Analysis of New York City’s Adopted Budget for 1999
Analysis of New York City’s Adopted Budget for 1999
Last month, the Independent Budget Office (IBO) issued a report analyzing the Mayor’s executive budget for 1999. Since then, the City Council adopted a budget including a number of tax and spending policy changes from the Mayor’s final plan. This report highlights those changes and provides IBO’s pricing of the adopted budget.
IBO projects fiscal year 1999 will end with a surplus of $843 million, including $543 million in cash plus $300 million reserved for the budget stabilization account. The sizable surplus results in large part from IBO’s forecast that local tax revenues will be $365 million greater than assumed by the Council in crafting its budget. (The Charter requires the Council to use non-property tax revenues as estimated by the Mayor; IBO’s forecast for non-property tax revenues, however, is $530 million higher than the Mayor’s.) The differences are summarized in Figure 1.
The first section below highlights the revenue budget and includes a discussion of the current controversy over property tax rates and billing. The second section highlights expenditures and includes a discussion of changes in selected agencies.
I. Revenue Budget
IBO Revenue Reestimates. The recent budget battle and its effect on the process of adopting a budget has had a significant impact on the city’s revenue budget. Tax revenue projections, which in prior years were routinely updated by the Mayor to reflect new information gleaned from April income tax collections, were left essentially unchanged this year. As a result, IBO estimates that the budget as adopted understates total city fund revenues by $376 million in 1999.
Under the Charter, the Council is required to accept the Mayor’s estimates for all revenue sources except the property tax. In general, the estimated revenues from these sources submitted by the Mayor on June 5th were the same as those in the executive budget released in late April. Estimates of personal income and sales tax revenues were revised, however, to reflect the changes in tax policy included in the budget adopted by the Council (see below). The Mayor also reduced the forecast for non-tax revenues, primarily federal and state aid, by $251 million.
The final step in the revenue budget process is to set the property tax levy and tax rates. Property tax revenues are the "plug" that brings the budget into balance after the Council has set the expense budget and the Mayor has estimated all other available revenues. Other things being equal, the Mayor’s June 5th submission of a lower forecast for non-property tax revenues would have forced
IBO’s Pricing of New York City’s Adopted Budget for 1999
(In millions of dollars)
the Council to raise the property tax levy and break the informal "freeze" in average tax rates that had been in place since 1992. Rather than raise the average tax rate, however, the Council made up the difference by lowering their estimate of property tax reserves. More specifically, the Council decreased their projections for delinquencies and refunds and raised their estimates from prior years and tax lien sales.
The top portion of Figure 1 contrasts the estimated tax revenues in the adopted budget with IBO’s forecast, the latter of which includes our estimates of the costs of the tax policy changes incorporated in the budget. IBO’s projection for total tax revenue is $365 million (or 1.8 percent) higher than in the adopted budget. Our forecasts for personal and business income taxes are all significantly higher—the total difference is $516 million—than in the adopted budget. In contrast, IBO’s property tax forecast is $165 million lower due to our more conservative estimate for the reserve.
IBO’s forecast of miscellaneous revenues is $200 million lower than in our May 1998 report, reflecting uncertainty about the timing of the Coliseum sale. The Mayor’s executive budget included $200 million in proceeds from a sale in 1998. In June, the Mayor submitted a budget modification eliminating the $200 million from the current year, but in his revenue submission for the 1999 budget—which was incorporated in the Council’s adopted budget—he did not reflect a shift of the proceeds into either 1999 or the out-years of the budget.
Tax Policy Changes. The centerpiece of the budget’s tax policy changes is the elimination of the 12.5 percent personal income tax (PIT) surcharge. Under current law, the surcharge is scheduled to expire at the end of this calendar year. Because the surcharge rate is generally the same for all levels of income, surcharge elimination provides greater savings in dollar terms for higher income taxpayers. IBO estimates that surcharge expiration will cost the city $192 million in 1999 (when the surcharge will be in effect for half the fiscal year), rising to $638 million in 2002.
