal year 1999 and identifies aspects of the plan that conflict with the Citizens Budget Commission's (CBC) values and policies. The third part reviews the "out-year" portion of the plan and identifies concerns for that period. The final section presents recommendations which the Mayor and the City Council should pursue between now and budget adoption in June in order to make the financial plan more responsive to the CBC's concerns.

Developments in Fiscal Year 1998

The summary of the City's financial plan in Appendix Table 1 includes a budget for the current year (fiscal year 1998) of $34.9 billion containing a $1,220 million surplus. As shown in Table 1, the unanticipated resources creating this surplus come from four sources. First, and numerically least significant, is a drawing down of $100 million from the budgeted general reserve. It is not unusual for the City to begin using its reserve fund, which totals $200 million, at mid-year. Second, the City achieved savings of $164 million in debt service through refundings and lower-than-expected interest rates.

A third source of new revenue is $791 million of increased federal ($565 million) and State ($226 million) categorical aid. This increase is more a function of City budget practices than of true unanticipated revenue. The City typically budgets cautiously for categorical aid. As these funds are confirmed for the fiscal year, the City adds both the revenues and the expenditures they support to the budget; however, federal aid, and to a lesser extent State aid, generally is underestimated in the financial plan and at the time of budget adoption.[1] Because the added revenue is used to support initially unbudgeted expenditures, these funds do not help create a surplus for the current year.

The most significant source of unexpected revenue is local taxes. The Mayor's January plan anticipates tax revenues $888 million above those in the adopted budget. More recently, the City Comptroller has estimated that tax revenues may grow another $255 million, which together with other favorable developments could push the City's current-year surplus to over $1.5 billion.[2]

More than one-third ($319 million) of the additional tax revenues is the result of explicit policy decisions, rather than economic performance. A delay in a State tax relief program ($47 million) and a decision to postpone planned tax cuts ($272 million) mean that tax revenue previously expected to be foregone will be collected this year.

The remaining $569 million of additional taxes are the product of better-than-expected economic performance driving up primarily non-property taxes. January plan estimates of personal income tax revenues are $212 million or 5 percent higher than projected in the adopted budget.[3] Corporate income taxes were $275 million higher (17 percent), and property-related taxes were $74 million higher (1 percent) overall, net of a $62 million shortfall in the commercial rent tax.

The growth in the local economy has been unexpectedly strong. The city gained 48,900 jobs in calendar year 1997 and is projected to add 44,000 in calendar year 1998, although this pace of growth trails the nation--1.5 and 1.3 percent versus 2.3 and 1.9 percent, respectively.[4] In contrast, the city's average wage rate rose 5.7 percent in 1997 and is projected to grow 4.7 percent this year, significantly more than the national rates of 4.2 and 3.8 percent for those years. Estimates of city personal income show growth of 5.7 percent in 1997 and 5.1 percent in 1998, compared with 5.8 and 5.2 percent, respectively, for the U.S. as a whole.

These economic growth indicators from the City's January plan exceed the expectations of the adopted fiscal year 1998 budget. Calendar year 1997 job growth was actually 8,500 higher than projected. Similarly, the wage rate growth was 0.8 percentage points higher (5.7 versus 4.9 percent); real gross city product (GCP) growth, 1.2 percentage points higher (3.9 versus 2.7 percent); and, personal income 0.2 percentage points higher (5.7 versus 5.5 percent).[5]

The rise in the City's projections of economic growth in calendar year 1998 is more substantial. Projected job growth increased from 19,400 to 44,000, real GCP from 1.2 to 2.7 percent, average wages from 3.2 to 4.7 percent, and personal income from 4.0 to 5.1 percent. These upward revisions are even more remarkable because they compound the greater-than-expected improvement in calendar year 1997.

The economic growth in New York City has been particularly strong in the financial services sector. The State Comptroller estimates that the securities industry accounts for 4.5 percent of the city's employment, but 17 percent of total wagesup from 11 percent ten years ago. The State Comptroller also estimates that security industry bonuses were $11.1 billion in 1997, compared to $9.6 billion in 1996, and that industry profits in 1997 exceeded the 1996 record of $11.3 billion.[6]

The 31 percent gain in the Standard & Poor's index associated with the higher profits and bonuses also drove up capital gains through greater value and higher levels of realization. Similarly, a greater number of transactions and higher sales prices have driven up the real property transfer and mortgage recording taxes.[7]

Not all of the unexpected tax revenues and other resources have been available to create a current-year surplus. As the previous discussion of categorical aid suggests, a substantial share of these funds support added spending, and expenditures for agency programs increased $839 million from the adopted budget. (Refer to Table 1.) In addition, adverse unanticipated events consumed some of the new funds; specifically, $201 million was required to offset the loss of unrestricted intergovernmental aid included in the adopted budget. After adjusting for these events, the City had $920 million to add to the $300 million "budget stabilization fund" established in the adopted budget. This sum of $1.2 billion, designated in financial plan documents as the budget stabilization fund, comprises the "surplus." [8]

Proposals for Fiscal Year 1999

As presented in the financial plan, the fiscal year 1999 budget would be balanced at $34.3 billion, representing a reduction from fiscal year 1998 in total spending of $544 million or 1.6 percent. (Refer to Appendix Table 1.) However, these figures are misleading for two reasons. First, as noted earlier, the City traditionally underestimates both revenues from categorical aid and the spending which these revenues support. The historical pattern suggests that federal categorical aid, and associated expenditures, will be about 13 percent or $521 million higher than the estimate in the financial plan. (See Appendix Table 2.) Second, the financial plan reflects the prepayment of $1,220 million of debt service otherwise payable in fiscal year 1999 with the surplus available in fiscal year 1998. When adjustments are made for this transaction (and similar ones in fiscal years 1997 and 2000), the more meaningful results indicate that total spending will increase 2.4 percent, and City-funded spending will increase 4.3 percent in fiscal year 1999 (rather than the 0.6 percent reported by the City).

The basic features of the fiscal year 1999 budgetgrowth in expenditures supported by the "roll" of a large current year surpluspoint to the CBC's two major concerns about this plan. The fiscal year 1998 surplus is not being used in a prudent fashion, and there are no major proposals for productivity improvements to help curb spending. In addition, the 1999 budget continues and modifies a program of tax changes that has both positive and negative features.

Prudent uses of a surplus

The Mayor proposes to use the $1.2 billion budget surplus in fiscal year 1998 to prepay debt service expenditures due in fiscal year 1999. This action violates a basic tenet of fiscal prudencethat governments live within their means by financing current expenditures with current revenues. Using these large one-time resources to fund ongoing expenditures temporarily sustains a level of spending that will not be affordable in future years, because such sizable surpluses are unlikely to recur.

Fiscal prudence dictates that nonrecurring resources be used in ways that improve the long-run financial condition of a government. Five uses are consistent with this objective: To reduce or eliminate accumulated deficits; to reduce outstanding long-term liabilities; to fund capital investments; to fund the cost of one-time programs, especially those that provide multi-year benefits; and, to establish or enlarge reserves for economic downturns. These uses are elaborated in the CBC's position statement on surpluses, which is attached.

The absence of productivity improvements

If the fiscal year 1998 surplus is used in a prudent fashion, then other actions will be required to balance the fiscal year 1999 budget. The Mayor's strategy should be to curb expenditure growth, and even reduce spending, by using productivity improvements to gain savings while protecting and enhancing services.

Regrettably, the new financial plan represents a retreat from earlier City promises to reinvent government. As local economic fortunes have improved, the City has abandoned its attempts to lower costs and reduce the size of its work force. When the fiscal years 1998-2001 financial plan was adopted in June 1997, the gap-closing program for fiscal year 1999 included $465 million of actions under the general category of reinvention. This figure was reduced to $75 million in the November 1997 modification, and the category was completely eliminated in January 1998.

The current plan to close the 1999 budget gap includes $429 million of "agency programs." Within the agency programs, $20 million derives from initiatives that increase efficiency, representing less than 5 percent of the agency programs and just 1 percent of the total gap-closing program. (See Table 2.)

The largest single part of the "agency programs" is not the product of agency actions, but is instead additional State and federal aid. The agency programs include $113 million of intergovernmental aid (26 percent), $101 million of which are one-shot resources. Unspecified spending reductions account for another $104 million or 24 percent. Revenue actions, including more intensive collection efforts, increases in fees, and asset sales, represent $47 million or 11 percent. The programs include $33 million in service reductions; furthermore, $17 million comes from a hiring freeze, which, in the absence of improved efficiency among remaining employees, likely will result in service cuts.

Trends in municipal employment provide further evidence that the City has abandoned restructuring and productivity as the economy has improved. Between fiscal years 1993 and 1996 full-time headcount fell by nearly 14,000 positions or 5.6 percent.[9] However, in 1997 headcount rose nearly 1 percent or 1,800 positions. The January financial plan projects a further increase of more than 2,000 positions or 1 percent by the end of fiscal year 1999.[10] More telling is the fact that the current projection for fiscal year 1999 is fully 10,000 positions higher than the City's first projection of fiscal year 1999 headcount in February 1995.[11]

Good and bad provisions in the tax program

Lowering New York City's tax burden is an essential ingredient, along with better services and infrastructure, to making the city more competitive in attracting and retaining businesses and residents. The CBC has endorsed virtually all of the tax reductions enacted during the Giuliani administration.[12] Tax cuts already enacted have a total projected value of $1.0 billion in fiscal year 2002, including $457 million from commercial rent tax reductions, $23 million from the hotel tax cut, $110 million from changes in the unincorporated business tax, and $133 million from other business tax reforms.[13]

Three of Mayor Giuliani's new proposals in the January plan are consistent with the CBC's previous recommendations: Elimination of the remainder of the commercial rent tax (at a cost of $396 million annually by fiscal year 2002); extension of the unincorporated business tax-personal income tax credit ($39 million); and, creation of a personal income tax child care credit ($31 million). (See Table 3.) Based on the CBC's comparative analysis of the City's tax burden, these actions address taxes that contribute significantly to the great disparity between New York and other U.S. cities, and are thus high-priority targets for improving competitiveness via tax cuts.[14]

The sales tax, on the other hand, is more closely aligned with national norms, and therefore the proposed elimination of the sales tax on clothing and footwear is not a high priority. Furthermore, there is no credible evidence that cutting the sales tax in the manner proposed will result in substantial economic development benefits by shifting economic activity from other states to New York.

An analysis of the impact of eliminating the tax for clothing purchases under $500 concluded that secondary improvements in other City revenues would offset only 14 percent of the foregone sales tax revenue.[15] Another study arrived at similar conclusions, estimating offsetting revenue gains equal to 10 to 13 percent of revenue losses.[16] Finally, the New York State Department of Taxation and Finance examined the impact of a one-week sales exemption for clothing purchases under $500 in January 1997 and found that sales during the quarter increased only 2.9 percent statewide, or about the rate of inflation.[17] The report states, "[I]t seems likely that most of the 2.9 percent increasemay be part of the larger national trend and may not be attributable to the temporary exemption."[18]

Two other tax proposals would have harmful economic impacts. First, the Mayor proposes to extend the coop/condo property tax reduction (worth $180 million annually by 2002). The inequitable structure of the City's property tax system is exacerbated by allowing these properties to share in the subsidy provided to owners of one-, two- and three-family homes, at the expense of inefficiently high taxes on the owners of commercial and large residential property. In effect, this measure enlarges the already gross disparity between the effective property tax rate on commercial property and that on smaller residential property, thereby discouraging job creation. The effective tax rates on commercial property and large residential property currently are $4.13 and $4.12 per $100 of market value, respectively, or 5.3 times greater than the rate of $0.78 on small residential properties.[19]

Second, the City has requested the State to extend two surcharges on the personal income tax (set to expire on December 31, 1998, and December 31, 1999). Previous CBC research indicated that the personal income tax is a major source of the higher tax burden in New York than in competitive regions, and that a personal income tax cut should be a high priority.[20] Together,these two surcharges raise over $1.1 billion dollars annually, or approximately $365 million more than the value of the newly proposed tax cuts. In other words, on balance, the new tax program is actually a tax increase proposal, with the new revenue raised through the economically harmful surcharges on the personal income tax.

Although taxes have been reduced in recent years, the pace of tax cutting has not been rapid enough to improve New York City's competitiveness relative to other U.S. cities. Between calendar years 1993 and 1996, the burden of major state and local taxes on a family of four in New York City with an annual income of $25,000 fell from 10.9 to 9.7 percent; at the $50,000 level the burden declined from 13.5 to 12.7 percent, from 15.0 to 14.5 percent for $75,000, and from 15.4 to 15.0 percent for $100,000.[21] Nevertheless, tax burdens have improved very little relative to other cities. For the highest income level, New York City has remained the second highest tax burden among the largest city in each state and the District of Columbia. At the $50,000 and $75,000 levels the City's rank fell from second to third. For the poorest families, the City's relative position fell from the eleventh highest burden to the twelfth.

