Citizens Budget CommissionCitizens Budget Commission

Letter to Mayor Rudolph Guiliani

April 15, 1999

New York, NY

Dear Mayor Guiliani:

The Citizens Budget Commission has examined the Preliminary Budget for fiscal year 2000, which was released January 28, 1999. I am writing to convey the Commission's recommendations for improving the plan. These recommendations are elaborated in the attached memo prepared by the CBC’s staff.

The Commission is pleased that the strong economy continues to generate higher revenues and City surpluses, that taxes were lowered and that crime was reduced.

Because the economy is so strong, there is a natural tendency to increase spending--and there are surely many important, unmet needs--but good times are also the only time to save. In public as in private life, the most successful institutions are those which strike the right balance between the urge to spend and the need to save.

Regrettably, while the City's preliminary budget for the millennium may be balanced from an accounting point of view, it fails to achieve the more important balance between short-run pressures and long-term prudence.

The current economic recovery has simply not been used to shore up the City's finances:

If the City is to improve its services, enhance its competitive position and avoid service reductions and tax increases in a future downturn, then its current actions must be more innovative than those of the past. To improve the City's long-run fiscal health, the Commission recommends four improvements to the fiscal year 2000 budget:

  1. Put the surplus to good use. The preliminary proposal uses the fiscal year 1999 surplus to balance the expense budget in fiscal years 2000 and 2001. This is not prudent, because it finances recurring commitments with non-recurring resources; the surplus can only be spent once, but the programs will continue.

    Instead, the surplus should be used to reduce outstanding debt, fund one-time commitments that provide multi-year benefits (such as an early retirement incentive that is part of a productivity enhancement program), or saved for use during an economic downturn.

  2. Recommit to reinventing government. While government and business are very different, and they cannot be run in the same way, each can learn from the other. Most major businesses have used their current prosperity to reduce costs and improve productivity. Widespread publicity has been given to companies that actually reduced the number of their employees even as the economy expanded. Disciplined by adversity in the early 1990s, they have resisted the temptation to expand their costs as fast as their revenues have grown.

    Apparently, the City's brush with bankruptcy is too far in the past for its lessons to be fresh in our minds. In this preliminary budget, specific productivity plans are virtually invisible, and nowhere is there a plan for reinventing government. New productivity accounts for only 1.3 percent of the budget's gap-closing actions.

    With most major collective bargaining agreements coming up for renewal within the next eighteen months, there is an urgent need to define and dramatize the case for efficiency. The goal should be a workforce with more pay, more skills and more productivity.

    Recent growth in the number and cost of municipal workers reinforces the need to increase productivity. After a 13,731 decline in headcount between fiscal years 1993 and 1996, your plan will increase employment by 9,836 between fiscal years 1996 and 2000. In addition, real personal services spending is growing and will be at its highest level in decades.

  3. Manage debt before it manages us. In addition to their focus on productivity, most businesses have used the long economic boom to "clean up" their balance sheets by repaying debt or reducing new borrowing. We seem to be going in the opposite direction; the burden of City and City-related debt increases steadily, and the consequence is a steady increase in debt service-more than 40 percent in the next four years.

    Moreover, the City has taken steps to obscure the true cost of that debt. Last year, the City stopped reporting Transitional Finance Authority (TFA) debt service in its financial plan, and the preliminary budget argues that tobacco bonds should not be counted as City debt. These actions make it difficult for the public to make judgements about affordability.

    Of course, there are pressing demands for construction and rehabilitation, but we have to meet these needs by finding creative new ways to address them rather than finding creative new ways to borrow. If the City spent more on maintenance, there would be less need to replace facilities that wear out beyond repair. If the City made better use of its facilities-by actively pursuing year-round schooling, for example-there would be less need for new construction. If the City used its surplus to pay for projects on a current basis, there would be less need for new debt.

