The Citys Finances, Part 2: Budget-Cutting Made Simple
Balancing the books doesnt take genius, just political courage.
Mayor Michael Bloomberg says that balancing New York Citys budget in tough times requires shared sacrifice, by which he means combined tax increases and spending cuts. Yet as is often the case in New York, the biggest sacrifice is expected of taxpayersthis time, nearly $1 billion in tax hikes on top of what is already the heaviest tax burden among major cities in the nation (see Life in Taxopolis).
The citys budget-cutting, by contrast, is exceedingly modest. In fact, Bloomberg isnt really cutting the citys budget in the fiscal year that begins July 1; hes merely slowing (slightly) its rate of growth. According to the Independent Budget Office, city-funded spending to provide services will rise $1.6 billion, to $46.9 billion, in the new year. Thats a 3.3 percent increase, once you include expenditures in the coming year that the city has already paid with surplus funds from the Wall Street boom. By contrast, Bureau of Labor Statistics data show, inflation in the greater New York area is running at zero percent. In other words, in the middle of a deep fiscal crisis, city spending is rising significantly faster than inflationpart of a pattern that goes back to the beginning of the Bloomberg administration. Over Bloombergs tenure, the city has, thanks to annual spending increases, expanded the budget on an inflation-adjusted basis faster than any mayor since John Lindsay, whose spending pushed New York to the edge of bankruptcy (see New Yorks Next Fiscal Crisis, Summer 2008).
Bloomberg has a reputation in some circles as a cagey fiscal manager, but he owes that reputation mostly to Wall Street, which flooded the city with massive tax revenuesenough for him to offer fat contracts to public unions, add to the city-worker headcount, and still have money left over. But now, facing the possibility of a long-term Wall Street decline, the mayor will need to earn his reputation by real budget-cutting and restructuring of city services. He could start by reducing city spending growth to zero next year, something that Rudy Giuliani achieved in his first tough year in office.
In fact, Bloomberg could do that in one fell swoop by negotiating a wage freeze for city employees, who are scheduled to get 4 percent raises because of his generous contract deals. The Citizens Budget Commission has estimated that a one-year freeze, a concession that has become common in the private sector, would save $1.2 billion. Thats enough to halt spending growth and prevent a tax hike next year.
Is such a wage freeze politically feasible in the face of strenuous public-sector union opposition? Yes, if Bloombergor, should he improbably lose this years election, his successorthreatens an alternate series of steps that, combined, would likewise make the citys finances sustainable. The first: shrinking New Yorks bloated workforce. In his budget presentations, the mayor typically lists employee-benefit costs, such as pension and health benefits, as uncontrollable, since theyre subject to state mandates and fixed by contract negotiations. But one way New York City adds to those costs is letting the city-worker headcount drift up. Since 2003, it has grown by some 41,000 workers, including over 16,000 paraprofessionals made full-timers at the Department of Education and the Department of Parks. At an average cost of more than $100,000 per worker in salaries and benefits, workforce size matters.
Scrambling to keep up with sinking revenues, the city committed this year to 2,644 layoffs and projects that it will not fill another 8,200 or so slots, though half the reductions are coming at city-subsidized organizations like arts groups and the libraries, whose workers the city doesnt officially count as municipal employees. Facing continuing soft revenues, the mayor is now calling for only 1,115 more layoffs next year and some 2,700 further reductions through attrition, part of a mere $324 million in new spending cuts by city agencies. Even former mayor David Dinkins, hardly a hard-nosed fiscal manager, laid off 6,000 municipal workers when the city went through a prolonged recession in the early 1990s. Tougher-minded reductions that would bring the citys headcount more in line with past recessionary periodssay, an additional 5,000 layoffs or attrition cutswould save the city another $300 million next year.
Next, Bloomberg could increase the 35-hour workweek that city employees currently enjoy, thus allowing the city to hire fewer replacements as workers retire. There are numerous ways to do this, but the Independent Budget Office estimates that one option, going to a 40-hour weekstandard issue for federal and state employees as well as many workers in the private sectorwould save the city some $130 million next year, $267 million by fiscal year 2011, and $411 million by fiscal year 2012.
The mayor could then target the single biggest beneficiary of the Wall Streetdriven revenue surge: the Department of Education. Its budget has swollen under Bloomberg from nearly $13 billion to $21 billion, a more than 50 percent increase that includes a 43 percent gain in teachers average salaries. The city now spends about $20,000 per student, far more than the average for public education in America or in New York State (and more than tuition at some elite private schools), and the schools budget is projected to rise another $1 billion, or 5 percent, next year.
