March 27, 2000

The Hon. Rudolph W. Giuliani
Mayor
City Hall
New York, NY 10007

Dear Mayor Giuliani,

 

Recent years have been good ones for New York City. Record-long national and local economic growth have yielded strong job gains, that in 1999 even outpaced those of the nation as a whole. This prosperity has fueled municipal revenue growth that has provided substantial annual budget surpluses.

These good times provide the context for the Preliminary Financial Plan you released in January and the Executive Budget you will be submitting to the City Council in April. The Citizens Budget Commission has reviewed your preliminary plan, and I am writing now on behalf of the Trustees to convey our recommendations for how that plan should be transformed into an Executive Budget that we would enthusiastically support.

Our six recommendations fall into three categories: (1) Measures presented in your preliminary plan that we endorse; (2) Measures discussed in the preliminary plan that address important issues, but that need modification in order to be most effective; (3) Measures you proposed in your preliminary plan that should be reversed in the Executive Budget.

Proposals Deserving Enthusiastic Support

The two initiatives that warrant enthusiastic support are:

Meaningful Tax Cuts. The parts of the tax package you proposed which we believe will enhance the City's competitiveness and are therefore job-generating consist of elimination of the commercial rent tax, dropping the 14 percent personal income tax surcharge, reducing business income taxes, increasing tax credits for resident partners in unincorporated businesses and S-Corporations, and restructuring the local utilities tax to conform with reductions being proposed in the State's tax on utilities.

The commercial rent tax drives up the cost of manufacturing, retail and office space. It has often been cited by those who study the City's taxes as harmful to New York's economy. Recently, otherwise thriving start-up firms in the new media industries have complained about its negative impact on their ability to grow within the city. Your proposal finally to eliminate this tax is welcome.

The 14 percent income tax surcharge was called temporary when it was imposed in fiscal year 1992 to tide the City over as revenues fell rapidly in the deep local recession. Now the city has recovered all of the jobs lost in that recession, and tax revenue growth has surpassed expectations for five straight years. It is time to keep the initial promise by allowing the surcharge to expire.

Reducing the rates for the City's three corporate income taxes is a way to help local firms be competitive with counterparts in other areas without favoring some firms over others, as is the case when discretionary tax breaks are granted. Similarly, the reductions in the utility tax will keep business costs down while treating all enterprises fairly. The credits for partners in unincorporated businesses and S-corporations will place them on an equal footing with other businesses and avoid the effective double-taxation under which they now suffer.

Our only reservation about these desirable tax cuts is the speed with which they can be safely implemented. Your plan calls for a four-year phase-in, growing from $446 million in fiscal year 2001 to $1,762 million in fiscal year 2004. Tax cuts should be matched with expenditure reductions in order to keep the budget balanced. As we note below, a much expanded productivity initiative or other offsetting actions are required to achieve these tax cuts with a balanced budget. This effort should begin immediately.

Merit Pay. As the Commission's President and Vice President observed recently in the Daily News, your merit pay proposal "could potentially revolutionize the way city services are delivered." Offering workers who perform well additional pay makes good sense. Competence and energy should be rewarded.

You and Commissioner James Hanley should move promptly to obtain agreement on merit pay concepts in the current round of collective bargaining. With the District Council 37 contract due to expire at the end of this month, urgent action is necessary since such a plan will be complex to design and implement, and difficult to implement retrospectively. These workers, as well as the many others whose contracts expire later this year, should begin working under a merit pay system as soon as their current contracts expire.

Proposals Requiring Modification

Two of your proposals reflect a concern for important issues affecting the City's future, but require modification to be most effective:

Debt Reform. As your preliminary plan recognized, the limit in the State Constitution on the City's general obligation debt no longer makes sense. It is linked to property value, an outdated measure of ability to repay debt, and it puts a limit on borrowing that is too tight to permit a capital budget that would keep the City's public assets in decent condition.

For three fiscal years the City has sustained its capital budget through a temporary device, the Transitional Finance Authority. Borrowing authority under this mechanism will be exhausted in fiscal year 2001, and it is time to replace an entity transitional in intent and name with a more permanent solution. You should make good on the pledge to propose a constitutional amendment with a modernized borrowing limit. That limit should achieve a balance between affordability in terms of the debt service burden and adequacy in terms of the level of capital investment it supports. We look forward to reviewing your specific proposal.

Stadium Subsidies as Economic Development. More than two years ago you put an important issue on the public agenda: How can the City retain its major league baseball teams? The Yankee's lease at Yankee Stadium expires in 2002, and the Met's lease at Shea Stadium expires in 2004. The presence of these teams brings economic benefits to the city, and it is wise to begin planning for the teams' retention.