  4. Reduce the right taxes. New York City will be more competitive in attracting and retaining businesses and residents if it reduces its tax burden. Although additional tax reductions are proposed in the preliminary budget, the priorities are misplaced. The tax reduction package should be revised.

The attached memo proposes several revisions, but two should be emphasized:

* * *

This is my first opportunity to comment on the City's budget as Chairman of the Citizens Budget Commission. As the former Chairman of the Municipal Assistance Corporation, I worked with you in the early days of your first term to achieve a significant reduction of the City's workforce. This reduction was meant to be permanent, and was to begin a continuing, strategic effort to reduce headcount and increase productivity. The numbers in this year's budget suggest that that strategy has been abandoned.

The fiscal legacy of the current economic recovery will be shaped by this budget. Using the surplus prudently, increasing the productivity of the workforce, managing our debt better, and targeting the right taxes would place the City on firm fiscal footing for the future.

Sincerely,

Eugene J. Keilin
Chairman





TO: MEMBERS OF THE BUDGET POLICY COMMITTEE
FROM: ANDREW REIN, ASSOCIATE RESEARCH DIRECTOR
ELIZABETH LYNAM, RESEARCH ASSOCIATE
DATE: APRIL 14, 1999
RE: REVIEW OF THE CITY OF NEW YORK FISCAL YEAR 2000 PRELIMINARY BUDGET PROPOSAL

On January 28, 1999 Mayor Rudolph W. Giuliani presented the fiscal year 2000 preliminary budget along with the updated City of New York Financial Plan for fiscal years 1999 to 2003. This memo reviews the proposed budget and plan. The first section reviews the Mayor's proposals; the second section recommends improvements based on the Citizens Budget Commission's research and principles.

Fiscal Overview

This section describes developments in fiscal year 1999 and summarizes key aspects of the Mayor's preliminary budget and financial plan. (See Table 1.) It also reviews the City Council's response to the preliminary budget. [1]

The fiscal year 1999 surplus

The January financial plan projects a $1.6 billion surplus in fiscal year 1999. (See Table 2.) When the fiscal year 1999 budget was adopted, the City reserved $465 million for future needs. During the fiscal year, an additional $1.1 billion became available--most from unanticipated revenues.

Primarily due to economic growth that exceeded the forecast, revenues are $1.1 billion higher than originally projected. Tax revenues now are expected to grow 4.6 percent in fiscal year 1999, rather than decline 1.5 percent as originally projected. The largest portion of these additional revenues, $464 million, is from the personal income tax. Property and property-related taxes increased $350 million and other revenues increased $255 million.[2]

Spending is lower than originally projected, providing $45 million in resources. Remaining fiscal year 1998 expenses, known as "prior year payables," are $300 million less than the funds reserved for this purpose. Another $101 million is from the City's general reserve.[3] Lower debt service spending contributes $11 million. These savings are offset $367 million due to higher agency spending.

By the end of fiscal year 1999, the surplus is likely to be larger than $1.6 billion. Revenues in the second half of the fiscal year may exceed expectations. Fiscal monitors estimate that the surplus will be $161 million to $176 million larger than the Mayor's estimate, primarily due to higher revenues.[4]

The Mayor proposes to use the surplus to finance operating expenditures in fiscal years 2000 and 2001. The majority, $1.2 billion, would be used in fiscal year 2000 and the balance, $345 million, in fiscal year 2001.

Fiscal year 2000 spending growth

Although the preliminary budget reports a 0.4 percent decrease in spending, from $35.6 billion to $35.5 billion, it actually would increase spending 4.1 percent, or $1.5 billion, between fiscal years 1999 and 2000. (See Table 3.) The reported spending decrease omits three relevant elements.

First, the Transitional Finance Authority (TFA) debt service is excluded. The TFA was created in 1997 to enable the City to borrow after reaching its limit on general obligation debt. TFA bonds finance the City's capital program and are repaid with dedicated personal income tax (PIT) revenues, but are not counted against the State constitutional limit on City general obligation debt. Between the January and April financial plans in 1998, the City stopped reporting TFA debt service and the associated PIT revenues in the financial plan, thereby distorting the budget's growth. TFA debt service grows from $144 million to $284 million between fiscal years 1999 and 2000 and should be added to reported spending.