New York now employs about 80,000 teachers, yielding a ratio of one teacher to 13 students. However, the average classroom is larger (about 22 students in elementary schools and 26 in high schools) because the citys contract with teachers includes so many impediments to productivity that some teachers dont teach much. A modest, mandated rise in class sizes by two to four students would save somewhere between $190 million and $380 million annually.
Bloomberg could also look for innovative ways to raise revenues, as other cities have done. The citys major revenue-raising effort at the momenthiking the sales tax and eliminating the sales-tax exemption on clothing purchases at a time when local retailers are strugglingis harmful to the economy. A less harmful and more creative option is fees that encourage residents to change their habits in ways that produce even more savings for the city. One example is pay-as-you-go garbage collection, which is practiced in thousands of cities and towns around America (William F. Buckley, Jr. called for New York to adopt this when he ran for mayor back in 1965). Making residents pay for the volume of garbage that they produce provides an incentive for them to recycle more and produce less trash in order to reduce their costs, thereby helping the city cut its own costs. The Independent Budget Office estimates that such a program would generate some $300 million annually for the city in combined savings and revenues.
Crunch the numbers, and youll find that these four stepsreducing the public-sector workforce, increasing the workweek, raising class sizes slightly, and pay-as-you-go garbagewould together save the city roughly $1 billion, enough to avoid tax increases. But Bloomberg shouldnt stop there. New Yorks long-term productivity has been harmed by the businessman mayors nearly complete rejection of privatizationboth what David Osborne, coauthor of Reinventing Government, calls managed competition for city services, and sales of assets that the city has no business owning. In refusing to consider competitive bidding for services now handled by public employees, the mayor has removed a valuable bargaining chip in contract negotiations with city workers, one reason why hes struggled to get productivity gains from unions. Its also a reason why the worker headcount has soared.
Bloombergs own experience should have taught him valuable lessons here. Soon after he took office, he reversed Giulianis long effort to privatize the citys Off-Track Betting parlors. Bloomberg promised that he would install new management and make OTB run better, in the process scotching what the New York Times estimated would have been a $250 million sale of the parlors to private owners. Since then, OTBs performance has deteriorated, requiring budget subsidies until the city finally pushed the state to take over the 60 city parlors last year, at no gain for Gotham.
On the following pages are two major privatization initiatives: Howard Husocks recommendation that the city shrink its empire of subsidized housing and then sell it off (net value, well over $4 billion); and worldwide privatization expert E. S. Savass plan to bid out bus contracts, something that dozens of cities do to improve service and cut costs. Cities around the country provide many more examples of ways to use managed competition in everything from sanitation to the delivery of welfare and social services. The mayor would be wise to consider some of them, especially because New York provides far more services than other cities doincluding an extensive hospital network whose deficits are rising.
The pages of this issue are filled with other reform ideas, from Sol Sterns recommendations on restructuring teachers contracts to make them more productive to John Avlons observations on how the city can reduce its exposure to half a billion dollars a year in lawsuit judgmentsa cost unlike any that other cities face. These reforms would yield both immediate savings and long-term payoffs.
The mayor and his supporters object that reforms arent easy to accomplish in New York. Of course not. But times of great fiscal stress call for politicians willing to upset apple carts to achieve whats difficult but necessary. Hugh Careygovernor of New York in the 1970s, when the state had to deal with Gothams near-bankruptcywas such a fighter and reformer. He handed the mantle to Mayor Ed Koch, who was a tenacious and transformative fiscal manager in his first term. Later, Rudy Giuliani took office facing a $2.3 billion gap in a $30 billion budget. Resolving not to raise taxes on citizens, hit hard by state and local tax increases in previous years, he threatened and cajoled and maneuvered until he had achieved a number of major reforms, including merging the citys three separate police departments, getting sanitation workers to work an eight-hour day, and forcing productivity changes on the notorious school janitors union, which had run the schools as its own fiefdom for years. All were considered politically impossible until Giuliani achieved them.
Bloomberg has preferred instead to make his name on environmental issues (being photographed in a tree by Time) and lifestyle changes imposed through the health department (outlawing smoking in bars and banning trans fats from city eateries). But if noted economist Luigi Zingales is correct in his assessment that New Yorks financial preeminence is now under serious long-term threat (see Wall Street 2015, coming soon), the mayor needs to get serious about the citys budget. The good times will not return soon to bail us out.
Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. He is the author of The New New Left.