Concerns for the Long Run

According to the Mayor's January plan, local economic growth will continue for the foreseeable future. The City estimates that between calendar years 1997 and 2002, employment will increase by 159,000 jobs or 5 percent; real GCP will rise an average of 2.6 percent annually, the average wage rate 3.8 percent a year, and personal income 4.3 percent annually on average. In the real estate market, asking rents for primary office space in Manhattan are expected to increase an average of 4.7 percent a year, and the office vacancy rate will decline from 9.7 to 7.8 percent.[22]

Despite the favorable economic outlook, the City is facing budget deficits in fiscal years 2000-2002 ranging from $1.8 billion to $2.0 billion. (Refer to Appendix Table 1.) These gaps arise because revenues are projected to grow 3.3 percent while expenditures will increase 8.7 percent. Moreover, the budget gaps are likely larger than estimated by the City, for reasons explained later in this memorandum.[23] To the extent that actual economic performance falls short of expectations, the budget gaps will grow even larger.

Three major problems characterize the longer-run outlook. First, debt service expenditures are projected to grow rapidly and consume a much larger portion of local revenues. Second, the financial plan does not include expenditures in connection with a new labor settlement once the current contracts expire in 2000. Third, the City's plan depends heavily on unrestricted intergovernmental aid, which may not become available.

Rapid growth in debt service

Expenditures to pay the interest and principal on outstanding long-term bonds are expected to grow 36 percent from almost $3.2 billion in fiscal year 1998 to $4.3 billion in fiscal year 2002, or more than nine times the projected rate of growth of local revenues (taxes and miscellaneous charges and fees).[24] Consequently, the share of local revenues devoted to servicing debt will increase from 13.6 to 17.8 percent during the period. (See Figure 1.) These percentages do not include the debt service expenditures of the Water Finance Authority (WFA), which repay bonds issued to invest in the City's water and sewer infrastructure. Adding the WFA's debt service expenditures and operating revenues (and adjusting for double-counting of WFA payments to the City) pushes the figure for 2002 to approximately 20.0 percent.

In other words, by the end of the financial plan one of every five dollars of locally raised revenue will be devoted to paying off long-term debt. This trend reduces the resources available to pay for other priority expenditures, and constrains the City's ability to cope with future budget gaps.

New labor expenditures

Current collective bargaining agreements cover the 1995-2000 period; contracts with municipal employee unions will expire during the course of fiscal year 2000. No provision is made in the final years of the financial plan, however, for funding a new labor settlement, despite the fact that any settlement not funded with productivity improvements will add over a billion dollars to the fiscal year 2002 budget.

The cost of an across-the-board 1 percent pay increase is approximately $200 million. Using this estimate, Table 4 calculates the added spending from three levels of annual pay increases and the impact of that spending on the out-year budget gaps. If the City secured a contract that provided only cost-of-living increases keyed to its projections of inflation (2.5 percent in fiscal year 2001 and 2.6 percent in fiscal year 2002[25]), personal service expenditures would rise $503 million in 2001 and over $1.0 billion in 2002, increasing the projected budget gaps in those years from $2.0 billion to $2.5 billion and from $1.9 billion to $2.9 billion, respectively.[26] The average annual increase in the last three years of the current agreement is 4.25 percent (no raises were granted in the first two years); replicating that agreement in fiscal years 2001 and 2002 would add $850 million and $1.7 billion of expenditures, respectively, and increase the budget gaps to $2.9 billion and $3.6 billion.[27]

Great expectations for intergovernmental aid

Both the City's baseline budget and its projected gap-closing programs expect significant increases in assistance from the State and federal governments. These expectations, however, are not for additional categorical aid--such grants are accompanied by additional spending, and thus do not reduce budget gaps. Rather, the City is hoping that by 2002 it will have an additional $2.0 billion of unrestricted or "no strings attached" intergovernmental aid that it can use to close its budget gaps by financing growth in spending otherwise paid for with local revenue. While CBC policy is supportive of many of the City's proposals for new intergovernmental aid, new aid of this magnitude is not a realistic assumption upon which to balance a budget.