Second, reported spending should be adjusted for the use of the City's annual surplus. In order to transfer a surplus from one fiscal year to the next, the City prepays expenses-usually debt service-for the following year. Therefore, reported expenditures are distorted by the prior year's prepayment and by current-year prepayments for the year following. Adjusting for these prepayments increases fiscal year 1999 expenditures $457 million and fiscal year 2000 expenditures $1.2 billion.

Finally, reported expenditures should be adjusted because the City historically has underestimated State and federal aid and its associated spending until late in the fiscal year. Based on recent experience, these expenditures will be $70 million higher in fiscal year 1999 and $798 million higher in fiscal year 2000.[5]

Closing the fiscal year 2000 budget gap

Last June the City projected a $2.3 billion budget gap in fiscal year 2000. The preliminary budget relies on $3.3 billion of items that close the gap, including the fiscal year 1999 surplus, revenue forecast revisions, savings from agency actions, and additional intergovernmental aid. (See Table 4.) These are sufficient to support $1.1 billion in additional expenditures and proposed tax reductions, and to cover previously planned revenues that will not be realized.[6]

The decisions the City makes to close its budget gap are critical to the City's long-run fiscal health. In order to reduce future gaps and increase fiscal stability, proposed actions should be realistic and have a recurring impact. Furthermore, the productivity of the City's workforce should be increased so that spending can be reduced without a diminution of services. Finally, new tax and spending programs should make the City more competitive for attracting businesses and residents. These criteria are not met substantially in the fiscal year 2000 preliminary budget:

Of the $3.3 billion in items that decrease the gap, fully $1.8 billion are non-recurring. These include $1.2 billion from the fiscal year 1999 surplus, $345 million from the sale of the Coliseum, and, as discussed below, $227 million in one-time agency savings.[7] Furthermore, the Coliseum sale may not occur this year.

Including the Coliseum sale, revenue changes decrease the gap nearly $1.0 billion. Due to continued strong economic performance, the revenue forecast was increased $351 million. In addition, a recent legal settlement with several tobacco companies is expected to generate $300 million in fiscal year 2000.[8]

Proposed agency initiatives-spending reductions and revenue enhancements-generate $591 million in gap-closing resources.[9] (See Table 5.) However, only $30 million is attributable to increased productivity, such as transferring traffic enforcement agents from foot patrol to motorized patrol to increase their coverage areas and reestablishing absence control teams in Emergency Medical Services. This represents 5.0 percent of the agency initiatives or a mere 1.3 percent of the total gap-closing program. Productivity increases would allow the workforce to decline; however, the Mayor's preliminary budget adds 180 employees by June 2000.[10] This would bring the City's workforce to 246,788-the highest level since 1993.

Rather than productivity increases, the largest portion of the agency initiatives is $145 million from State and federal aid-$92 million of which is non-recurring. This includes $47 million in non-recurring revenue from State reimbursement for foster care, a one-time $10 million transfer from the State for the Consolidated Highways Improvement Program, and $26 million in additional State and federal reimbursement for services provided by the Department of Social Services, the Department of Correction, and the Police Department.

Asset sales provide another $76 million. This brings total non-recurring actions to 38 percent of the agency initiatives, or $227 million.

Fully 22 percent of the agency initiatives likely will reduce services or eliminate planned service enhancements. Over half of this, or $74 million, is specified, including the elimination of $15 million for additional paraprofessional staff and classroom materials for the Board of Education and a delay in the $12 million rental assistance program at the Department of Homeless Services. Another $56 million comes from substantially reducing the subsidy to libraries and cultural institutions. The plan states that the $38 million cut from libraries should be absorbed without service reductions. Lacking specifics, this is unlikely.

