This paper analyzes the causes of and chosen solutions to the City of New York’s unprecedented budget gap for fiscal year 2004. Its point of departure is the fiscal year 2004 gap as projected in the four-year Financial Plan that accompanied the budget adopted in June 2001, before terrorists attacked the World Trade Center and the national economic downturn gathered momentum. It traces the changes to expected revenues and expenditures in seven subsequent Financial Plans through the Mayor’s Preliminary Budget released in February 2003.

Three key points emerge from this analysis:

• Increases in spending had a larger impact on widening the budget gap than did falling tax revenues. Of the changes that worsened the fiscal year 2004 gap, $3.1 billion were increased expenditures and $2.9 billion were revenue declines. The drop in tax revenue was $2.4 billion.
• Revenue increases, primarily tax rate increases, played a much larger part in closing the budget gap than did spending cuts. Revenue increases account for $4.8 billion or 54 percent of the City’s gap closing plan.
• Of the $2.8 billion in savings that City agencies have identified to close the gap, most have no effect on City services. Rather, $1.7 billion or 60 percent of these savings result from shifting costs to the State or federal governments, raising fees, finding efficiencies, and revising cost estimates. Actual cuts in services total about $600 million. Some elements of the plan to close the gap have not been implemented and are at risk. The City may have to find different means to achieve budget balance in fiscal year 2004, which would change the balance between revenue and spending measures.