The budget also incorporates two additional reductions in the personal income tax, both identical to proposals contained in the executive budget. The first gives a tax credit for child and dependent care expenses, with greater benefits targeted to low- and moderate-income taxpayers. The second provides city residents who are shareholders of subchapter S corporations a tax credit for a portion of their share of the firm’s tax liability under the city’s general corporation tax. IBO estimates that the combined cost of the two credits will be $68 million in 1999 and remain relatively constant over the next several years. In addition to the PIT reductions, the budget includes two clothing sales tax-free weeks in 1999, which together are expected to cost the city $16 million.
IBO estimates that all of those adopted tax cuts will cost the city a total of $276 million in 1999, roughly equal to the cost of the tax cuts proposed in the Mayor’s executive budget and $76 million less than the tax proposals contained in the Council’s Fiscal 1999 Preliminary Budget Response (March 1998).
Recently proposed tax policy changes that were not included in the June 5th budget are likely to be the focus of future negotiations. The Mayor’s executive budget included a proposal to accelerate the state’s School Tax Relief (STaR) personal income tax credit at a cost to the city of $157 million in 1999, declining to zero in 2002 when the state’s credit is fully phased in. Other Mayoral tax proposals that would have large long-run fiscal impacts include eliminating sales taxes on clothing items over $110 (estimated to cost the city $98 million in 2002), reducing the effective rate on the commercial rent tax (CRT) to 3 percent ($86 million in 2002), and diverting the remaining CRT receipts to an off-budget stadium authority ($308 million in 2002).
Similarly, the Council has proposed a number of tax policy changes that were not in the adopted budget, including a restructuring of personal income tax rates and brackets that would direct more of the benefits of surcharge elimination to low- and middle-income taxpayers. IBO estimates that restructuring would increase PIT revenues by $44 million in 1999 and $162 million in 2002. In addition, the Council has proposed an earned income tax credit (EITC) for city taxpayers. IBO estimates that the EITC proposal included in the Council’s Fiscal 1999 Preliminary Budget Response would cost the city $85 million in 1999, with the cost increasing gradually over time. Legislation recently introduced in Albany on the Council’s behalf, however, would phase in a more limited EITC over two years—at roughly 40 percent of the cost of the earlier proposal in the first year and 75 percent in subsequent years. Finally, both the Mayor and the Council have proposed extending the existing property tax abatement for coops and condos.
The Debate Over Property Tax Rates
Property tax rates have been caught up in the recent budget battle between the Mayor and the City Council. Under the budget adopted June 5th, the city will levy $8.1 billion in property taxes, $209 million higher than the 1998 levy. This increase is entirely attributable to growth in assessed value; under an informal agreement, the overall property tax rate has been frozen since 1992 and will remain unchanged in 1999.
However, while the overall tax rate has been frozen, the individual rates for the city’s four property tax classes have changed since 1992 and will change again in 1999. This results from the fact that market values have grown faster than average in some classes and slower than average in others, changing the distribution of total assessed value among the four classes. Under state law, these changes trigger adjustments in the shares of the total property tax levy borne by each class, thereby raising property tax rates for some classes and lowering them for others.
State law also requires that the increase in any class’s share of the levy attributable to market value growth can not exceed five percent in one year. When changes in underlying market values would result in a class share increase exceeding five percent, the City Council chooses how to allocate the excess burden among the other classes—that is, the Council determines which individual class tax rates must grow a little more or fall a little less in order to ensure that no class tax rate will rise too much. Apart from this, the Council has no discretion over the setting of the individual class property tax rates. If the Council or the Mayor wish to further limit the annual changes in class shares, they must appeal to Albany for interim legislative relief.
As part of this year’s budget battle, the Mayor lowered his non-property tax revenue projections. As noted above, because property tax revenue is the plug in the budget, the Mayor apparently expected his actions to force the Council to make up the difference by taking the politically unpopular step of increasing revenues from the property tax. The Mayor’s charter-mandated submission of estimated revenues called for a higher levy, ending the freeze on the average tax rate. The Council resisted, choosing instead to lower the reserves for non-payments and refunds and to increase the estimates for collections from prior years rather than raising the levy.
