Summer 1998 (v3#1)

FY 99 CITY BUDGET:
COUNCIL’S DECLARATION OF INDEPENDENCE

In the first salvo of what promises to be a messy, ongoing battle, the City Council has declared some independence by adopting its own budget in defiance of Mayor Rudolph Giuliani. Although the 1989 City Charter revision granted the Council sole budget approval, it had never before been invoked. The mayor responded, predictably, with a series of vetoes which the Council subsequently voted to override on June 16. The mayor then refused to certify the budget, as required by the City Charter, on June 17, citing the Council’s failure to approve a final modification to the 1998 budget. The Council subsequently approved that budget modification, MN15, on June 24.

Power Struggle
Unlike past years when the City Council largely rubber-stamped the Mayor’s Executive budget, this year’s budget evolved into a real power struggle. Driven, in part, by Speaker Vallone’s gubernatorial aspirations, the Council flexed its muscle by passing its own budget without the Mayor’s assent. The main bone of contention was the Speaker’s plan to submit a referendum to voters on whether or not to use city funds to build a new Yankee stadium in Manhattan. Mayor Giuliani had proposed creation of a Sports Facilities Corporation using a portion of the commercial rent tax to partially finance construction of new stadiums for both Mets and Yankees. Mr. Vallone’s referendum would likely thwart those plans, given popular sentiment opposing use of public funds to build a new Yankee stadium on Manhattan’s westside.

The Council also disagreed with the Mayor over revenue projections and continuation of the 12.5% personal income tax (PIT) surcharge. Mayor Giuliani wanted to renew the surcharge, which is due to expire at the end of this calendar year, while Vallone and the Council wanted to let it expire, thereby reducing taxes for city residents. Amid the posturing and trading of threats which followed, no real negotiation of budget issues occurred.

But for all the sound and fury around the referendum and PIT surcharge, the Council’s budget still only tinkered around the margins, especially for education. The budget which the City Council ultimately adopted was slightly smaller, by about $50 million, than the Mayor’s Executive Budget. The council added $200 million in spending on city services, including an additional $15.67 for education, and appropriated $165 million to retire high cost debt, thereby saving future interest costs. The elimination of the PIT surcharge beginning next January will cost the city about $200 million in tax revenues in FY 99, rising to more than $600 million by 2002.

$2 Billion Budget Surplus
The city ended FY 98 with the largest budget surplus in history, as much as $2.2 billion when all is said and done. Why was there such a huge surplus this year? First of all, New York City, as well as the nation as a whole, has experienced a period of economic recovery and growth over the past two years. This economic growth, particularly the Wall Street boom, has yielded higher than expected tax revenues. In addition, lower spending on programs such as Medicaid and Welfare, and lower debt service payments due to a decrease in interest rates, contributed to the size of this year’s budget surplus.

These surplus funds have been "rolled over" into next year by prepaying debt service costs that would otherwise have been due in FY 99 (state law requires that the city spend all surplus funds). The "savings" in FY 99 debt service payments can then be allocated and spent as part of the FY 99 budget process.

What to do with this windfall? According to New York City Comptroller Alan Hevesi, "The city should take advantage of its good fortune to strengthen its long-term financial condition by reducing its debt burden, increasing pay-as-you-go capital financing programs and continuing to invest in education to ensure a skilled and flexible workforce."

No Major Education Investment
Although the City Council did pay down some debt, they failed to heed the Comptroller’s other advice. There was no major investment in public education despite the record budget surplus. The Council’s adopted budget adds just $15.67 million to the Mayor’s Executive Budget education allocations. The UFT and EPP had advocated extending early grade class size caps to limit fourth grade classes to an average size of 25 students at a cost of $36 million. Rather than make that commitment, the Council appropriated $7 million "to provide additional instructional support to fourth grade classes in severely overcrowded districts, thereby increasing the ratio of adults to students." Another $7 million was added for new furniture, equipment and geographical instructional materials. The remaining $1.67 million was allocated to the Sports and Arts in Schools Foundation ($800,000) for a summer program; the Efficacy Institute ($200,000) for professional development; and to various "Council Initiatives" in individual schools and districts ($671,457).