The $2.0 billion of new intergovernmental assistance is divided into four parts. First, the baseline financial plan assumes that unrestricted aid will more than double from $587 million to $1.2 billion in fiscal years 1999-2002. (Refer to Appendix Table 1 and see Table 5.) All but $93 million of this growth is additional State aid to compensate for reductions in the property and personal income taxes under the State's STAR program. (Observe the concurrent reduction in tax revenues in Appendix Table 1.) However, recent experience suggests that even $93 million may be optimistic. Between fiscal years 1992 and 1997 unrestricted aid declined 21 percent. Furthermore, the City was forced to reduce its projection of unrestricted aid for the current year 26 percent or $201 million. Second, the baseline budget also includes $390 million of unspecified "anticipated" revenues from the State and federal governments. Measures expected to generate this aid include greater State funding for child welfare services and for child care services, and more aid to the City from the new federal Temporary Assistance for Needy Families (TANF) grant.

Third, the fiscal year 1999 gap-closing program counts on State and federal actions with a recurring value of $450 million.[28] The expected measures include the restoration of federal revenue sharing, increased State revenue sharing, an increased share of Medicaid intergovernmental aid, and increased reimbursement for jailing State inmates. Finally, the out-year gap-closing programs expect even more intergovernmental assistance, amounting to an additional $400 million in 2000 and $500 million in 2001 and 2002.

Recommended Actions to Improve the Financial Plan

To improve the City's long-run fiscal health, Mayor Rudolph W. Giuliani, Speaker Peter F. Vallone and the City Council (with the assistance of Governor George E. Pataki and the State Legislature) should take four actions during the months leading up to budget adoption in June: (1) Use the current-year surplus in a fiscally prudent manner, including giving consideration to creating a true rainy day fund; (2) add restructuring and productivity initiatives; (3) establish a viable long-run debt policy; and, (4) revise the program of tax proposals.

Be prudent with the surplus, and consider a true rainy day fund

As described earlier, the CBC recognizes at least five different ways in which a surplus can be used in accord with principles of fiscal prudence. However, rolling the surplus into next year to support ongoing operating expenditures is not one of them. This proposal by the Mayor is fiscally imprudent and should be changed.

Among the options which the CBC recommends are using the surplus to retire outstanding debt and using it to avoid long-term debt by paying for capital investments on a "pay-as-you-go" basis. In addition, the surplus could support one-time operating expenses that would yield benefits in the future, such as introducing new computer technology.

Another attractive option is to create a "rainy day" fund. The purpose of a rainy day fund is to soften the impact of ups and downs in the economy on the government's budget. Prudent fiscal management suggests that, when the economy is performing well and a government is collecting more resources than it requires in a given year, some or all of those excess resources should be saved in expectation of a future period when the economy turns down. Monies from such funds are not meant to compensate fully for the impact of a downturn in the economic cycle, but rather to mitigate the need to make drastic spending reductions (which could diminish the quantity and quality of public services) or to enact large tax increases (which could do further damage to the economy).

The adopted budget for fiscal year 1998 included an agreement between the Mayor and the City Council to create a "budget stabilization account" of $300 million which would be used to help balance the fiscal year 1999 budget. This account was subsequently increased to $1.2 billion in the January financial plan. The Mayor and the City Council deserve praise for attempting to deal with fiscal problems beyond the current year. However, the budget stabilization account does not exhibit the characteristics of a rainy day fund. Most significantly, funds deposited into the account can be removed at any time; in fact, the financial plan proposes to use $1.0 billion of the funds next fiscal year, and the remainder in the following year. Yet in both these coming fiscal years economic growth is projected to continue; no downturn is expected. The resources in a real rainy day fund are inviolate until clearly specified economic trends trigger their release; thus, it is the economy, and not public officials, that determines their availability. Further, there is no ongoing provision for building up the budget stabilization account during periods when the economy continues to grow.

The Mayor and the Council may have chosen this structure because a true rainy day fund cannot exist under the current provisions of State law as they apply to the City of New York. The law requires the City to balance its budget annually according to Generally Accepted Accounting Principles (GAAP). Under GAAP rules, if the City were to use resources from a rainy day fund to pay its obligations, those resources could not be recognized as revenues because they were received in an earlier period--in other words, the revenues and expenditures would not be balanced, the law would be violated, and a financial control period would begin.