With its reliance on non-recurring actions and service reductions, the preliminary budget takes another step away from the Administration's prior promises to reinvent government. Although often not achieved, prior plans relied more on productivity measures. The fiscal year 1997 Executive Budget stated that "reinvention initiatives" would account for $500 million of gap-closing actions for fiscal year 2000. After combining this category with privatization and procurement initiatives in the fiscal year 1998 Executive Budget, the category was eliminated in the fiscal year 1999 Executive Budget. This year's $30 million of productivity initiatives represents a further decline in the will to reinvent government.

In addition to the aforementioned State and federal aid increases included in the agency programs, the budget relies on $485 million in new unrestricted intergovernmental aid.[11] The City is counting on $190 million from the federal government, including $140 million attributable to an increase in the federal share of Medicaid from 50 percent to 52.5 percent, and $50 million from a reinstitution of federal revenue sharing, which was eliminated in 1986. Both are unlikely to be enacted and have been proposed in the past without success.

The City also is counting on new State aid of $295 million, including $200 million from Medicaid cost containment, $70 million from tort reform, $10 million in reimbursement from Child Health Plus, and $15 million in additional State revenue sharing. Most or all of this aid is unlikely to be received. The $200 million in Medicaid savings is based on proposals in the Governor's executive budget. However, the program is unlikely to be enacted in full; even if it is, the savings estimate may be overstated.[12] Tort reform was proposed in the past and not enacted. Additional State revenue sharing is not included in the Governor's budget.

Offsetting the items that reduce the gap are $1.1 billion in increased expenditures, revenues that will not be realized and proposed tax reductions. Spending changes implemented in fiscal year 1999 are estimated to increase the gap by $367 million. Increases of $525 million-the largest portions being $116 million for the Board of Education and $71 million for employee fringe benefits-are offset $159 million by savings from refunding debt.[13]

Another $350 million compensates for revenue the City planned to realize from arbitration with the Port Authority regarding the lease of the airports. The City contends that the Port Authority owes it these funds. These revenues have been expected in past financial plans, only to be delayed because the arbitration does not occur. Once again, the City will not realize the revenues.

The Mayor proposes tax reductions that grow in value from $338 million to $473 million between fiscal years 2000 and 2003. These include extending the program that taxes cooperative and condominium owners like single-family homeowners ($166 million), reducing the commercial rent tax rate ($21 million), eliminating the sales tax on clothing and footwear priced above $110 ($51 million), and unspecified tax reductions ($100 million).[14] As discussed later, these tax reductions would not be the most effective ones to increase New York City's competitiveness.

Future budget gaps

The City projects that adopting the fiscal year 2000 preliminary budget would result in future budget gaps that increase from $1.4 billion in fiscal year 2001 to $1.6 billion in fiscal year 2002, and then decline to $1.2 billion in fiscal year 2003. (See Table 6.) However, the future gaps are likely to be larger than reported in the preliminary budget due to two factors.

First, the gap projections do not include costs associated with new collective bargaining agreements. Labor contracts with the municipal employee unions begin to expire in the last quarter of fiscal year 2000.[15] Salary increases equaling the rate of inflation would increase the City's personal service expenditures $372 million in fiscal year 2001, $871 million in fiscal year 2002, and $1.5 billion in fiscal year 2003.[16]

Second, as discussed above, the fiscal year 2000 gap-closing plan relies on unrealistic estimates of $485 million in new unrestricted intergovernmental aid. This is assumed to grow to $488 million in fiscal year 2001, $492 million in fiscal year 2002 and $496 million in fiscal year 2003.

These two factors increase the projected gap significantly. The restated gaps are $2.3 billion in fiscal year 2001, $3.0 billion in fiscal year 2002 and $3.1 billion in fiscal year 2003. In fiscal year 2003 the projected gap equals 7.8 percent of expenditures.