Nor did the city increase capital spending programs. EPP and other advocates had sought a $500 million increase in the capital budget to create additional classroom space so that the state’s class size reduction initiative could be fully implemented. Unfortunately, the city’s contribution to the capital budget for the schools was not increased. This begs the question: Will the city be able to take full advantage of state funding to hire more teachers to reduce classes in grades K - 3 to no more than 20 students slated to begin in September 1999? (See the article on Class Size Reduction on page 3.)

In his Executive Budget, the Mayor offered continued funding for Project Read ($125 million) for one year only. Several other programs were continued at existing funding levels, including Partners in Reading ($3.5 million) and Second Opportunity Schools ($7 million); or expanded, including Projects ARTS ($25 million) and computer network upgrades via the Universal Service Fund ($34 million). New initiatives being funded this year include: Ending Social Promotion ($25 million), a summer program for 3rd graders in danger of being left back; Borough Young Adult Centers ($7 million), to provide evening instruction for high school students who require more than 5 years to graduate; Summer School Enhancement ($39 million), to offer expanded summer academic programs for students in grades K - 2, middle and high schools; and Breakaway Summer Camp ($2.4 million), a pilot program to send 1,340 students to sleep away and day camps. This year, the Board of Education is conducting summer school for the largest number of students ever, 250,000 or approximately one-fourth of the city school system.

What is particularly disappointing is the continued reluctance of both the Mayor and City Council to address poor student performance by investing in cost-effective measures like the suburbs do, such as smaller class sizes and better teacher training, to prevent student failure. Instead, the focus has been on modest fix-it programs, such as summer remedial help, to deal with pervasive failure during the regular academic school year. Failure triggers such high costs in remediation, grade repetition and inappropriate special education referrals, not to mention the inestimable costs to the students themselves. Why not try larger scale efforts to reduce the number of students who fail?

Tax Cuts Abound
Ironically, considering the bruising budget battles, the Mayor and Council didn’t differ much on substance. Despite a huge budget surplus, both pursued a fiscally conservative, tax-cutting agenda.

In his January Financial Plan the Mayor had originally proposed abolishing city sales tax on all clothing purchases (including shoes) on December 1, 1998; completely eliminating the Commercial Rent Tax by 2002; continuation of property tax relief for co-op and condo owners; city income tax child care credit; and a reduction in taxes for subchapter "S" corporations. Later, in the Executive Budget issued in May, the Mayor altered some of his proposals considerably. Rather than eliminating the city’s sales tax on all clothing and footwear by December 1998, he proposed moving the start-up date to December 1, 1999 to coincide with implementation of a state law which will eliminate all state and local sales taxes on clothing and footwear priced under $110. He decided to gradually reduce the Commercial Rent Tax rate to 3 percent and dedicate this revenue source to provide public funding towards new stadiums for the Mets and Yankees and to create a Sports Facilities Corporation to oversee construction. The Mayor also added a new proposal to use city funds to accelerate the personal income tax credit for city residents under the STAR program. STAR (School Tax Relief) is Governor Pataki’s tax reduction initiative, offering an income tax credit to residents of New York City and property tax relief in the rest of the state. Scheduled to begin implementation this year for senior citizens only, the Mayor proposed to have the city absorb the cost to extend this credit to all residents beginning this year, until the state-funded STAR tax cuts are fully phased-in for all taxpayers by 2002. However, the City Council refused to adopt the Mayor’s tax proposals.

