A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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Gothams Problems Are Camelot-Proof
Neither Caroline Kennedy nor Washington, DC can solve New Yorks fiscal crisis.
6 January 2009
Last week, New York deputy mayor Kevin Sheekey argued that Caroline Kennedy, a Barack Obama supporter during the presidential race, was New Yorks only acceptable choice to replace Hillary Clinton in the Senate. If Caroline is appointed, Barack Obama has to come to New York as his first political trip to . . . support her and, in turn, New York, Sheekey said. What kind of support would that be? New York has a huge budget gap, Sheekey explained. That means giant cuts. . . . We need help from the new president. He was right about the problem but wrong about the solution. Lets hope that Sheekeys boss, Mayor Michael Bloomberg, realizes that even a high-voltage political star cant solve the citys budget woes.
As the last fumes dissipate from Wall Streets manic era, its become painfully clear that New York Citys budget has been in dangerous imbalance for years. Indeed, if you dont include the big leftover surpluses from Wall Streets recently ended bubble years, New York City will spend $4.3 billion more than it takes in this fiscal year, or a whopping 10 percent of city-funded revenues, state comptroller Thomas DiNapoli reported just before the holidays. For the citys next fiscal year, which begins in July, that operating deficit will have grown to $7.2 billion, or 17 percent of city-funded revenues. And by July, DiNapoli warned, the actual cash deficitafter weve finished using the last of those huge bubble-era surplusescould reach $3.5 billion, almost triple the $1.3 billion that the city projects.
But the real drop-dead time for New York comes 18 months from now. By then, New York could face a cash deficit of $8 billion, amounting to 13 percent of total spending and 18 percent of city revenues. This figure is particularly chilling because at the peak of New Yorks 1970s fiscal crisis, the citys deficit, as a percentage of the citys own revenue, stood at 14 percent. But its no surprise, since current city spending, adjusted for inflation and population, is 22 percent higher than when John Lindsay sat in the mayors office. Most of the increase has come in the past half-decade. Worse, this projection already includes the extra cash influx from the recently enacted $1.3 billion property-tax increase, estimates of $1 billionplus in projected budget cuts, and a cash extraction out of what was supposed to be a long-term benefits trust for future retiree health-care costs.
Its jaw-dropping that Mayor Bloomberg, faced with these projections, has actively made things worse. City workers salaries are projected to increase by 13 percent between now and our drop-dead date, largely because the mayor voluntarily entered into labor agreements late last year offering fat raises to both civilian and uniformed workers. The cost of higher salaries and wages adds nearly $1.7 billion to the drop-dead-year deficit. Plus, the city-funded labor force has swollen by more than 12,000 people in the past three years, meaning that even the 4,556 projected job cuts Bloomberg will make over the next 18 months wont bring us back to 2005 workforce levels.
Then theres what Bloomberg always calls the uncontrollable parts of the budgetlargely pension and health-care costs. DiNapoli expects pension costs to grow to more than $7 billion per year by 2011, up from about $1.5 billion annually in the late 1990s. Since pensions are based on salaries, recent wage increases make things worse here as well. Health-care costs for public-sector workers, too, will rise from roughly $1 billion to $2 billion annually in the late 1990s and early 2000s to more than $4 billion annually in 2011. The pension and health-care growth owes much to what Bloomberg didnt do starting when he took office: recognize the unsustainable future numbers for what they were and start working with Albany to control them.
The solutions to these unglamorous problems must come from within ourselves, not from political celebrities. First, during his budget speech later this month, the mayor should say publicly that while weve got to wring efficiencies out of the citys bloated workforce, the deficits cant be closed with across-the-board budget cuts to important services like policing without severely endangering the citys quality of life. Nor, he should concede, can they be closed even with the most draconian of income-tax hikes to follow the extra property-tax levy. The numbers are just too big, and more tax hikes would only drive more jobs away.
Instead, the mayor must make outsized cuts to education, whose city-funded budget has increased at nearly 10 percent every year since Bloomberg took office without commensurate results in achievement. Unfortunately, much of that increased spending came in the form of contractually guaranteed six-figure teacher salariesmeaning that Bloomberg will have to reduce staff, including teaching staff, rather than paychecks. He can make sure that students are harmed as little as possible by keeping highly paid teachers in the classroom, rather than doing administrative work, and cutting more deeply in the back office and management rather than in classroom budgets.
Next, the mayor has to work with Albany to make real cuts to Medicaid, which consumes more than $5.5 billion annually in the city, also without discernible effect on New Yorkers health compared to other states. Here, New Yorks two senators actually can help by spearheading cost-saving reforms from Washington on down.
The mayor also must, at long last, take the lead on pension and other benefits reform. Bloomberg said last month that hed work with Albany to ask future city employees to continue contributing to their own pensions after ten years of employment and to become eligible for pensions after ten years instead of the current five. The mayor also proposed to increase the number of years before eligible retirement for future uniformed workers from 20 to 25 and to increase the minimum retirement age to 50. These are modest steps, surebut the mayor should make clear that theyre just the beginning. The public-sector workforce will have to start paying much more, in the form of higher contributions and lower future benefits, to keep the guaranteed pensions and generous health benefits that the private sector abandoned long ago.
Its true that real changes to budget items like pensions wont be felt for a while. But in two years time, bondholders will be more likely to forgive New York its continuing problems if they see that the city has made real progress on future liabilities during the tough times. If, on the other hand, we dont address our problems and instead continue to dither as mid-2010 draws closer, well be no different from passive New Orleanswhich, for years before Hurricane Katrina, expected Washington to provide the physical infrastructure needed to guard against an inevitable storm, and then, once the flood arrived, depended on its Washington connections to fix the city. New Yorks fiscal flood is still coming, and weve had ample warning to start fixing our broken budget infrastructure. We may get some help from Washington on key reforms like Medicaid, but we cant depend on it. And neither can we depend on potential senators personal connections to the president-elect.
Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst.