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The Bill Comes Due

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The Bill Comes Due

New York’s next mayor will have to contend with a fiscal nightmare. November 12, 2020
New York City Reborn
Economy, finance, and budgets

New York City mayor Bill de Blasio took office during an economic expansion and immediately started spending money liberally, including granting unprecedented retroactive pay raises to tens of thousands of workers. De Blasio maintained his extravagant ways for nearly seven years, adding new programs, swelling the size of the city workforce to previously unseen levels, and pushing for spending to hit $95 billion annually.

It’s now clear that de Blasio will end his tenure amid a titanic budget squeeze due to the economic slowdown caused by Covid-19. Even with a presumptive President Biden promising more federal aid to cities, money from Washington to New York likely won’t come close to solving the city’s long-term budget problems from Covid and eight years of de Blasio’s free spending. Much of the budgetary crisis won’t be his to deal with, however. Absent a stunning economic and fiscal turnaround for New York, the mayor that voters elect in November 2021 will face tough choices in dragging the budget back on stable fiscal ground. New York is already one of the highest-taxed big cities in the country, and widespread reports of residents, especially well-heeled ones, fleeing the city, make steep tax increases risky and probably counterproductive. The good news, if one can call it that, is that de Blasio spent so liberally that he’s left room to cut and realign spending, if New York can find a new mayor with the wherewithal to challenge the political forces that shape the city budget.

New York’s balance sheet will look very different from the one de Blasio constructed during his mayoralty. From his first day in office through his approved 2020 budget, the mayor—before Covid-19 upset his plans—sought to boost spending nearly $23 billion, a growth rate of 30 percent. (Inflation during those years amounted to 9 percent.) De Blasio set the pace early on, when he awarded city employees those generous pay raises—including for work done before he took office. His predecessor, Michael Bloomberg, had balked at employee demands for large pay hikes with no concessions, and he left office without new contracts for many city workers.

De Blasio’s retroactive increases for city unions stretched as far back as 2009, five years before he became mayor. He awarded teachers, for instance, a 4 percent “pay” raise for the year 2009, another 4 percent for 2010, and then a bonus for 2011. The pay raises, which came on top of the annual “step” increases that teachers get for working additional years, added $4 billion to payroll costs over the contract’s life. By the time de Blasio was done negotiating with other unions, the raises had bloated the city budget by $5 billion during his first year in office.

Bloomberg had resisted ratifying new contracts because he sought labor savings from the unions, including from health benefits for workers and retirees. The city’s expenses in these areas were already stratospheric, and they’ve kept rising rapidly. Virtually alone among large cities these days, Gotham pays almost the entire cost of health care for city workers and retirees—the promises to retirees alone amounting to more than $100 billion in future costs that the city hasn’t funded. During the de Blasio years, that debt swelled by more than $25 billion—an ever-larger load for future taxpayers. Because it hasn’t saved enough, the city must pay for retiree health care out of its everyday budget, with the bill climbing above $2.5 billion annually. Combined with the cost of future benefits of current workers—rising yearly by another $5 billion that the city isn’t saving for—future mayors will encounter a budget nightmare.

The way those fringe-benefit costs play out in New York City’s budget is illustrated by spending on police protection. Earlier this year, following George Floyd’s death in police custody in Minneapolis, some New York officials pressured de Blasio to slash police spending. The mayor approved what he called $1 billion in cuts, though much of the savings involved sleight of hand, such as shifting spending to other departments and pledging to limit overtime, without a plan for how to accomplish that. And yet de Blasio left untouched one of the department’s biggest budget-busters: nearly half of its operating expenses are pensions and fringe benefits, accounting for half of the $2.8 billion in new spending on policing over the last decade. For every dollar that the department pays an officer in salary, it spends nearly as much on pensions and health care for workers and retirees, who make virtually no contributions toward their own health care, something rare even in the public sector these days. But those expenses keep mounting because de Blasio has left them untouched.

Even as those increases have made the price of employing the average worker soar, de Blasio has sharply expanded New York City’s workforce, which has now reached an all-time high of 330,000. De Blasio has added about 30,000 fulltime positions, an 11 percent gain—growth unseen since the 1980s, when the city added 50,000 workers after reducing its personnel rolls during the fiscal crisis of the 1970s to 200,000 workers.