The property tax levy in the adopted budget keeps the average rate frozen, although as in prior years, some rates rose while others fell. The class 1 rate increased by 3.4 percent and the rate for class 3 grew by 8.8 percent. For class 2, the rate fell by 2.8 percent, and for class 4 the decline was 0.3 percent. The class 1 rate increase for 1999 is much larger than in the prior three years when it averaged 0.5 percent. However, the 1999 increase still lags the growth in market and assessed values for the class.
Even though the Council set the new tax rates, the Mayor instructed the Department of Finance to produce bills for 1998/99 using the 1997/98 tax rates. While the city has occasionally prepared property tax bills using the prior year’s rates, it was in years when the rates were set too late for Finance to use when preparing and mailing bills which must be received by taxpayers before the start of the fiscal year on July 1st. It is extraordinary for the city to not use the adopted rates when they are available. By using last year’s rates, the Mayor has made it certain that city will need to send new bills later this year, at an estimated minimum cost of $400,000. (Rebilling might be necessary in any case, if the Mayor and the Council eventually resolve some of their disagreements.) In a letter included with the bills mailed to property owners, the Commissioner of Finance gives a number reasons for taking this action.
The letter refers to the Council’s tax fixing resolution as "invalid and improper" and in violation of the City Charter, because the rates were set on June 8th, rather than June 5th, as mandated. Given that the Mayor did not deliver his estimate of non-property tax revenues—which is needed before the rates can be set—until shortly before midnight on June 5th, it would have been virtually impossible to meet the deadline. Instead the Council delayed until the next business day—Monday, June 8th—to adopt the tax fixing resolution. In past years, the Mayor and the Council have always worked together to adjust the various budget milestone dates in the Charter to accommodate each other’s scheduling needs.
The letter also blames the Council for the increase in the class 1 rate and pledges that the Mayor will work to have it reduced. However, once the class shares of the levy have been determined, the Council has no discretion in setting the individual class rates under existing law. It is true that in five of the six previous years the Mayor and the Council have worked together to secure legislation in Albany which has lowered the cap on changes in the shares of the levy in a series of one-year interim amendments. For example, last year’s cap was lowered from 5 percent to 2.5 percent. With a lower cap, rate increases in classes with growing shares are constrained but not eliminated. Moreover, it is not clear that the Mayor and Council would have jointly sought such a reduction in the cap this year. Nor is it certain that if they did combine forces that they would have been successful, or by how much the cap would have been lowered. In short, the Council followed existing state law in setting tax rates using levy shares based on a 5 percent cap. The Mayor’s assertion of the right to ignore such action and bill taxpayers using levy shares which do not conform with state law raises questions about the division of budgetary powers between the legislative and executive branches.
Finally, it should be noted that the desire to protect some property owners from rate increases, protecting class 1 may not be desirable from the perspective of equitable tax policy. By lowering the cap to protect homeowners in class 1, the excess burden must be shifted to other classes, at least until they too hit the cap. In setting the class shares this year, the Council had already shifted excess growth above the 5 percent cap away from classes 1 and 3, onto class 4. A lower cap would almost certainly have forced a shift onto class 2 as well. Given that the effective tax rate (property tax as a share of market value) in class 1 is already much lower than in classes 2 and 4, it is not clear that shifting additional burden to these classes is appropriate.
II. Expense Budget
IBO Expenditure Reestimates. IBO's pricing of the 1999 adopted budget contains $870 million more spending than is reflected in the budget. In short, IBO projects the city will spend more largely because of the availability of $804 million more in state and federal categorical grants. IBO also projects city-funded expenditures will be $255 million higher than the adopted budget. Excess city-funded expenditures are mostly offset by IBO's projected surplus of unspent city funds at BOE, resulting in a net effect of $66 million more in city-funded spending than the adopted budget. The following describes our reestimates:
We project $27 million more in city-funded expenditures for public assistance in 1999 than provided in the budget. This results from our projection that the city’s public assistance caseload will decline to an average of 754,000 in the coming year, 42,000 higher than projected by the Council as part of its adjustment to the executive budget.