Capital and debt service spending

The City's Preliminary Ten-Year Capital Strategy allocates $48.1 billion for capital investments between fiscal years 2000 and 2009, and $22.0 billion during the fiscal years covered by the financial plan-2000 through 2003.[17] (See Table 7.) The proposal includes a new financing mechanism to borrow outside the City's constitutional debt limit and assumes passage of a constitutional amendment to permit additional general obligation debt in fiscal year 2002 and beyond. Nevertheless, the City lacks a comprehensive debt policy, and its debt service would become less affordable.

The plan does not use the fiscal year 1999 surplus for pay-as-you-go capital spending or to reduce debt. Instead, the proposal is financed by borrowed funds and intergovernmental aid. General obligation bonds finance $6.3 billion, or one-third, of the plan between fiscal years 2000 and 2003. Fee-backed debt issued by the water and sewer authority finance $5.1 billion, or 27 percent of the plan. Bonds of the TFA would finance $3.5 billion, or 19 percent; this exhausts the TFA's statutory bonding authority. Bonds backed by tobacco settlement revenues would fund $2.5 billion, or 14 percent. The State Dormitory Authority would finance $766 million, with the balance, $247 million, from other sources, such as private grants.

The City expects to reach the constitutional limit on general obligation debt in fiscal year 2000. A constitutional amendment is required to increase that limit, and could provide additional borrowing capacity no earlier than January 2002.[18] To help finance the plan prior to an amendment, the City created the Tobacco Settlement Asset Securitization Corporation, whose $2.5 billion in debt would be outside the constitutional limit. These bonds would be repaid with approximately 70 percent of the tobacco settlement revenues.[19]

Although the City advocates increasing the constitutional debt limit, its short-run policy is to circumvent the limit with new borrowing entities. The resulting fractured system obscures analysis of the capital plan's affordability because debt service is not reported in total or in relation to relevant measures. In fact, the plan would significantly increase the debt service burden. Debt service would grow 12.2 percent annually, from $3.8 billion to $5.4 billion between fiscal years 2000 and 2003.[20] With personal income projected to increase 3.6 percent annually during this period, a growing share of the City's economy would be consumed by debt service.[21] Debt service as a percent of personal income would grow from 1.40 percent to 1.78 percent-the highest level since fiscal year 1983.

Furthermore, the plan does not reduce the need for debt by improving the City's utilization of assets and funding of maintenance. The Board of Education provides an example of an alternative way to utilize assets. The City's plan includes $2.4 billion to expand school capacity between fiscal years 2000 and 2004. This, however, will not significantly relieve overcrowding. Although the plan relies on a limited use of year-round education-which would effectively increase the school's capacity without new construction-more extensive implementation would reduce or eliminate the need for these planned expenditures.[22] Thus, more intensive utilization of the City's assets-school buildings in this case-would allow the City to shift funds to other needs, such as bringing all schools to a state of good repair and equipping them with computers.

Capital needs also can be lowered by adequately maintaining infrastructure. The City has historically under-funded maintenance, thereby increasing its capital needs. KPMG Peat Marwick found that the City's spending on maintenance is approximately 40 percent of recommended levels.[23]

City Council Fiscal 2000 Preliminary Budget Response

In its response to the Mayor's preliminary budget, the City Council prepared its own budget.[24]

The Council projects that fiscal year 1999 will end with a $2.1 billion surplus, $541 million more than the Mayor's estimate. Higher tax revenues account for $297 million of the additional surplus and lower spending for $244 million. The Council proposes to use the surplus to finance operating expenditures in fiscal years 2000, 2001 and 2002. The majority, $1.3 billion, would be used in fiscal year 2000. The balance would be used in fiscal year 2001 ($547 million) and fiscal year 2002 ($304 million).

The Council's spending in fiscal year 2000 would be $105 million higher than the Mayor's.[25] Adjusted for TFA debt service, the impact of rolling surpluses and underestimated intergovernmental aid, Council spending would grow 6.8 percent between fiscal years 1999 and 2000. This is higher than the Mayor's spending growth because the Council projects lower spending in fiscal year 1999, as well as the additional spending in fiscal year 2000.