If the Mayor and the Council were diligent about maintaining and building the size of the budget stabilization account, and refrained from drawing down its resources until the state of the local economy required it, then the City would effectively have a viable rainy day fund. In essence, the City would "roll" the surplus from one year to the next by using it each year to prepay debt service expenditures from the following year. When the economy sours and those resources are needed, the amount of the debt service prepayment would decline; in an economic recovery the prepayment amount would be increased again. Despite the promise of such a scenario, it is less desirable than a true rainy day fund because the budget stabilization account remains subject to political vagaries, and no assurance can be made to the public that its resources will not be spent by elected officials to finance unsustainable levels of spending or to avoid making tough budgetary choices. In fact, this appears to be the case for fiscal year 1999.

Mayor Giuliani and Speaker Vallone should call upon the Governor and the Legislature to amend State law to create a rainy day fund for the City. They should then deposit some or all of the fiscal year 1998 surplus into that fund.

Add restructuring and productivity initiatives

As described above, the current financial plan is devoid of innovative measures for improving or protecting public services while reducing their costs. The problem is not a lack of good ideas (see, for example, the wide range of initiatives suggested in the Restructuring Government Services report of the CBC's Budget 2000 Project[29]), but rather a lack of political will to change the way the City provides services.

A good example of the City's lack of progress toward a smaller, more productive workforce is the New York Police Department (NYPD). Despite consistent criticism that too many police officers work in administrative and other non-enforcement positions, very little civilianization has been accomplished. Civilianization uses less expensive civilians employees to replace officers working in administration, freeing the officers to work in enforcement. The CBC's December 1997 report, The State of Municipal Services in the 1990s: The New York Police Department,[30] concluded the NYPD overstates the amount of civilianization it has done, and many opportunities for further civilianization remain.

The Mayor has proposed hiring 1,600 police officers with new federal aid. If the Mayor hired 1,600 civilians instead, and also took actions to increase the number of times officers appear for work and perform enforcement duties, then two to three times as many officers would be added to the streets as under the Mayor's proposal, but at roughly half the cost over the next five years.

Implementing productivity improvements would address four needs at once. First, it would create recurring reductions in expenditures that would help close future budget gaps, while maintaining and perhaps improving the quality and quantity of public services. Second, it would allow the City to use its fiscal year 1998 surplus more prudently for one of the five purposes described above. Third, it would enable the City to reduce the financial plan's reliance on new intergovernmental aid to more realistic levels. Fourth, productivity improvement is the only fiscally prudent means to award salary increases beyond 2000 without increasing the size of the out-year budget gaps.

Establish a long-run debt policy The City's authority to issue general obligation debt is limited. The amount of outstanding general obligation debt the City can carry is limited in the State Constitution to 10 percent of a rolling five-year average of total market value of real estate in the city. The combination of large and growing capital expenditures that raised the level of outstanding debt and declining property values that lowered the constitutional ceiling has dramatically reduced the City's available borrowing authority. The City ended fiscal year 1997 less than $700 million below the limit that year of $31.9 billion. The City Comptroller estimates that the general obligation debt limit will decline to $28.8 billion for fiscal year 1999, and that as of July 1, 1998, the City will be nearly $3.2 billion over the limit.[31] These enormous liabilities explain debt service's growing consumption of City revenues.

The City's solutions thus far have been to cut capital spending and to ask the State to create a new Transitional Finance Authority (TFA). The TFA was given the power to issue $7.5 billion of bonds during fiscal years 1998-2001; this debt is backed by the personal income and sales taxes and is not subject to the constitutional limit. The TFA was intended only to be a temporary solution, however, pending a more comprehensive, long-run plan. Time is of the essence if such a plan is to include a constitutional amendment to change the debt limit, because amendments must be approved by two separately elected legislatures and then by a public referendum.[32] However laudable the notion, though, the constitutional debt limit should not be raised until a reasoned and prudent long-range plan for managing the City's outstanding debt has been crafted. Such an approach would apply any new debt limit to all forms of City borrowing, not just general obligation bonds.

One feature of a fiscally prudent debt policy would be to supplement long-term debt with current surplus funds when available. Surplus resources should be used to improve the City's fiscal health in this regard in two ways. First, the City should pay off outstanding debt, thereby lowering debt service expenditures in the operating budget in current and future years and clearing room beneath the constitutional debt limit. Second, funds should be used to pay for capital investment and avoid an equivalent amount of borrowing, thereby similarly reducing projected debt service expenditures and freeing up borrowing power.

