On the evening of Friday June 24 Mayor Michael Bloomberg and City Council Speaker Christine Quinn announced an agreement on the City’s budget for fiscal year 2012; five days later, on Wednesday June 29, the Council voted to approve the deal and taxpayers got to see the specifics. The deal averted teacher layoffs, spared fire companies and avoided other high profile service cuts, but it also offered cause for concern.  The City’s leaders missed the opportunity to address the big-ticket items – health insurance, pensions and debt service – whose unchecked growth will continue to dominate the budget.  As a result, other less publicized service reductions and layoffs will proceed in 2012, and more spending reductions are likely to be proposed before the 2012 fiscal year is over.

 The context for the Mayor’s Executive Budget proposal released in early May included a local economy that fared relatively well through the national recession.  Luckily, the recession never reached the depths feared in the City; in fact, the City emerged from the recession more quickly than the rest of the nation.  Another helpful aspect was that the City had accumulated surplus revenues that it used to offset expenses during the height of the downturn.  Finally, agencies began making spending cuts as early as 2008 – before the recession hit New York City.  Agencies have made 10 rounds of cuts since, reducing projected spending by $5.4 billion in fiscal year 2012.

Despite these prudent steps, the City faced a significant budget deficit for 2012, which the Mayor proposed closing through service and workforce cuts.  The proposal included the elimination of 9,450 positions, including 5,660 layoffs.  Most layoffs – almost 4,300– were planned in the Department of Education, since teachers and other educators make up the largest share of the City’s workforce.  The Executive Budget also included reductions in library service and 20 fire company closings.

The Council set as its priority the avoidance of teacher layoffs, keeping all fire companies open, and the restoration of as many other cuts as possible. Early negotiations to restore these jobs and services centered on using one-shot revenues from the retiree health insurance trust fund and the health insurance premium stabilization fund.  Both of these proposals would have raided the funds for general budget relief and not their intended purposes; furthermore, they would have provided only a temporary, one year solution.  They were wisely rejected.

The final budget agreement added a net $521 million in spending and financed it with a patchwork of measures. The United Federation of Teachers agreed to cancel teacher sabbaticals for the 2012 school year and to require excessed teachers to serve as substitutes for savings of up to $60 million.  More importantly, revenue forecasts for 2011 were adjusted upward by $300 million and smaller expense changes were made to generate the total.  This not only avoided teacher layoffs and fire company closings, but also extended library services and added funds to many other agencies.

The celebratory mood over spending restorations obscured the fact that more than 1,000 layoffs and cuts in other city agencies will proceed. This reality results from a missed opportunity to use the budget negotiations to address the City’s fiscal problems in a lasting way – one that would eliminate the need for these layoffs and that would greatly reduce the need to propose other cuts in the future.

New York City’s finances suffer from a structural problem: spending growth is consistently projected to outpace revenue growth, resulting in repeated budget gaps.  While the 2012 budget is now balanced, the financial plan shows a gap of $4.8 billion in fiscal year 2013.  Driving the City’s spending growth are three items: health insurance, pension contributions and debt service.  Spending on these items totaled $11 billion in 2005 and is expected to reach $23.1 billion in 2015.  While these expenses will double, the rest of the budget is projected to grow only 25 percent during this period.  As a result, spending on the “big three” as a share of the budget will grow from 22 percent to 33 percent of total revenues between 2005 and 2015.  As these items claim a larger slice of the pie, less is available for other priorities.  And that means service cuts will continue unless the City changes course.

The City must take three steps to start on the path to fiscal prosperity.  First, the City’s leaders must work with the Municipal Labor Committee to reform health insurance arrangements.  The burden of health insurance costs can no longer be shouldered by the City alone; employees and retirees should be required to pay a share of their premiums in order to both lower taxpayer costs and to give the workers a stake in containing future premium increases.  Adopting a premium-sharing arrangement similar to that of most New York State employees – 10 percent for individual and 25 percent for family coverage – would produce $625 million in savings beginning in 2012.  Requiring retirees under age 65 to pay 50 percent of their premium would generate about $700 million, and eliminating the Medicare Part B reimbursement for retirees over age 65 would save an additional $250 million.  These cumulative savings would grow to over $2 billion by 2015.

Second, the City Council should join the Mayor in backing the pension reform bill that has been introduced by the Governor.  Benefits for current employees and retirees would be unchanged, but pension eligibility and benefits for future employees would be adjusted.  The proposal would increase vesting to 12 years, raise the retirement age to 65, require greater contributions from employees, and eliminate overtime from the final salary calculation upon which benefits are based.  Savings would be modest in the beginning, but would total $30 billion over the next 30 years. 

Third, the Mayor and City Council should make slowing the growth of debt service a higher priority.  This can be done by downsizing the capital budget.  Resources should be directed toward the rehabilitation of essential infrastructure, like schools, roads, bridges, water mains and sewer pipes.  Non-essential expenses, such as economic development projects, should be postponed or reassessed to ensure that a strong economic justification for undertaking each project exists.  Even a modest cut can produce hundreds of millions of dollars in debt service savings over the ten-year period.

The City’s leaders missed an important opportunity to put the City on firmer ground this budget cycle.  As a result, thousands of layoffs and cuts will proceed in 2012 and another multi-billion budget gap looms in 2013.  In just a few short months, the Mayor, the City Council and municipal labor leaders will be back at square one, debating additional cuts and layoffs to close the gap.  Rather than subject New Yorkers to another budget cycle of uncertainties and even more cuts, the City’s leaders should work together to restrain the growth of the City’s three fastest-growing expenses.