The Council's revenue estimates are higher than the Mayor's, providing an additional $770 million in fiscal year 2000, $1.2 billion in fiscal year 2001 and $1.4 billion in fiscal year 2002. These revenues support additional spending and tax cuts, and result in smaller projected future budget gaps. The Council estimates that under its plan the fiscal year 2002 gap would be $648 million-lower than the preliminary budget estimate of $1.6 billion. However, if the Council's revenue forecast proves to be too optimistic, then the future gaps would be far greater than the Council projects. For example, if revenues are actually in line with the Mayor's projection, then the Council plan would produce a gap of $2.4 billion in fiscal year 2002.

The Council proposes tax reductions that would grow from $693 million to $1.3 billion between fiscal years 2000 and 2002. Like the preliminary budget, the Council would reduce taxes on cooperative and condominium owners and eliminate the sales tax on clothing and footwear priced under $110. Unlike the Mayor, the Council would eliminate the commercial rent tax ($410 million in fiscal year 2002), dedicate the hotel tax ($200 million in fiscal year 2002) to sports stadiums and cultural programs, and enact a City earned income tax credit ($107 million in fiscal year 2002).

Another noteworthy difference is that the Council rejects the Mayor's plan to swap proceeds from the sale of the Coliseum for bonding for the MTA. Relative to the preliminary budget, this would reduce outstanding debt and decrease debt service $6 million in fiscal year 2001 and $18 million in fiscal year 2002.

Recommendations for Improving the Plan

To improve the City's long-run fiscal health, Mayor Rudolph W. Giuliani, Speaker Peter F. Vallone and the City Council should take four actions in the fiscal year 2000 budget: (1) use the current-year surplus in a fiscally prudent manner and work to create a rainy day fund; (2) increase the productivity of the workforce; (3) establish a comprehensive debt policy; and (4) revise the tax reduction program.

Use the surplus prudently and work to create a rainy day fund

The preliminary budget would use the fiscal year 1999 surplus to support operating expenditures in fiscal years 2000 and 2001.[26] This is not prudent because it finances recurring commitments with non-recurring resources; the surplus can be spent only once, but the programs will continue. Furthermore, it squanders the opportunity created by the strong economy to stabilize the City's finances.

Instead of using the surplus to close budget gaps in fiscal years 2000 and 2001, the City should use the surplus to do any or all of the following:

Increase the productivity of the workforce

Rather than relying on one-time resources, the City should balance the budget with productivity initiatives. This would improve the City's long-term financial health by controlling spending while preserving services. Increasing the efficiency of services was an early focus of the Giuliani Administration; however, this year's preliminary budget contains few innovative measures. In light of large future gaps and the upcoming labor contract negotiations, the Administration should return its focus to government reengineering.

Recent growth in the workforce and in real personal services spending reinforces the need to increase productivity. (See Figure 1.) After a 13,731 decline in headcount between fiscal years 1993 and 1996, municipal employment will increase 9,836 between fiscal years 1996 and 2000. In addition, between fiscal years 1997 and 2000, real (inflation-adjusted) personal services spending will increase 11.9 percent, or 3.8 percent annually, to its highest level ever. Since spending is growing faster than employment, real personal services spending per employee will grow 7.5 percent, or 2.4 percent annually, between fiscal years 1997 and 2000. These trends are similar to those during the expansion of the 1980s. Between 1981 and 1990, the workforce increased 2.8 percent annually and real personal services expenditures increased 3.9 percent annually. Despite different political leadership, the City's response to the current economic expansion is similar to its response to the last expansion. If the City is to avoid the past counterproductive responses to a downturn (service reductions and tax increases), then its current actions must change.