IBO projects more in city-funded Medicaid expenditures in 1999 than provided in the budget. The Mayor’s executive budget had projected city-funded Medicaid spending at the Human Resources Administration (HRA) to reach $2.2 billion in 1999. At adoption, the Council reduced that appropriation by $20 million, expecting that inpatient utilization would continue to decline at a quicker pace than anticipated by the Mayor. We project that Medicaid spending will exceed the Mayor’s forecast by about $8 million, or $28 million higher than projected by the Council.
Consistent with a projected roll by the Board of Education (BOE) of $250 million in unspent funds from the current fiscal year into next year, IBO estimates city-funded appropriations in the final adopted budget will exceed actual BOE expenditures in the coming year by $189 million. That amount includes $15.5 million in additional education spending in the budget.
In IBO’s analysis of the Mayor’s executive budget, we estimated that overtime appropriations for the coming year were underfunded by $27 million. In its adjustments to the executive budget, the Council further reduced overtime appropriations in the city’s four uniformed agencies (Police, Fire, Correction, and Sanitation) by a total of about $20 million. With the exception of a $4 million reduction in the Department of Correction due to savings related to uniformed headcount increases, we estimate that overtime appropriations in the budget are underfunded by a total of $43 million.
The Council’s adopted budget reduced the labor reserve allocation by $13 million based on a reestimate of the cost of collective bargaining agreements not yet negotiated. Given that the executive budget already reflected an earlier financial plan reduction in the 1999 allocation for the labor reserve, IBO assumes that the executive budget amount is necessary to maintain sufficient funding for unsettled contracts and therefore the budget is underfunded by $13 million.
Finally in his executive 1999 budget, the Mayor removed the budget lines itemizing spending and revenue for the New York City Transitional Finance Authority (TFA) debt service. As in its May report, IBO continues to show the $144 million in 1999 TFA debt service expenses and personal income taxes collected to pay for TFA debt service.
Expenditure Changes in Selected Agencies
The 1999 adopted budget contains a number of expenditures that differ from the Mayor’s executive budget. Below are descriptions of some of the more significant changes in selected agencies.
Administration for Children’s Services (ACS). Child Care. The adopted budget provides $25.6 million in child care funds to the Agency for Child Development (ACD). The increase represents $18.1 million in new city funds and $7.5 million transferred from the Office of Employment Services (OES). These funds will translate into approximately 4,300 city-funded ACD child care slots. About $22.5 million in state and federal matching funds are also available from the OES transfer, for about 3,450 ACD slots. (Those figures do not account for the reduction in OES slots.) In contrast, there were no increases to the number of ACD slots in the Mayor’s executive budget.
The $18.1 million in additional city funds are allocated for the following types of child care: $8.2 million for 1,350 family day care slots; $6.8 million for 1,050 center-based slots; and $800,000 for about 400 collaborative and extended-day Head Start slots. An additional $2.1 million is designated to fund about 350 vouchers at an average family day care rate of $6,100 per voucher. According to the Council, ACD has identified providers that would be able to put these funds to use immediately to increase the number of child care slots. A speedy expansion could be important, since in March 1998 there were 26,500 children on ACD’s waiting list.
The $7.5 million transferred from OES will support ACD slots at the center-based care rate of $6,500 per slot, giving emphasis to licensed over unlicensed care. (OES annually spends about $5,118 per slot since it funds a higher proportion of unlicensed child care.)
Child Welfare. The Council added over $10 million to the Mayor’s executive budget for ACS to support foster care and prevention services. Namely, $3.4 million was added to increase the foster boarding home reimbursement rate, currently below the maximum state aid rate (MSAR). If matched by state and federal funds, this would bring foster home reimbursement up to 100 percent of the MSAR. The Council also added $4.5 million for parent stipends in order to restore a part of the cut to those stipends taken in 1996. Another $800,000 would ensure that no foster care agency receives less than $17 per child per day for placement and monitoring of children in care if fully matched by state and federal funds. Also, $1.5 million was added to support prevention programs at the new Beacon schools.
