THE CITY OF NEW YORK

INDEPENDENT BUDGET OFFICE

110 WILLIAM STREET, 14TH FLOOR

NEW YORK, NY 10038

May 15, 1998

Chapter

1

As required by Section 252 of the New York City Charter, the Independent Budget Office (IBO) has prepared this analysis of the Mayor’s executive budget for 1999. Earlier this year, IBO issued reports on New York City’s long-term fiscal outlook as well as the Mayor’s preliminary budget for 1999 and financial plan through 2002. This report updates our forecast of the city’s economic and fiscal outlook in light of the recently released executive budget and revised financial plan.

As displayed in Figures 1-1 and 1-2, IBO projects fiscal year 1998 will end with a surplus of about $2.0 billion, including $17 million more in surplus funds than estimated in the Mayor’s financial plan. The city’s sizable current year surplus is primarily attributable to local tax revenues being generated at a far greater rate than anticipated at the start of the year, which in turn is in large part a result of the continuing record profitability of Wall Street securities firms.

The Mayor’s financial plan and 1999 executive budget proposes using the 1998 surplus to prepay debt service costs scheduled for payment in 1999 and 2000. At the close of the year, surplus funds can be utilized to prepay debt service costs otherwise payable in the subsequent year, thereby in effect allowing a given year’s surplus to be "rolled" forward into the ensuing fiscal year. (State law requires the city to spend all surplus funds during the year they are generated.) The Mayor’s financial plan proposes to use the current year’s surplus to prepay debt service costs otherwise payable in 1999, and tentatively earmark $416 million of the resulting 1999 debt service savings for prepayment of debt service presently scheduled for payment in 2000.

Figures 1-1 and 1-2 show IBO’s projected surpluses and gaps for 1999 through 2002 under the Mayor’s executive budget and financial plan. Our projections assume adoption of the Mayor’s proposal to spend 1998 surplus funds to reduce debt service costs presently scheduled to be paid next year. However, for illustrative purposes, we depart from the executive budget by assuming that the Mayor’s aforementioned $416 million debt service prepayment will not occur. This assumption on our part, along with our projection that revenues next year would outpace expenditures by $653 million, results in a projected surplus of nearly $1.1 billion in the coming year, followed by a gap of $2.0 billion in 2000.

In contrast, the Mayor projects a balanced budget in 1999 and a shortfall of $1.5 billion in 2000. Beyond 2000, we project budget gaps of $2.2 billion and $1.8 billion in 2001 and 2002, slightly larger than those projected in the Mayor’s financial plan. These gaps result from our projection that expenditures will grow at a substantially faster pace than revenues beyond 1999, as shown in Figure 1-3.

While the strength of the local economy is helping the city solve many of its near-term budget problems, persistently large projected out-year gaps at this point in the business cycle could be an omen of difficult times ahead. If the city follows its recent practice and uses the lion's share of its 1999 surplus to prepay debt service scheduled for 2000, the projected gap looking two years ahead would be at its lowest level (3.7 percent of city funds) since the 1990 executive budget. However, the projected gaps for 2001 and 2002 (8.9 percent and 7.0 percent of city funds—excluding yet to be negotiated collective bargaining pay raises) remain much larger than the comparable out-year gaps of the mid- and late-1980s, the city's previous period of sustained economic growth. In fact, the 1988 and 1990 executive budgets actually projected surpluses at the end of the respective plan periods.

Those projected surpluses, of course, were rapidly transformed into large deficits by the steep recession of the early 1990s. But the city's fiscal situation would have been even more dire had it entered that period of rapidly declining revenues and rising spending needs with significant out-year budget shortfalls. The danger facing the city today is that even a modest slackening of the still-robust growth forecast for the next four years could quickly push projected out-year budget gap percentages back up to the double-digit levels of the early 1990s. Spreading surplus 1999 funds over the entire financial plan period and beyond by reducing the city's outstanding debt would help fortify the city's long-term fiscal position.

IBO expects economic growth, very strong here and nationwide over the past two years, to slow towards the end of calendar year 1998 and remain slow in 1999 before accelerating in 2000. These changes in the economy play a significant role in our revenue projections.

With recent data showing that economic growth and tax collections have remained robust, we have revised up our forecast of baseline 1999 tax revenues—excluding proposed tax cuts—by $266 million since March.