A viable debt policy should also explore opportunities to finance investment in certain kinds of infrastructure with user fee-backed debt instruments.[33] The City should follow its own successful model, the Water Finance Authority, when considering what other parts of the infrastructure are good candidates for user fee-funded investment.

Finally, the City should also take three kinds of actions to improve the effectiveness of its planned capital investments. First, the City should consider changes in the way infrastructure is operated that alter capital investment needs. For example, using New York City public schools more intensively--via year-round schooling and double-shifting--would eliminate the need for new school construction and reduce demand for major rehabilitative work, while ensuring that every student attends a technologically modern school.[34]

Second, the City should not continue the practice of underfunding annual infrastructure maintenance. Reports mandated by the City Charter show that maintenance underfunding is widespread: Actual spending ranges from 80 percent of needed transportation maintenance to 53 percent for police, 30 percent for jails, 12 percent for sanitation and less than 10 percent for parks and libraries.[35] Skimping on maintenance shortens the useful life of infrastructure and increases the costs of repair. Third, the City should face the difficult task of reexamining its capital priorities to direct investment to those features of the physical plant with the highest economic return, and to reduce other spending. The City's current circumstances dictate that tough choices be made about the relative importance of various kinds of capital spending.

Revise the tax program

The proposals for reductions in the commercial rent, unincorporated business and personal income taxes should help to close the gap between the tax burdens on New York City residents and businesses and the burdens on residents and businesses in competitor cities. Therefore they should be retained.

Conversely, the proposed elimination of the sales tax on clothing will not provide significant economic development benefits and should, therefore, be dropped. If the City retains this proposal, the State Legislature and the Governor should not implement it.

The Mayor's intention to extend the two personal income tax surcharges will increase residents' tax burdens in a form that has been found to be economically harmful. The State Legislature should reject this plan. The expiration of these taxes will greatly reduce the tax burden on families and improve the City's competitive standing relative to other major cities' tax burdens.

Finally, because the subsidy of coop and condo owners' property tax bills exacerbates the massive inequities of the City's tax system between small residential and commercial property, it should be repealed for fiscal year 1999, and the proposal to extend it beyond 1999 should be abandoned. Rather than widening the system's disparities, the City ought to be narrowing the gap between small residential tax rates and those of commercial and large residential property owners.

NOTES

1. During fiscal years 1990-1996 actual federal categorical aid was 13.3 percent higher on average than was projected in the adopted budget. The comparable figure for State aid is 1.2 percent; however, State aid was actually overestimated in fiscal years 1990-1991 (2.3 and 2.5 percent, respectively). The average underestimate of State aid in fiscal years 1992-1996 was 2.6 percent. See adopted budgets for the relevant fiscal years and City of New York, Comprehensive Annual Financial Report of the Comptroller for the Fiscal Year Ended June 30, 1997 (NY: Office of the Comptroller, October 27, 1997), pp. 234-235.

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    • 2. City of New York, Office of the Comptroller, The Comptroller's Comments on the Fiscal Year 1998 Financial Plan and the Fiscal Year 1999 Preliminary Budget (NY: Comptroller, February 1998), p. ii.

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    • 3. Ibid., p. 13, and City of New York, Office of the Comptroller, Comptroller's Comments on the Fiscal Year 1998 Adopted Budget and the Financial Plan for Fiscal Years 1999-2001 (NY: Comptroller, July 1997), p. 18.

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    • 4. Economic data in this paragraph are from City of New York, Office of Management and Budget, Financial Plan Fiscal Years 1998-2002, Volume 1 (NY: OMB, January 29, 1998), p. 14.

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    • 5. Economic data in this and the next paragraph are from Ibid., and City of New York, Office of Management and Budget, "Monthly Report on Current Economic Conditions" (NY: OMB, June 25, 1997), p. 5.

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    • 6. Office of the State Deputy Comptroller for New York City, Review of the New York City Financial Plan: Fiscal Years 1998 through 2002, Report 5-98 (NY: OSDC, February 26, 1998), p. 10.

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    • 7. City of New York, Office of Management and Budget, op. cit., January 29, 1998, p. 17.