The recent workforce and personal service spending growth should be reversed. The CBC and others have proposed numerous productivity enhancements.[27] Some require contract negotiation; others do not. The City should begin now with strategies that do not require contract negotiation, and then use next year's negotiations to finance salary increases and gain savings with productivity enhancements agreed to in the contract. This next round of contract negotiations will be extremely important; it is unclear how term limits will affect the priority placed on the City's future finances and services by the City's negotiators.

Competition between public and private workers could provide significant savings in many agencies. For example, the collection, recycling and cleaning functions of the Department of Sanitation are ideal candidates for public-private competition since many private vendors provide the same service. Other jurisdictions have divided their districts into sections and have public employees compete with private contractors for each section. As a result, jurisdictions saved an estimated 27 percent.[28]

Although extremely successful in fighting crime, the Police Department could achieve the same gains in public safety at lower cost by placing lower paid civilians in non-enforcement positions now held by police officers.[29] In 1994 the CBC found that the Department could civilianize 1,481 positions.[30] Recently, the City Comptroller found that 1,257 positions filled by uniformed officers could be filled by civilians, generating annual savings of $36 million.[31] The Mayor's current proposal would increase the number of police by 400, while simultaneously decreasing the number of civilians by 673-indicating movement in the opposite direction of civilianization.[32]

Productivity could be increased at the Fire Department through variable staffing. Currently, firehouses continuously are staffed without regard to their predictable level of activity. Using historical data on fire incidents, firehouses in adjacent areas could be staffed in pairs to ensure the necessary fire-fighting capacity while reducing costs.[33]

Technology also can be used to improve the efficiency of services. For example, information technology already in use in other cities and states offers the opportunity to lower the City's revenue-collection cost by as much as 10 percent.[34]

Collective bargaining should change non-salary compensation and work rules. The City's employee health insurance program should be restructured to bring it in line with private and other public sector employers; instituting employee and retiree contributions could save at least $520 million annually.[35] Work rule and compensation changes would yield significant savings in many agencies including the Board of Education. Eliminating paid sabbaticals and time spent working on union business and reducing in-school preparation time to the norm of other large urban districts would have the same effect as hiring 4,300 teachers at no additional cost.[36]

Establish a comprehensive debt policy

The City should establish a comprehensive debt policy. Debt service is becoming less affordable, and its costs are being obscured by incomplete reporting practices. Furthermore, the need for debt is not being reduced by using assets efficiently and by adequately funding maintenance of capital assets.

Prudent debt management requires standards to assess affordability. The City's response to the current constitutional debt limit has been to create entities that circumvent the limit; this is not a long-run solution. Instead, the City should take three steps.

First, the City should advocate forcefully in Albany for a new, better debt limit. The limit should measure affordability by the relationship between all debt service and an indicator of the economy's ability to support the debt. This economic measure could be personal income or another comprehensive indicator of the City's taxable economic activity.

While the City has supported increasing its debt limit, it also has taken steps that obscure the current cost of debt. Last year the City stopped reporting TFA debt service in its financial plan, and the preliminary budget argues that new Tobacco Settlement Asset Securitization Corporation bonds should not be counted as City debt. These actions make it difficult for citizens to make judgments about the affordability of the capital plan.

Second, the City should reduce the need for debt by optimizing its use of assets. Year-round schooling is one example; it would almost eliminate the need for new construction so capital funds could be focused on ensuring that every student attends a technologically modern school that is in a state of good repair.[37] Other possibilities include having two teams share a sports stadium and off-peak pricing on tolls and subways to reduce rush-hour capacity problems.

Third, the City should reduce the need for debt by adequately funding maintenance. Capital spending that results from inadequate maintenance wastes precious resources. For example, the City Comptroller concluded that a substantial portion of the last five years of capital investment in public schools served as a substitute for woefully inadequate maintenance funding.[38]

Revise the tax reduction program

New York City will be more competitive in attracting and retaining businesses and residents if it reduces its tax burden and creates an economically neutral property tax. Some important steps have been taken to reduce the City's high tax burden; however, more needs to be done. Although additional tax reductions are proposed in the preliminary budget, the priorities are misplaced. The tax reduction package should be revised.