Board of Education (BOE). The adopted budget increases the Mayor’s executive budget for BOE by $15.5 million for a variety of initiatives. Of that, $7 million was added to Community School District allocations and fringe benefits to hire 306 paraprofessionals in overcrowded districts. The new support personnel would be used to increase the ratio of adults to children in the classroom. In addition, $7 million was added for equipment which represents $4 million for the replacement of antiquated furniture and $3 million for maps, atlases, and related geographic software. The Council also allocated $800,000 for after-school sports and arts programs and about $515,000 for initiatives targeted to specific schools.
In BOE’s capital budget, the Council added $100 million for the replacement of coal burning furnaces and about $35 million for computer installation at specific schools. The Council also amended BOE’s budget to require a class size reduction feasibility study and implementation plan this year.
Debt Service. The adopted budget reduces appropriations for debt service by $32.9 million. The net decrease represents a combination of actions taken for 1999. A savings of $58 million in long-term debt service, along with a savings of $23.9 in temporary debt service, is the result of lower projected interest rates. The Council assumes interest rates will be lower than those projected in the executive budget. The Council also appropriated $116 million less to the budget stabilization account than the Mayor’s executive budget, which brings the account back to the adopted fiscal year 1998 level. Finally, the Council appropriated $165 million to fund the retirement of high interest debt.
Department for the Aging (DFTA). The Council added about $4.5 million to fund five social adult day care programs (one per borough) and 166 local initiative contracts.
Department of Correction (DOC). The budget decreases total appropriations for DOC by $6.7 million below the executive budget. The decrease principally comprises a $1.6 million cut in non-personnel related appropriations for the coming year, as well as cuts in overtime appropriations for uniformed personnel. The latter should be considered a low-end estimate given that uniformed correction overtime appropriations were already $5 million lower than recent annual spending averages.
Department of Cultural Affairs (DCA). The Council restored the Mayor's budget cuts to the Department of Cultural Affairs and added funding for Council initiatives for a total of $21.1 million. The restorations would reverse a 50 percent cut to the program services budget, which supports small arts groups throughout the city. Also restored is a 17 percent cut to funding for cultural institution groups (CIGs), which include many of the city's larger cultural institutions like the Metropolitan Museum of Art and the Brooklyn Academy of Music.
Department of Health (DOH), Department of Mental Health (DMH). The Mayor’s executive budget contained a proposal that would create a single agency to provide the services for which two separate agencies—the Department of Health and the Department of Mental Health—are currently responsible. The executive budget proposed $785 million for the new Department of Public Health, coupling the DMH and DOH budgets. The adopted budget, however, reverses the merger and makes minor expenditure changes to each agency.
Department of Homeless Services (DHS). The budget includes a significant new program to create 3,500 rent vouchers to move homeless adults and families from shelters to private housing. As conceived, the program would result in savings of about $3 million in 1999, with the expectation that the reduction in shelter usage and expenditures would more than offset the new voucher costs. To fund the vouchers, the city would need permission from federal and state officials to redirect funds normally used for temporary shelter.
Department of Parks and Recreation (Parks). The adopted budget for the Parks Department restores $3 million cut in the Mayor’s executive budget and adds another $4.8 million. The restoration includes $1.5 million in funding for 55 year-round Urban Park Service positions and $1.5 million for contract maintenance work. The Council’s additions include $2 million for 51 maintenance workers, 51 playground associates, and two recreational specialists. The balance of $2.8 million funds tree removal, a water safety program, and an unspecified maintenance and operation initiative.