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    • 8. The budget stabilization fund is not truly a separate fund, but rather a designation of certain monies to be used to prepay fiscal year 1999 debt service. The fund is described further on pages 13-14.

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    • 9. All figures in this paragraph have been adjusted to account for the merger of the three police departments and for the absorption of the Emergency Medical Service by the Fire Department. Data provided by the New York City Office of Management and Budget.

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    • 10.

    City of New York, Office of Management and Budget, op. cit., January 29, 1998, p. 68.

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    • 11. City of New York, Office of Management and Budget, Financial Plan of the City of New York, Fiscal Years 1995-1999: Full Time Staffing Levels (NY: OMB, February 14, 1995), p. 2.

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    • 12. The most notable exception was the coop/condo property tax subsidy.

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    • 13. City of New York, Office of Management and Budget, op. cit., January 29, 1998, p. 5.

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    • 14. Charles Brecher, Tax Policy: A Report of the Budget 2000 Project (NY: CBC, December 1996).

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    • 15. David Belkin, Would Clothing Sales Tax Cuts Pay for Themselves? (NY: New York City Independent Budget Office, June 1997).

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    • 16. Thomas Conoscenti & Associates, Inc., Who Benefits? An Analysis of the Elimination of the Sales Tax on Clothing (Albany, NY: New York State Association of Counties and New York State County Executives Association, May 1997).

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    • 17. New York State Department of Taxation and Finance, Office of Tax Policy Analysis, The Temporary Clothing Exemption: Analysis of the Effects of the Exemption on Clothing Sales in New York State (Albany, NY: NYSDTF, November 1997).

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    • 18.

    0 Ibid., p. 22.

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    • 19. Calculated from data provided by the New York City Office of Management and Budget.

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    • 20. Brecher, op cit.

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    • 21. District of Columbia, Department of Finance and Revenue, Office of Economic and Tax Policy, Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison (Washington, DC: Department of Finance and Revenue, June 1994 and July 1997), pp. 8-11.

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    • 22. City of New York, Office of Management and Budget, op. cit., January 29, 1998, p. 14.

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    • 23. The adjustment for underestimated federal aid is not salient here, because increases in categorical aid are accompanied by equal growth in expenditures, and thus the dollar amount of the imbalance between revenues and expenditures is unaffected.

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    • 24. Expenditure figures do not match those in Appendix Table 1 because they have been adjusted to remove the accounting impact of the surplus rolls.

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    • 25. Fiscal year inflation projections are averages of calendar year data presented in City of New York, Office of Management and Budget, op. cit., January 29, 1998, p. 14.

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    • 26.

    0 Because the contracts expire prior to the end of fiscal year 2000, additional expenditures for a new contract would actually begin in that year, and would therefore be higher than estimated here for fiscal years 2001 and 2002.

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    • 27. Including the two years without pay raises produces an annual average increase similar to the preceding cost-of-living increases. These estimates are understated because they are based on the civilian pattern, but the uniformed contracts were more generous.

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    • 28. Another $113 million of intergovernmental aid is included in the gap-closing program under the category "agency programs," $101 million of which is one-time assistance. See page 6.

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    • 29. Dean Michael Mead and Andrew S. Rein, Restructuring Government Services: A Report of the Budget 2000 Project (NY: CBC, December 1996).

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    • 30. Dean Michael Mead, The State of Municipal Services in the 1990s: The New York Police Department (NY: CBC, December 1997).

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    • 31. City of New York, Office of the Comptroller, Fiscal Year 1998 Annual Report of the Comptroller on Capital Debt and Obligations (NY: Comptroller, December 1997), pp. 4-6.

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    • 32. Even though legislative elections are to be held this November, the earliest a voter referendum could be voted on would be November 1999.

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    • 33. For further development of this concept, see Charles Brecher and Dean Michael Mead, Capital Investment and Debt Service: A Report of the Budget 2000 Project (NY: CBC, December 1996).

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    • 34. See Richard Delaney, School Buildings for the Next Century: An Affordable Strategy for Repairing and Modernizing New York City's School Facilities (NY: CBC, September 1996).

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    • 35. Figures are for fiscal year 1996. City of New York, Office of Management and Budget, Asset Condition and Maintenance Schedules for Major Portions of the City's Capital Plan: Agency Reconciliation of Maintenance Schedules (NY: OMB, January 30, 1996).

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