IBO PROJECTS LARGER BUDGET SURPLUS THIS YEAR BUT BIGGER GAPS DOWN THE LINE

A surplus of $1.4 billion is expected in the City budget for the current 1998 fiscal year according to an Independent Budget Office (IBO) report, Analysis of the Mayor’s Preliminary Budget: IBO’s Reestimate of the Mayor’s Preliminary Budget for 1999 and Financial Plan through 2002, issued today as required by the City Charter. The City is expected to use this year’s surplus to prepay 1999 debt service, contributing to a surplus of $75 million next year. Enactment of the Mayor’s preliminary budget proposals would result in a 5.2 percent growth in spending over this year, with expenditures totaling of $35.4 billion in 1999, when debt service prepayments are excluded. Beyond 1999, IBO projects gaps of more than $2 billion annually. IBO’s gap projections are higher than the Mayor’s forecast by $367 million in 2000, $536 million in 2001, and $635 million in 2002.

Such large out-year gaps could portend the need to cut services or raise taxes in the years ahead, particularly in the event of an economic downturn. It is important to note that the Mayor’s financial plan through 2002 assumes continued growth in the local economy. In the event of an economic downturn, however, spending needs would increase—particularly for social programs—at a time when revenues would be decreasing, thereby making future budget gaps even larger. According to IBO Director Douglas A. Criscitello, in the event of a downturn the city would face an unenviable choice between increasing taxes in a slow economy or reducing spending when it is needed most.

Absent an economic downturn, these out-year gap projections are likely to become smaller as a result of changes to the Mayor’s financial plan as each new fiscal year approaches. However, the negative consequences of last minute service reductions, tax increases, or reliance on non-recurring revenues to pay for ongoing expenses, highlight the need for the city to plan strategically for its financial future. While the Mayor’s budget contains an out-year gap closing plan, details are very sketchy. A more detailed systematic, long-term plan to close projected gaps would help eliminate budget year balancing scrambles, further improve the city’s bond rating, and according to Criscitello "instill confidence in the citizenry that its government is behaving in a fiscally responsible manner."

Among the issues highlighted in IBO’s review of the preliminary budget are:

Revenue: Although IBO projects that the Mayor’s tax program would cost the city $259 million in 1999, the cost would rise nearly threefold to $765 million by 2002. The program includes elimination of the commercial rent tax and the sales tax on clothing, reductions in the real property tax on coops and condominiums, and personal income tax credits for subchapter S corporations and child care expenses. The fiscal prudence of cutting taxes depends on anticipated spending requirements, the specific tax cuts under consideration and their stimulative impact on the local economy, and on the sustainability of recently strong revenue growth. The larger question is whether the city will ultimately be able to afford the Mayor’s tax program.

Public Assistance: IBO projects additional city spending on public assistance (over and above the Mayor’s plan) of $8 million in 1999 growing to $86 million by 2002. Two provisions of the welfare reform law—increasing work quotas for adult welfare recipients and setting a five-year lifetime limit on federal assistance—will likely have a particularly strong impact on future caseloads and expenditures. While IBO projects a slower but more extended pattern of caseload decline for the Family Assistance (FA) program than foreseen by the Mayor, we expect the state- and city-funded Safety Net Assistance (SNA) caseload to soon bottom out and gradually start to rise again. IBO expects both caseloads to become increasingly made up of very needy and hard to employ individuals. Moreover, the five-year rule on federal eligibility is expected to lead to a shift of 62,000 FA recipients into the SNA program in 2002.

Overtime: IBO projects substantially higher spending (above the Mayor’s budget) on city employee overtime costs¾ $42 million annually through 2001 and increasing to $70 million for 2002.

Parks: Total Parks Department expenditures, adjusted for inflation, are now at their lowest level in 10 years. The Parks budget has decreased by 35 percent between 1989 to 1998 in real terms.

CUNY: The Mayor’s proposal could have a significant impact on CUNY’s revenue stream and effectively eliminate its longstanding open enrollment policy.

Copies of the 52 page report are available by calling (212) 442-0632, writing to the Independent Budget Office, 110 William Street, New York, NY 10038, or by clicking here. Established in 1996 pursuant to the New York City Charter, IBO provides nonpartisan analysis to both elected officials and the public on fiscal and budgetary issues affecting New Yorkers.

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