Instead, the main tax-cutting focus of the Council’s adopted budget was elimination of the 12.5% surcharge on personal income tax, instituted under the Dinkins administration to pay for more cops via the Safe Streets/Safe City program, which is due to expire in December 1998. Speaker Vallone maintained that, by refusing to renew it, the Council was just keeping a promise to taxpayers to make this surcharge temporary. Critics contend that Vallone was more interested in bolstering his gubernatorial ambitions by cutting taxes to appear more fiscally conservative. The Council also decried the Mayor’s stadium proposal as a waste of taxpayer money. Vallone vowed to place a referendum on the ballot in November letting taxpayers decide whether they wanted to subsidize a stadium for the Yankees in Manhattan. Viewing this as a threat to his negotiating position with the Yankees and as a political ploy by Vallone to draw voter turnout to the polls in November to boost his sagging gubernatorial aspirations, Giuliani came up with a counter measure. The Mayor appointed a Charter Revision Commission to come up with proposals to be placed on the November ballot. Under state law, a Charter proposal automatically knocks all other referenda off the ballot. The Commission has already held initial hearings on Charter Revision proposals in all five boroughs and is proceeding with plans to mount a ballot referendum.

Battle Not Over
Although a budget was adopted, the budget battles are not over. Shortly after its adoption, the Mayor vetoed Council member items and other spending totaling $201 million from the expense budget, $315 million from the capital budget and $165 million earmarked for debt pre-payment. On June 17, the Council voted to override the Mayor’s vetoes amid the cheers of a gallery filled with advocates and social service providers, potential victims of many of the Mayor’s program cuts.

Mayor Giuliani has already begun to retaliate with a "targeted spending slowdown." He contends that the City Charter gives him the power to withhold funds by delaying or canceling contracts with non-profit agencies, for example. The Council leadership responds that the Charter stipulates that funds can be impounded only in case of a fiscal crisis and they plan to sue the Mayor over the freeze in spending, a prospect that Mayor Giuliani clearly relishes. Unfortunately, their lawsuit must be able to demonstrate the harmful impact of the slowdown in spending, a tall order this early in the fiscal year, particularly when many service providers don’t even receive their funding from the city until January or later.

Despite the uncertainty over the final outcome of this tug of war, one thing is sure: the Council has taken an unprecedented step towards independence in exercising their full powers as a legislature under the City Charter. Their actions should bring greater balance to future budget negotiations. The chest-thumping, raucous nature of the June 16 veto override session indicates that many Councilmembers clearly exult in their first show of strength. However, there remains an undercurrent of concern among Councilmembers, as well as service providers, who fear the consequences of the inevitable confrontation with a vengeful Mayor. The budget battle is likely to continue throughout the year, so we’ll just have to stay tuned to see how it all turns out.

City’s Future Outlook
According to projections by both the NYC Comptroller and the Independent Budget Office (IBO), the city’s economic recovery should begin to slow down next year. Although a budget surplus is projected for FY 99, the size is expected to be much smaller, estimated from $800 million to $1.1 billion, than that for FY 98. In the "out" years of 2000 - 2002, the city once again faces the spectre of large budget gaps, projected by the IBO at $2 billion, $2.2 billion and $1.8 billion respectively.

The bad news: in spite of two strong years, including record Wall Street profits, decreasing interest rates on bonds reducing the cost of debt payments, declining welfare rolls and increasing employment, economic growth is not expected to continue at the same pace for the city in the latter part of this year and next. In truth, the economic recovery in New York City has not been as strong as in other parts of the country. The city’s employment increase, 1.7% in 1997, was lower than that of the U.S. as a whole at 2.3%, for example. Some experts predict that a national economic slowdown, fueled by a labor shortage and the financial crisis in Asia, will begin to be felt in the city next year. In addition to the slowing economy, fiscal monitors have identified several risky items in the budget, as they always do, such as uncertain city proposals for state and federal aid, unfunded overtime costs, and millions in prior-year state aid claims by the Board of Education that the city will be forced to write-off as uncollectible.

The good news: growth in the national and New York City economies is expected to pick up again beginning in 2000 as the Asian economy recovers. However, it is anticipated that this growth will be accompanied by rises in wages and prices and will occur at a much slower rate. Although large budget gaps are currently projected for the city from 2000 - 2002, these projections are based on current information and they can, and do, change substantially over time. Keep in mind that last July the FY 98 budget surplus was estimated to be only $100 - $600 million and we wound up with more than $2 billion - so keep your fingers crossed.