Last January your preliminary financial plan allocated $882 million over the 2000-03 period to a proposed Sports Facility Corporation without indicating the specific projects or whether that would cover the total cost. Because of our concern that stadium subsidies might become excessive, the Commission completed and sent to you last April an analysis of the economic benefits from having a professional baseball team in New York City. We concluded that these benefits justified a team subsidy of no more than $23.1 million annually, or the equivalent of $318 million in a one-time capital subsidy, and that your goal in negotiating with the team owners should be to keep the subsidy well below that figure in order to maximize the taxpayers' rate of return from the investment.

This year your preliminary plan modifies previous proposals in two ways. First, the proposed sum for facilities to be built through the new Corporation is reduced to $573 million over the fiscal year 2000-02 period, eliminating the $303 million previously allocated for fiscal year 2003. Second, the City through its capital budget allocates $50 million for a minor league sports stadium in Brooklyn and another $29 million for one on Staten Island. However, the full cost of the Staten Island facility, after accounting for related improvements, reaches $71 million.

This new plan should be modified in two ways. First, more information should be provided on the nature of the projects to be funded with the $573 million appropriation. Any subsidy to a professional sports team should follow the guidelines presented in our 1999 analysis, and it is not clear whether this is the case for your plans. Second, new and relatively large subsidies for the minor league stadiums should be reconsidered. The major economic benefits from sports teams flow from attendance and spending by nonresidents at the games. Based on the model we developed for analyzing the major league stadium investments, it would be impossible for the City to recoup a $71 million investment in the Staten Island facility--even if all the attendees were from out-of-town and they spent as much as people at major league games. Substantial investments in minor league facilities cannot be justified on economic development grounds. As recreational and amusement facilities, these are large expenditures which need to be judged against other City-wide needs for public improvements.

Objectionable Proposals

Two elements in the preliminary plan will worsen the City\rquote s fiscal prospects. Future New Yorkers will be obliged to deal with large budget gaps because this financial plan:

Imprudent Use of the Surplus. The January plan estimates that in the current fiscal year the City will have an operating surplus of nearly $2.2 billion, largely because tax revenues are above levels anticipated last June when the budget was adopted. Your proposal is to use the bulk of these unanticipated resources ($1.5 billion) to support operating expenses in fiscal year 2001 and the remainder in fiscal year 2002.

Using a surplus to cover recurring expenses only postpones the inevitable task of sizing municipal government to fit its economic base. Even with the benefit of this year's surplus, the fiscal year 2002 budget has a projected gap of $2.2 billion, and the future will become even more troublesome. The surplus should be used to achieve more enduring benefits, not to postpone hard decisions.

In our view, prudent uses of the surplus would include reducing the City's outstanding debt by repaying bonds, reducing the need for future borrowing by utilizing pay-as-you-go capital financing; making other one-time investments with recurring future benefits such as new information technology to enhance productivity; and working with the State Legislature to establish a true rainy day fund.

Low-priority tax cuts and limited productivity gains. Recurring budget balance requires that revenues and expenditures move in parallel directions. Your financial plan worsens the longer-term outlook, because it puts them on diverging paths. Revenues are sacrificed for some low-priority tax cuts, while expenditures are projected to grow at a pace at or near inflation. Productivity growth, which has fueled the private economy, is neglected in the City's plans.

The unnecessary tax measures add about $300 million to future budget gaps and consist of property tax abatements for residential cooperatives and condominiums ($200 million), dropping the mortgage recording tax for some home buyers ($48 million), lowering the hotel tax ($40 million), and tax credits for some commercial development outside Manhattan ($12 million). The large residential property tax reductions will add to inequities in the local property tax system by further widening the disparities between effective tax rates on residential and commercial uses; the preferable strategy is to pursue reforms that would eventually equalize effective tax rates for all types of property. Favoring first-time homebuyers under the mortgage recording tax will do little to permit homeownership for those who otherwise could not afford it, and diverts tax resources in an inequitable way to relatively high-income households. The hotel tax was cut significantly in previous years by the City and the State in order to make it competitive with other cities, and the continuing strong performance of the local tourism industry suggests it is unnecessary to cut it further. The relatively small commercial redevelopment program is of questionable merit, causing no net gain in activity for the city as a whole while favoring some neighborhoods over others.

Bringing future years' budgets into balance will require discipline in spending as well as avoiding unnecessary tax breaks. This can be achieved without sacrificing services to the public through productivity initiatives. Your preliminary plan proposes, but does not specify, $300 million in productivity savings by fiscal year 2004. Much more is needed, and the current round of collective bargaining is the opportunity to achieve it. During the current national economic boom, private sector productivity gains have averaged 2.2 percent annually with a somewhat lower gain in the services sector than in manufacturing; performance by municipal government equivalent to that of the private services sector over the next four years would yield annual savings of $1.8 billion. The Executive Budget should set a more ambitious target for productivity enhancements, and your efforts at the bargaining table should implement it.

The Citizens Budget Commission looks forward to the release of your Executive Budget and to a fiscal year 2001 budget of which we can all be proud. The plenitude of good times should be used to forge a future in which New York City will continue to prosper even if circumstances become less kind.

Sincerely,

Eugene J. Keilin
Chairman
Board of Trustees