Beneficial tax reductions already enacted include cuts in the commercial rent tax (CRT) ($386 million), the unincorporated business tax (UBT) ($53 million), and in other business taxes ($110 million).[39] The City also allowed the 12.5 percent personal income tax surcharge to expire ($632 million). To increase the City's long-run competitiveness, further reductions should include lowering the personal income tax and real estate transaction taxes, and eliminating the UBT and CRT. Furthermore, the property tax should be modified to be economically neutral. The preliminary budget does not take this course.

The preliminary budget proposes a modest reduction of the CRT, but dedicates most of the remaining CRT to finance stadiums.[40] CRT rates would be reduced from 3.9 percent to 3.4 percent on December 1, 1999, and to 3.0 percent on June 1, 2001. Revenue losses would grow from $21 million in fiscal year 2000 to $91 million in fiscal year 2003.[41] Between fiscal years 2000 and 2003, $882 million of CRT revenue would fund the New York City Sports Facility Corporation.

The CRT should be eliminated because it is unique to the City and contributes significantly to the City's high tax burden relative to other U.S. cities.[42] The proposed reduction is a step in the right direction. However, the proposal to dedicate most of the remaining revenue to fund new stadiums should not be adopted. Stadiums should be funded in the capital budget and should compete with other priorities when allocating limited capital dollars.[43] Furthermore, it would lock in a need for the tax, making elimination extremely difficult.

The preliminary budget proposes to extend tax relief that treats owners of cooperatives and condominiums the same as one-, two-, and three-family homeowners. Revenue losses would grow from $166 million in fiscal year 2000 to $187 million in fiscal year 2003.[44] This should be rejected. Economic neutrality requires that the City not favor one type of property use over another. The current system imposes differential rates; the burden on business property is excessive while the burden on small residential property is comparatively light. The current effective tax rates on commercial and large residential properties are $3.95 and $4.05 per $100 of market value, respectively, or 5.1 times greater than the rate of $0.79 on small residential properties.[45] The effective rate should be the same for all classes of property. The cooperative and condominium property tax relief program moves in the opposite direction; it extends the subsidy that is currently provided small homeowners to another select group.

The preliminary budget proposes to eliminate the sales tax on clothing and footwear. Elimination of the tax on items priced under $110 would be in conjunction with the State's elimination of its share of the tax. The City proposes to go further by eliminating the sales tax on these items regardless of price. In the first full year, this program would reduce revenues $326 million. While this enjoys popular support and may be an attractive political choice, it should be rejected because the economic development benefits would be limited. Analyses of similar cuts have concluded that the economic stimulus generated would be outweighed by the revenue lost.[46] Furthermore, in the aggregate, New York's sales taxes are in line with national norms.[47]

The preliminary budget extends the City's temporary 14 percent surcharge on the personal income tax past its December 31, 1999 expiration date. To be competitive New York City should reduce its personal income tax rate to 1 percent from the current 3.4 percent.[48] Last year, following leadership by the City Council, the City allowed its 12.5 percent temporary personal income tax surcharge to expire. The City should build on this positive step and let the 14 percent surcharge expire. This would further reduce the tax burden on earners, improve the City's competitive standing relative to other major cities, and help restore public trust that is jeopardized when actions are termed "temporary" to gain political acceptance and then become permanent.

The tax program should be revised to focus on improving New York City's long-run competitiveness. The adopted budget should reduce the CRT, but not dedicate CRT revenue to stadiums, and it should reject the proposed sales tax cuts and the extension of the property tax subsidy to cooperative and condominium apartments. These changes would provide resources-growing from $451 million to $633 million between fiscal years 2000 and 2003-for higher priority tax cuts. These include allowing the 14 percent PIT surcharge to expire and further cuts in the CRT and the UBT. (See Table 8.)