IBO’s new baseline tax revenue forecast of $20.7 billion for 1999 is $649 million greater than projected in the Mayor’s executive budget. Of this difference, $505 million reflects the true difference in the two forecasts, while $144 million is due to accounting differences (see below). Most of that difference is attributable to differing estimates of cyclically sensitive personal and business income taxes. Similarly, for the 2000 through 2002 period, IBO’s forecast of baseline tax revenues is considerably more optimistic than the executive budget.

In a marked departure from past practice, the executive budget has removed both personal income tax revenues dedicated to the Transitional Finance Authority and commercial rent tax revenues dedicated to a proposed Sports Facilities Corporation from the city’s revenue budget. Because both of these organizations provide services exclusively to the city, IBO will continue to carry these dedicated revenue streams in the city revenue budget. We have adjusted the executive budget forecasts accordingly.

IBO estimates that total spending under the policies proposed in the Mayor's executive budget would decrease overall spending from $35.6 billion in 1998 to $35.0 billion in 1999. If debt service prepayments are excluded, however, spending would rise to $36.5 billion. Under the four-year financial plan proposed by the Mayor, spending would increase to $39.9 billion in 2002.

The portion funded with city-generated revenues would be $24.4 billion in 1998 and $23.7 billion in 1999, rising to $27.9 billion in 2002.

IBO forecasts higher spending on public assistance than amounts projected in the Mayor’s budget. Two provisions of the welfare reform law—increasing work quotas for adult welfare recipients and setting a five-year lifetime limit on federal assistance—will likely have a particularly strong impact on future caseloads and expenditures. While IBO projects a slower but more extended pattern of caseload decline for the Family Assistance (FA) program than foreseen by the Mayor, we expect the state- and city-funded Safety Net Assistance (SNA) caseload to soon bottom out and gradually start to rise again. Overall, IBO projects additional city spending on public assistance (over and above the Mayor’s plan) of $15 million in 1999 growing to $93 million by 2002.

IBO estimates that Medicaid expenditures at the Human Resources Administration will slightly exceed those contained in the Mayor’s executive budget. Accordingly, IBO projects more city spending on medical assistance¾ $8 million in 1999 rising to about $26 million each year thereafter¾ than contained in the Mayor’s budget.

IBO has developed a model to forecast Board of Education expenditures based in large part on the fact that enrollment is a significant factor driving expenditures. We project that overall city-funded spending will increase by $267 million in 1999. Our estimate of spending, however, is $173 million lower than the Mayor's budget because the Administration proposes to roll a projected year-end surplus of $200 million into 1999 for one-year funding of various programs. We forecast education spending would be $22 million higher than the Mayor's budget in 2000 rising to $76 million more in 2002. In addition to enrollment, IBO’s estimate reflects the net impact of various mayoral initiatives, collective bargaining increases, and inflation.

IBO projects higher spending (above the Mayor’s budget) on city employee overtime costs¾ $27 million annually through 2001 and increasing to $70 million for 2002. Those higher costs are being driven by implementation of crime prevention and drug eradication initiatives by the Police Department and other initiatives involving agencies which provide social services.

Chapter

This chapter begins with a review of the economic forecasts for the nation and the city, followed by IBO’s baseline tax revenue forecast. IBO’s baseline does not incorporate tax reduction initiatives proposed for 1999 and beyond; our reestimates of these tax program impacts are carried separately and discussed in the third section of the chapter. The chapter closes with a review of miscellaneous and other revenues.

In marked departures from past practice, the executive budget has removed both personal income tax revenues dedicated to the Transitional Finance Authority (TFA) and commercial rent tax revenues dedicated to a proposed Sports Facilities Corporation (SFC) from the city revenue budget. As noted earlier, IBO believes that TFA provides and SFC would be providing services exclusively to the city and that both should be reported as component units of the primary government. IBO will therefore continue to carry both dedicated revenue streams in the city revenue budget.

The revenue forecasts in this chapter are based on our projections for the U.S. and New York City economies. IBO expects economic growth, very strong here and across the country over the past two years, to weaken toward the end of calendar year 1998, and remain slow in 1999 before accelerating in 2000.¹

Recent Developments. The U.S. and New York City economies both performed very well in 1997. U.S. employment increased by 2.3 percent, or 2.7 million jobs (see Figure 2-1). Real gross domestic product (GDP) increased 3.8 percent, the fastest year-over-year growth since 1988. In spite of this strong growth, inflation has remained low. The consumer price index (CPI) rose by only 2.3 percent in 1997, the slowest growth in that index since 1986.