The school system has expanded particularly aggressively, adding 12,000 jobs, a 10 percent rise, because of new teaching and administrative positions, fattening the schools’ budget 80 percent, to $34 billion annually. The cost of salaries and benefits alone has risen $8 billion, or 62 percent, in that time. Other major areas of growth include mental-health services, led by the mayor’s ThriveNYC mental-health program, which dedicated several hundred million dollars a year in new spending, boosting personnel rolls in the city’s health and mental-hygiene department by 29 percent; and children’s services, which has increased staffing 22 percent.

Given robust New York revenues during de Blasio’s administration—a boon from a healthy real-estate market and strong Wall Street results—residents might have hoped that the mayor would have devoted more money to reducing the city’s debt. It didn’t happen: total indebtedness under de Blasio exploded by some $20 billion, due to more borrowing and a failure adequately to finance future retiree benefits. Debt service—that is, the price for paying off city bonds—is scheduled to go up by 32 percent, or $2.2 billion, in four years to $9.2 billion. Pension costs, which have ballooned nearly $4 billion, or 50 percent, in 10 years, were already scheduled to rise another $1 billion over three years before the pandemic. The market turmoil of 2020 will add another $200 million a year to that bill within three years, projects the New York City Comptroller’s office, as the pension system failed to hit its investment targets this fiscal year.

These numbers are part of what’s putting so much stress on the city budget since New York’s economy began shutting down in mid-March. In June, the city passed an $88 billion 2021 budget, downsized from the $95.3 billion that the mayor had proposed back in January, before the pandemic hammered the economy. But the budget includes numerous one-shot reductions, and it swipes money from city savings to balance the books, leaving huge questions about the future. In fact, of the $9 billion shortfall that the city was looking at, it used expense cuts to close only half of that deficit. Those included axing certain programs, such as residential composting; assuming unspecific labor savings—for example, some $250 million in overtime costs at the NYPD that it’s not clear the city can achieve—and realizing savings from a reduction of services in a city that has been partially closed for much of the last half year.

But tellingly, New York is also raiding some $4 billion in reserve funds to close the gap. About $1 billion of that money comes from the city’s surpluses, but another $2.6 billion is drawn from its retiree health-benefits fund. New York has made a practice over the years of tapping that fund to close budget gaps during recessions—one reason that it confronts a giant future liability to pay for unfunded health benefits. The city has realized few savings through better or more efficient operations. The Citizens Budget Commission noted that as little as one-fifth of the deficit-closing plan achieves such reductions.

The de Blasio administration has seemed indifferent even to the idea of improving government efficiency. Early on, he ended an initiative that had stretched over four different mayoralties, known as the Program to Eliminate the Gap, or PEG, which challenged city departments to find savings that eliminated projected future budget holes as they became apparent. Though many of the individual savings were small, the sustained push helped accumulate billions of dollars in savings over time—as much as $23 billion from 2010 through 2013, according to one study. De Blasio replaced PEG with a voluntary effort, which has produced much smaller savings, generated by fewer city agencies. Though de Blasio reinstated PEG last year, it has yet to produce the belt-tightening that once characterized it; the next mayor will need to ensure that it becomes a priority again.

Because it has done little to reduce long-term costs, New York must grapple with bigger deficits in the years beyond 2021. The state’s Financial Control Board, which audits Gotham’s finances, looked at the city’s new budget and identified significant risks that it thinks will worsen future deficits. The board focused on the so-called “unspecified” savings that New York must negotiate with labor unions, as well as hundreds of millions of dollars in overtime costs that the city hasn’t been able to control but now says that it will cut. The FCB estimates a $2 billion budget hole in the fiscal year 2021, which began on July 1, and a shortfall of $6.5 billion in 2022, with $5.7 billion and $5.9 billion deficits for the following two years. “The city cannot wait or count on [federal assistance.] Plans need to be developed now to deal with the risks, not just in the current fiscal year, but more importantly, starting to deal with the growing outyear gaps,” the FCB warned. “The city must develop a multi-billion plan, with recurring savings.”

