What ought to be considered a dramatic reversal of a highly praised policy has been buried in an arcane legal change made by the State Legislature at the request of Mayor Michael Bloomberg. The statute passed on Monday evening as part of a larger budget “extender” deal.  A single sentence beginning with the word “notwithstanding” was added to the 1978 Financial Control Board legislation that rescued the City from its mid-1970s fiscal crisis and required it to have a GAAP balanced budget. The effect of this sentence is to allow the City to borrow for a certain type of operating expense, the very practice that led to the much regretted fiscal crisis.

The City will be borrowing for remediation of pollution for which the City itself is responsible. Examples include removing asbestos from public schools or cleaning another form of pollution from a brownfield. The Office of Management and Budget (OMB) estimates that $150 million in this type of expense will be incurred in the next fiscal year and a similar sum in future years. Assuming the borrowing for these expenses will be repaid over a 30 year period, the total borrowing for operating expenses will reach about $4.5 billion.

The decision to abandon a requirement of GAAP is a new one for this administration. Previously, the City and its leaders had taken pride in a record of balanced budgets nearly every year since fiscal year 1981. The only exception was fiscal year 2002 when the City borrowed more than $2 billion to help deal with the unanticipated costs associated with the terrorist attacks on September 11, 2001. 

The Governmental Accounting Standards Board (GASB) required that remediation expenses be treated as operating expenses rather than capital expenses as part of GAAP effective in fiscal year 2009. In April 2008, shortly before that fiscal year began, the Mayor requested that the Financial Control Board (FCB) temporarily waive the requirement because the City did not have sufficient information to identify and segregate the remediation expenses included in many capital projects that involve more than just remediation. For example, it could not identify the costs associated with asbestos removal within a larger project to renovate an old school building. At the time, the Citizens Budget Commission supported a one year waiver, with the caveat that the exemption not be made permanent.

The FCB granted a two year waiver, but required periodic progress reports on the City’s effort to comply. The City engaged a consultant to help develop the required information and procedures, submitted the progress reports, and in January 2010 the OMB included an estimated $150 million cost of compliance in its Financial Plan for fiscal year 2010-11.Nonetheless, the Mayor subsequently decided to bypass the FCB and seek from the Legislature a permanent exemption from the GAAP rule.

In the context of total operating expenses of more than $63 billion, $150 million is a small sum and it could be argued this is a relatively minor departure from GAAP accounting. But this exemption creates a precedent that could be just a start toward more circumventions in future deals with the Legislature. Mayor John Lindsay started down a similar path when he sought to have the Legislature authorize borrowing for “investments in human capital,” really operating expenses for vocational training and other anti-poverty efforts. The practice eventually grew into the multi-billion dollar borrowings that caused the fiscal crisis. Mayor Bloomberg should reconsider this deal with the Legislature and keep the City’s budget balanced by funding the remediation expenses with revenue not borrowing.