Testimony of
Raymond D. Horton, President
Citizens Budget Commission

City Council Hearing
CITY HALL
Wednesday, July 15, 1998

Good morning. I am Raymond D. Horton, President of the Citizens Budget Commission. The Commission, founded in 1932, is a nonpartisan, nonprofit civic organization dedicated to promoting prudent financial management and competitive service delivery by New York City and New York State.

I will begin this morning by praising the role that the City Council, under the leadership of Peter Vallone and Herb Berman, played in crafting this year’s budget. The Council’s actions resulted in an adopted budget that is, in important respects, superior to the executive budget. By beginning public discussion of how additional funds might be used, this hearing reflects your continuing sensitivity to issues surrounding the City’s fiscal health.

The stimulus for this hearing is good news. There are indications that the City of New York will have more resources available in fiscal year 1999 than is reflected in the budget adopted last month. Specifically, on June 16, 1998, the Independent Budget Office projected that $543 million more than was budgeted, including $530 million in additional non-property tax revenues, will be available; similarly, on June 26, 1998, the City Comptroller projected that between $576 million and $806 million more than was budgeted will be available this fiscal year, including $244 million in additional tax revenues.

However, our pleasure at having the opportunity to consider how to respond to potentially favorable developments should be tempered by two sobering realities:

First, the money is not yet in hand, and changing economic conditions may mean it is never realized. Much of the additional resources are from increased revenue projections related to strong national, and even stronger regional, economic conditions. The forecasts of the City’s Office of Management and Budget, upon which the adopted budget estimates are based, are that personal income in the city will grow 5.7 percent in 1998 and 4.2 percent in 1999 compared with national rates of 4.7 percent and 3.9 percent, respectively. These forecasts are reasonable based on recent past experience, but it is important to remember that economic fortunes sometimes change in unanticipated ways, and quickly.

Some of you here today were also in office at the outset of the 1990s, when the unexpected events were much less pleasant. Recall fiscal year 1990. At the start of that fiscal year, Mayor Ed Koch used the trends of previous years to project that tax revenues would grow nearly 10 percent to $15.8 billion. But an economic turnaround made these estimates fiction; at year-end tax revenues fell $790 million below the projection, and difficult budget adjustments were required late in the year.

Second, the adopted budget for the current fiscal year is balanced only because the City was able to “roll” resources from last year. That is, balancing the fiscal year 1999 budget required over $1.5 billion of revenues actually generated in fiscal year 1998. These funds were used to support the fiscal year 1999 budget through the device of prepayment of debt service otherwise due this fiscal year. In other words, even with the unanticipated new revenue being discussed, the fiscal year 1999 budget could not be balanced with revenues actually generated this year. Spending beyond its means in this way helps explain why the City still has large projected budget gaps in future years—nearly $1.9 billion in fiscal year 2000 and over $2.4 billion in fiscal year 2001.

My goal is not to be the wet blanket at today’s party. Rather, it is to make the case for fiscal prudence as we consider how to use any new funds that become available.

The CBC uses the term fiscal prudence to denote behavior that promotes its two core values—balanced budgets and fiscal stability. Our commitment to balanced budgets is rooted in the principle that people should pay for what they consume, and not pass the cost on to others. That is, services provided by a government in a given period should be financed by revenues generated within that same period. Our commitment to fiscal stability is rooted in the belief that good financial management of local government requires reducing future risks and not burdening future taxpayers with unaffordable bills. Taking on a recurring obligation without reasonable expectation of matching recurring resources creates future budget gaps and fiscal instability.

From these core value we identify four prudent uses for additional resources that might become available during fiscal year 1999:

1. Reduce outstanding debt. Repaying outstanding debt supports balanced budgets and fiscal stability by reducing future debt service obligations. Priority should be given to retiring debt that has relatively high interest charges.

2. Fund capital investments. This includes both traditional “bricks and mortar” projects with long periods of usefulness as well as new information technology that modernizes the operations of government. This helps balance future budgets by reducing operating expenses and by eliminating the debt service expenses related to what would otherwise be a long-term obligation.

3. Fund one-time programs, especially those that provide multi-year benefits. Perhaps the clearest example of such items is a program of incentives for early retirement to reduce the municipal workforce, but similar imaginative initiatives should be encouraged. Like some capital investments, this usage helps balance future budgets by reducing future operating expenses.

4. Establish or enlarge reserves for economic downturns. Such “rainy day” funds should be protected from invasion for unintended purposes or use in favorable economic times. This use promotes fiscal stability by providing resources for less prosperous years.

It should be noted that the Budget Stabilization Account is not a rainy day fund. Its balance is not restricted to use only in economic downturns. Rather it can be used as a “one-shot” to support otherwise unaffordable spending in good times. If there were a commitment not to reduce the balance of the Account until a downturn, it would approximate a rainy day fund. However, it would be preferable to establish a true rainy day fund, which would require changes in State law. The CBC would be pleased to join the Council in pursuing this idea, and supporting such legislation.

Because the uses we recommend are often not as politically attractive in the short-run as simply increasing current operating expenses, they are sometimes criticized as impractical or not feasible. However, it is important to note that our making the case along with other fiscal monitors has produced some positive results. In fiscal year 1998 the Mayor proposed and the Council approved using $50 million of the available surplus funds to reduce outstanding debt. The Council’s adopted budget for fiscal year 1999 dedicated $165 million to debt reduction this year, with the indication in its four-year financial plan of the intention to repay more debt in the future.

These actions are an excellent starting point and should serve as a base for fiscally prudent use of any additional fiscal year 1999 resources. Using these funds in the ways the CBC recommends would capitalize on the opportunity presented by the strong economy to shore up the City’s finances as it enters the 21st century.

Thank you for the opportunity to testify.

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