Recurring savings means long-term changes, especially to compensation, which constitutes more than half of New York’s budget. In particular, city leaders must look at areas where compensation is out of proportion with that in other big cities and large private-sector employers.

Health-care insurance for workers and retirees certainly fits the criterion. The city pays all health premiums for more than 95 percent of its workforce and similarly shells out for generous retiree health care, with little or no contribution by retirees—something rare in both public and private sectors. A major part of the retiree bill is paying full insurance benefits for workers retiring before 65, as well as for their spouses. (After they reach 65, workers join Medicare, but the city still pays those subsidized premiums.) Retiree costs are especially onerous in public-safety departments, which have more pensioners than active workers, so the city winds up subsidizing full insurance benefits for the equivalent of two full workforces. The bill for retiree health care is projected to hit $3 billion annually within several years. Worker health care expenditures are slated to rise by 25 percent, or nearly $3 billion, over the next four years, according to the city comptroller’s office.

The next mayor will need to press for more cost sharing. A Citizens Budget Commission study found that cost-sharing of premiums is now widespread for government workers and retirees in other cities, states, and the federal government. If city workers contributed just 10 percent toward their health premiums—less than the average for big employers these days—New York would save more than half a billion dollars yearly, the city’s Independent Budget Office estimates. Requiring that early retirees pay half of their insurance premiums, and that those qualifying for Medicare contribute half of the so-called Medicare B federal premium, would save another $500 million. Gotham retirees also get full coverage for their spouses—an enormous expense. Reducing that subsidy by half would save hundreds of millions of extra dollars. The cuts would simply bring New York into line with other large cities.

The defined-benefit system the city uses to provide retirement funds for its workers places enormous potential liability on taxpayers, who must make up investment shortfalls within pension-fund portfolios. While the state constitution prohibits New York City from altering pension plans for current workers, the city should use the opportunity of the pandemic-caused financial crisis to institute broader reforms, which over time would make the pension system affordable. One way to proceed would be to provide New York employees with more options—specifically, a 401(k)-style defined-contribution plan that offers flexibility and portability to workers, and/or a hybrid model that combines a small defined benefit with a tax-free defined-contribution plan. An Empire Center survey found that 26 percent of government workers would favor the defined-contribution plan, and 57 percent would consider opting for a hybrid. One reason why: a large percentage of government employees change jobs over time, often losing a substantial part of their pension benefits when they do, because of the way defined-benefit plans work. Beginning to offer alternative plans now and starting the transition of new workers to these more predictable, less-expensive systems would yield significant long-term savings.

Mayor de Blasio’s new contracts for city workers have also proved expensive, all the more so with so many new hires. Salary costs have accounted for 40 percent of the total rise in the city’s budget. Getting concessions from workers on already-granted pay increases can be tough. But there’s another way. City employees typically work between 35 and 37.5 hours a week. Boosting the number of hours worked would provide labor savings, without reducing pay, allowing the city to shrink the workforce through attrition. Over three years, the Independent Budget Office estimates, such savings would rise to more than three-quarters of a billion dollars annually.

Reducing the workforce after de Blasio’s rapid expansion is essential, given the city’s generous wage and benefit structure. (De Blasio’s hiring, for example, will potentially add hundreds of millions of dollars to the cost of the city’s already underfunded pension system, which already consumes some $10 billion a year in city contributions.) The city has taken on several expensive new programs that have driven much of the new hiring, and they need reconsideration. The expensive ThriveNYC mental-health initiative, under the supervision of the mayor’s wife, Chirlane McCray, is a favorite of de Blasio’s, but has been rightly criticized for concentrating on nebulous mental-health problems of the general population instead of on services for the seriously ill. A smaller, more focused program could save the city hundreds of millions of dollars annually.

The mayor’s other signature initiative was universal pre-Kindergarten: extending pre-school for free for all three- and four-year-olds. The program originally targeted the four-year-old children of low-income households, but de Blasio extended it to all households, and to three-year-olds as well, as a matter of “equity”—necessitating a hiring spree for teachers. The program’s cost now approaches $1 billion a year. Though the state funded much of the original initiative, the city now picks up about a third of the tab and has been financing much of its recent expansion, even as the state, addressing its own budget problems, is cutting appropriations to the city. Trimming the program back to its original scope could save hundreds of millions of dollars annually and also help constrain the growth of employee benefits. But the mayor has refused to consider such a move.