Department of Probation (DOP). The budget provides $2 million in funding to DOP for monitoring, counseling and other support services to individuals who have been sentenced to probation. Of that amount, slightly over $1 million funds preemployment training, permanent job placement services, and programs to reduce crime and recidivism. Another $712,000 would restore funding to an alternative-to-incarceration program slated for elimination in the Mayor’s executive budget. This funding, coupled with state funding, is anticipated to serve 200 probationers in 1999. The budget also restores $377,000 to alternative-to-court, a program designed to reduce recidivism and prevent drug use and criminal behavior among juveniles. The funds would support services to 1,400 juveniles in 1999. The executive budget had proposed elimination of the program.
Department of Sanitation (DOS). The Council adopted programmatic restorations of roughly $14.3 million to DOS for 1999. The bulk of these funds support recycling. The Council allocated $5.4 million to increase the frequency of recycling collection to every week in the 41 sanitation districts that now receive bi-weekly collection. Another $3 million will be devoted to providing outreach and education to inform city residents of the new recycling schedule. Finally, $1 million will be added for education and outreach in those districts where recycling rates are the lowest in the city. The balance of restorations primarily fund collections and DOS positions.
Department of Youth and Community Development (DYCD). The adopted budget for DYCD contains funding for new programs and restores funding cut in the Mayor’s executive budget. The After Three Program, an after school program initiated by the Council, received $5 million. Also, on top of the 39 Beacon schools already funded in 1998, four more were added at $1.8 million for 1999. Further, $3.3 million was restored and $2 million added to Youth Delinquency and Development Programs, a major source of youth services contract funds. Those funds will maintain and build upon an increase granted to contract agencies in 1998.
Housing Preservation and Development (HPD). The budget adds $4.7 million in funds to the Department of Housing Preservation and Development. Of that amount, $2 million will fund 78 additional housing inspectors. Those inspectors, as part of HPD’s Office of Housing Preservation, will ensure compliance with the city’s housing code. In addition, $2 million will fund 11 legal aid programs to provide anti-eviction and single-room-occupancy (SRO) legal services.
Human Resource Administration (HRA). Food Assistance Program. Recent federal legislation restored Food Stamp benefits to most legal aliens who are currently covered by the city-funded Food Assistance Program (FAP). As a result, the Council reduced the FAP budget by $21 million. While the future of the FAP program remains unclear, the adopted budget maintains over $6 million in city funding to continue benefits for some elderly recipients who may not be covered by the new legislation.
Independent Budget Office (IBO). The budget funds IBO at $2.7 million for 1999, its legally required level. The Mayor had proposed to cut all funding for IBO and sought authority from the state to abolish the charter-mandated agency. Thus far, no action has been taken in Albany on the legislation.
Libraries. The budget restores the Mayor's cut of $15 million in the executive budget for libraries and adds $7.1 million to fund a program that links public schools with libraries, and other initiatives. The new spending would bring the city's support for the library system up to its highest level since 1990.
Police Department. The budget decreases total appropriations for the Police Department by $22.1 million as compared to the executive budget. The decrease principally comprises a $15.5 million cut in non-personnel related appropriations for the coming year, as well as a $5.4 million cut in overtime appropriations for uniformed personnel.
Miscellaneous Budget. Alternative-to-Incarceration Programs. The budget provides a total of $4.5 million for 12 alternative-to-incarceration programs to be funded in the miscellaneous budget. Most of the funds restore current contracts funded for 1998 but not included in the Mayor’s executive budget. These programs are separate from alternative-to-incarceration programs funded through DOP.
Criminal Defense. The budget provides $10 million for the Legal Aid Society to more adequately provide indigent criminal defense services. That funding is a partial restoration of reductions to Legal Aid’s budget over the last few years. Also, $2 million has been allocated to restore funding for the Neighborhood Defender Service which provides community-based indigent defense services.
Labor Reserve. The labor reserve was reduced $13.2 million based on a reestimate of the projected cost of collective bargaining contracts which have not been settled.
Assigned Counsel (18-B) Program. The Council reduced the allocation for the assigned counsel program by $10 million. The impact of the reduction would be mitigated through cost containment and productivity programs.
Fringe Benefits. The Council increased the allocation for fringe benefits by $4.4 million due to personnel changes included in the adopted budget.