April 1, 1998

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

Dear Mayor Giuliani,

The Citizens Budget Commission has examined the financial plan for fiscal years 1998-2002 which you presented on January 29, 1998.

We are heartened by the continued improvement in the local economy and its generation of surplus resources at the same time taxes are being reduced. Developments over the last four years, including the dramatic reduction in crime and much-needed cuts in the commercial rent, unincorporated business, hotel and other business taxes, are yielding praiseworthy results.

The danger of an economic recovery, however, is that it may erode elected officials’ resolve to make services more efficient and to improve the city’s competitiveness. There is evidence of such erosion in the financial plan.

Three strategic decisions in the financial plan raise concerns about your continued commitment to make the hard choices necessary to keep New York City on a path of long-run economic and fiscal health. (The attached memorandum prepared by the CBC staff presents our analysis of the financial plan in greater detail.)

First, using the fiscal year 1998 surplus to pay fiscal year 1999 debt service is fiscally imprudent. Nonrecurring resources should be used to improve the long-run financial condition of the City—not to support recurring operating expenditures. For instance, the surplus could be used to pay off outstanding debt, invest in infrastructure on a pay-as-you-go basis, or fund one-time operating expenses that yield benefits in the future. Alternatively, the funds could be used to create a rainy day fund. The CBC supports your intentions in establishing the budget stabilization account; however, the account does not function as a true rainy day fund that prevents surplus monies from being diverted in good economic times. We urge you to ask the State Legislature to amend State law to allow the creation of such a fund. Some or all of this year’s surplus should be deposited into this improved fund.

Second, while tax cuts should be a high priority, the tax program proposed for fiscal year 1999 includes three measures which are not well targeted: There is no evidence that cutting the sales tax will produce significant economic development benefits; extending the coop/condo property tax cut exacerbates an already inefficient disparity in rates between commercial and small residential property; and, extending the two personal income tax surcharges continues one of the City’s most economically harmful taxes. Furthermore, the pace of tax reductions is insufficient to improve the city’s competitive standing relative to the tax burdens in other major cities, where tax cutting is also taking place. Despite the tax reductions that have been enacted, between 1993 and 1996 New York City’s tax burden remained second highest among the largest cities in each state for a family of four earning $100,000 a year (behind Bridgeport, CT), and barely improved from second to third for a family earning $50,000 or $75,000 (after Bridgeport and Newark, NJ) and from eleventh to twelfth highest for a family earning $25,000.

To improve and accelerate the City’s tax program, the following actions should be taken: (1) Allow the two personal income tax surcharges to expire; (2) cancel the coop/condo property tax subsidy for 1999 and do not extend it further; and, (3) do not eliminate the sales tax on clothing. In addition, your proposals regarding the commercial rent tax, the unincorporated business tax, and the personal income tax child care credit should be implemented because each addresses a tax that contributes to the disparity between tax burdens in New York City and its competitors. As a result of these revisions, the bottom line will shift from an economically harmful net tax increase of $365 million by fiscal year 2002 to a tax reduction of approximately $1.6 billion annually by fiscal year 2002.

Third, the financial plan contains virtually no initiatives for improving services and reducing costs through greater productivity. The current plan represents an abandonment of earlier commitments to restructure government and to enhance the efficiency of services. When the financial plan was adopted in June 1997, the fiscal year 1999 gap-closing program included $465 million of actions under the general category of reinvention. As the economic outlook improved during this year, this figure was reduced to $75 million in the November 1997 modification, and the category was completely eliminated in the January plan. Your retreat from the hard task of reinventing government is evident in the fact that projected municipal employment for fiscal year 1999 is fully 10,000 positions higher than you expected it would be three years ago (after adjusting for the police and EMS mergers).

If the surplus is to be used in a prudent fashion, and if the tax reduction program is to be refocused and accelerated, new actions will be required to balance the 1999 budget. Reducing spending should be accomplished by adopting the many productivity enhancements recommended by the CBC and other groups. Returning to the goal of increased efficiency will help the City reduce out-year deficits, lessen its reliance on hoped-for intergovernmental aid, and award productivity-based salary increases after current collective bargaining contracts expire.

Thank you in advance for the careful consideration we hope you will give these suggestions.

Sincerely,

Lawrence B. Buttenwieser
Chair
Board of Trustees

Eugene J. Keilin
Chair
Budget Policy and Priorities Committee