Anything that might anger the teachers’ unions, in fact, seems off the table. Thanks to de Blasio’s unwise recent “deal” with the unions, New York still owes some $900 million that it doesn’t have for teacher “back pay.” In October, the mayor got the teachers merely to agree to accept half of that money this year, and half the next year, in exchange for a no-layoff pledge. The upshot: zero real savings for New York and a costly commitment to the high staffing levels that have blown a hole in the city’s budget.

The political forces in Gotham that traditionally resist such savings are powerful—and they have grown even more so as the city’s politics have moved left. Some voices, including de Blasio’s, have already argued instead for higher taxes on the rich. But New York is already suffering from a significant outmigration of residents, especially of wealthier taxpayers, because of the virus, social unrest, and high taxes. Solving budget woes with still higher levies will only encourage more flight. Two studies by the Independent Budget Office judge New York as the most heavily taxed big city in America. The most recent study found that New York’s taxes relative to the size of its economy were 90 percent higher than the average in other larger cities. New York government, the IBO found, takes twice as much in local taxes per $100 of economic resources than places like Los Angeles, San Diego, Houston, and Dallas—and nearly 60 percent more than Chicago and 85 percent more than Phoenix. Because the city taxes at such high rates, it takes a progressively bigger chunk out of growth than other places do. Property owners have paid $7.5 billion more in taxes since 2014, a 38 percent increase, while taxes on individuals have risen $3.2 billion, or 31.5 percent, in that time.

Even pre-pandemic, this tax burden was chasing wealthy people out of the city, evidence suggests. Census data from 2018 showed that the New York region led the nation in outmigration. In February 2020, Governor Andrew Cuomo noted a troubling decline in state income-tax revenue, which he attributed partly to federal tax changes that raised the cost of local taxes on wealthy New Yorkers—prompting them to move elsewhere. In August, meanwhile, Cuomo bristled at the notion that city officials wanted to hike taxes, even as moving companies reported record numbers of New Yorkers leaving the city. The shift of many high earners to remote work during the pandemic, leaving large swathes of city office space empty, further endangers the city’s fiscal future. “A single per cent of New York’s population pays half of the state’s taxes and they’re the most mobile people on the globe,” Cuomo said.

Cuomo may ultimately have a major role in reforming New York City’s budget practices. New York State’s union-friendly laws make it tough for mayors to cut benefits once they’ve been granted to workers, largely because, even after a contract expires, those laws mean current benefits stay in place. That arrangement incentivizes union leaders to refuse to negotiate with any mayor seeking worker concessions. During the 1970s New York City fiscal crisis, however, the state created an oversight entity, the Financial Control Board, to monitor city budgets and, if needed, impose money-saving measures. It’s a strategy that the next mayor should consider asking Albany to invoke. There’s little doubt that Cuomo could engineer such a takeover and initiate an overhaul of the city’s compensation practices.

A recent Manhattan Institute poll documented the risks to New York of inaction. More than four in ten residents responded that they would like to leave the city to live elsewhere. More than half of residents thought that services in the city weren’t worth the amount they paid in taxes, and 75 percent said that they approved of lowering taxes as a strategy to help revive the city. At the same time, 55 percent of residents endorsed limiting the collective-bargaining rights of city workers to address budgetary problems; only 28 percent opposed that as a strategy for balancing the budget.

The next mayor faces a fiscal crisis unlike any New York City has seen since the months after 9-11. Back then, resolute New Yorkers pulled together to save their city, and they could count on a collective will that valued a strong police department and civic order. Now, however, the city must counter potentially serious long-term trends—including a widespread move among high-income taxpayers to remote work, rising crime and public disorder, and a continuing fear of infectious disease—which make city living less attractive. Fiscally, the first order of business is to understand that city government can’t sustain itself for long under those conditions. New York must change—and change dramatically—how much money it spends, and why.

Photo by David Dee Delgado/Getty Images

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