A year ago, mayoral hopeful Michael Bloomberg promised that, if elected, he wouldn’t increase taxes to solve the city’s growing budget deficit. Raise taxes, he argued with admirable clarity, and “you will drive business and people out of this city. Your total tax revenues over a period of time would probably decline rather than go up.” But these days, the businessman mayor is singing a different tune. Several times recently, Bloomberg has suggested that he might resort to new levies to close the city’s projected budget gap for next year—estimated at $3.7 billion—and his administration has started to drum up support for tax hikes in Albany and city hall. Bloomberg’s argument seems to be that 9/11 blew such a gaping hole in the city budget that tax increases are the only way to restore fiscal stability.

Both the premise and the conclusion of this argument are wrong. New York City’s current budget woes stem mostly from chronic overspending on its bloated municipal welfare state, not from the terror attack. New York has by far the largest budget of any American city. The city government spends more than twice as much per capita, for example, as Los Angeles (including Los Angeles County) on municipal government and services; only four state budgets are bigger. During the late nineties, as the economy boomed, the city went on an especially extravagant spending spree. In 1998, the part of the budget financed by city tax revenues rose 6 percent, more than double the inflation rate; in 2000, it increased 5.7 percent; and in 2001, it rocketed up 9 percent—three times the inflation rate.

The city used huge budget surpluses, and not new taxes, to support this profligacy, but as the boom came to an end, slowing down the growth of tax revenues, the extra spending came back to haunt the city. Even before the terrorist attack, analysts were warning that a budget crisis loomed in the city’s near future. The revenues lost because of 9/11 only worsened an already bad situation.

The city’s projected budget for the fiscal year that begins next July boosts spending by about $3 billion, largely because of increases automatically built in to the budget, including rising debt payments and salary and pension hikes. Given these locked-in increases, Bloomberg argues that even without any new spending initiatives on his part, new taxes are necessary to balance city finances. But before he adds to New York’s tax burden—already approximately 75 percent higher than Los Angeles’s and Chicago’s, and more than double the rate of most large cities—he should take a long, hard look at the very different ways his two immediate predecessors dealt with their fiscal travails.

Confronting a $1.5 billion budget gap and a severe national recession soon after taking office in 1990, Democrat David Dinkins refused to cut city spending, which would have angered the municipal unions and social services industry that helped elect him. Instead, he jacked up New York’s already sky-high taxes by nearly $1 billion, and then inked a contract with the teachers’ union that boosted spending by $236 million, a 5.5 percent increase in one year. Even as city hall negotiated the contract, the Gulf War broke out, sending oil prices gushing upward and hurting the city’s tourism industry. Dinkins’s response was to load hundreds of millions of dollars of yet more new taxes onto already reeling city businesses and residents.

The result: catastrophe. While the nation pulled out of its recession shortly after the Gulf War ended in 1991, New York’s downturn dragged on for two more years. In one of those years, 1991, the city bled 192,000 jobs—more than any other U.S. city had ever lost in a single year. In 1991 and 1992 together, job losses totaled 285,000.

In 1994, Rudy Giuliani tried a dramatically different approach. Facing a deficit projected to grow to $2.3 billion because of spending increases built in to the city’s budget, Giuliani balanced the books by slashing discretionary spending, by relentlessly pushing for productivity gains from city workers, and by selling city assets. He achieved more than $600 million in savings just from tough productivity measures: combining the city’s multiple police forces into one unit; hammering out a new sanitation workers’ contract that extended their cushy four-to-six-hour workday to eight hours a day; wringing concessions from mollycoddled school custodians on work rules. Perhaps even more important, he ordered personnel cuts in the front office of the Board of Education and most non-uniform agencies to reduce the city’s workforce by 20,000 workers.

By the time Giuliani had finished, he’d cut enough city fat not only to offset the billions in automatic spending increases but even to reduce total city spending by $680 million—the first time in nearly a half century that the city’s budget shrank from one year to the next. That net reduction allowed Giuliani to include small tax cuts in his early budgets and made it easier for him to balance succeeding budgets. Together with the Giuliani-era crime turnaround, this hard-nosed approach to New York’s budget, which made the city more investor-friendly, contributed to the late-nineties economic boom. Unfortunately, Giuliani abandoned this abstemiousness during his second term.

Bloomberg has been acting less like Giuliani in his first term and more like Dinkins in his only term. Bloomberg won office in part because he preached fiscal sobriety after 9/11. But instead of responding to the 9/11 crisis by cutting spending radically, a move New Yorkers would have understood and endorsed at the time, Bloomberg’s first budget raised city-funded spending $800 million, or 2.7 percent. Equally alarming, he sought only small budget cuts in many agencies and virtually no reduction in the size of the city’s workforce, nor any real productivity gains from it either. Instead, the mayor helped fill the hole in his initial budget with $1.5 billion in borrowed funds, the first time in decades the city has used debt to fund its daily operations. Funding city operations with loans is like a homeowner paying his monthly mortgage with cash advances from his credit cards—a recipe for financial ruin in a city already paying $3.7 billion a year in debt payments. And now the mayor is calling for new taxes.

But it’s not inevitable that the city take the Dinkins path of higher taxes. Bloomberg’s budget deficit is roughly proportionate to the one Giuliani successfully dealt with eight years ago, and it will respond to the same kind of aggressive cost-cutting line of attack.

The best place to start is to get rid of the estimated 17,500 jobs that the city has added in the past four years, reversing the attrition of the mid-nineties. In particular, the mayor needs to strong-arm Chancellor Klein to reduce the size of the Board of Education bureaucracy as a way to stem school spending, up 6 percent this year, according to the Manhattan Institute’s E. J. McMahon. As a result of big increases over the last several years and the new teachers’ contract, the board now spends more money per pupil than schools in 45 states and in 94 of the nation’s 100 largest school districts. Yet, there’s little payoff for all that money.

To help bring New York’s spending more into line with that of other cities, Bloomberg should also require city employees to pay for a small portion of their health-insurance premiums—just as federal and state government workers and almost all private-sector workers do. That measure alone would save the city as much as $500 million yearly. Further, the city needs to resurrect privatization or managed-competition programs, such as allowing private-sector companies to bid for city trash contracts, district by district. And city and state need to combine their efforts to reduce New York’s overly generous and ludicrously expensive Medicaid program—the largest by far in the country. Trimming dental benefits and transportation services, for example, would save the city $37 million this year. Without moves like these, the city’s oversize budget will inexorably swell every year, even without new spending initiatives.

To achieve such reforms, however, Mayor Bloomberg must begin to acknowledge that New York’s spending is completely out of whack compared with that of other municipal governments, something that, to date, he seems loath to do. Most important, he needs to recall his experience as a successful businessman to remind himself—and explain to voters, as he is uniquely qualified to do—why new taxes are definitely not the answer and would make things catastrophically worse.


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