The New York City economy had a strong 1997 as well. The number of jobs in the city increased by 56,000, or 1.7 percent. Most of the 1997 employment growth was in the service sector, which boasted 44,000 more jobs in 1997 than in 1996, a growth rate of 3.6 percent. Earnings in both the service sector and the finance, insurance, and real estate (FIRE) sector surged past $50 billion, with service sector earnings growing by 7.2 percent and FIRE sector earnings growing by 9.2 percent.

Many New York City residents fared less well in 1997 than those earnings and total jobs figures would suggest, however. Employment among residents increased by just 21,000, while the labor force (residents who work or are looking for work) increased by 44,000. As a result, the city’s unemployment rate rose to 9.4 percent.

National Outlook. IBO’s economic forecast is governed by two principal factors, tightness in the labor market and financial turbulence in Asia. In each of the five years from 1993 to 1997, employment across the nation grew at a faster rate than the labor force. The current U.S. unemployment rate is the lowest since 1973. In the next few years, firms will find it increasingly difficult to fill jobs with suitable workers. That labor shortage is expected to constrain economic growth and lead to increases in wages and prices. The financial crisis in Asia is expected to have a more immediate impact on the American economy. Weakness in Asian economies and the relative strength of the dollar will tend to reduce exports, increase imports, and slow U.S. economic growth.

IBO expects the rate of growth in the national economy to decline in 1998 and 1999, as a result of the crisis in Asia and labor force constraints. We forecast a decrease in real GDP growth from 3.8 percent in 1997 to 3.0 percent in 1998 and 2.0 percent in 1999. As the Asian economy recovers, we expect an increase in the rates of growth of GDP and employment. Given the tightness in the labor market, however, these increases will lead to rises in wages and prices. The IBO forecast calls for the CPI to rise 2.2 percent in 1998, 3.0 percent in 1999, 3.1 percent in 2000, and 3.4 percent in the last two years of the forecast. Tighter Federal Reserve monetary policy, necessary to control those inflationary pressures, will also push up the 30-year Treasury bond rate.

The Mayor’s forecast of U.S. economic growth is similar to IBO’s: a decline from 1997’s strong rate of growth in GDP, followed by an acceleration in 2000. IBO’s national forecast differs from the Mayor’s in projecting a sharp increase in inflation and a rise in the 30-year Treasury bond rate beginning in 1999.

New York City Outlook. Slower growth in the national economy will lead to slower growth for New York City income and employment as well. Earnings in the city’s FIRE sector benefit from increases in corporate profits nationwide and rising stock prices. IBO expects growth in corporate profits to decline from 7.9 percent in 1997 to 4.0 percent in 1998 and 2.9 percent in 1999, and the growth in New York City’s FIRE sector earnings to decline from 11.4 percent in 1997 to 4.8 percent in 1998 and 4.1 percent in 1999. Beginning in 2000, as the national economy rebounds, the city’s FIRE sector will also strengthen, with earnings growth projected to reach 4.9 percent in 2002.

IBO’s forecast for employment follows a similar pattern: strong recent growth will slow in 1998, slow further in 1999, and then accelerate somewhat in the out-years of the forecast. In the service sector, which has been the city’s main source of job growth, employment growth will slow from 3.6 percent in 1999 to 2.7 percent in 1998 and 1.9 percent in 1999. After generating 44,000 new jobs in 1997, the service sector will create 35,000 and 25,000 jobs over the next two years. In the FIRE sector, rapid earnings growth has not been accompanied by impressive growth in jobs: jobs in the FIRE sector increased 1.0 percent in 1997. IBO expects no growth in FIRE sector employment in 1998 and a decline in 1999, due to a combination of continued restructuring in the banking industry and slower earnings growth. Overall, the growth in city jobs will decline from 1.7 percent in 1997 to 1.4 percent in 1998 and 0.6 percent in 1999. For the remaining years of the forecast, IBO expects jobs to grow at a rate of 0.8 percent annually.

Both the Mayor’s and IBO’s forecasts call for New York City personal income growth to decelerate in 1998 and 1999. The two forecasts differ slightly in the timing of the recovery; IBO projects that city personal income growth will begin to accelerate in 2000, while the Mayor’s forecast calls for the acceleration to occur in 2001. The forecasts also differ in the levels of income growth projected, which are higher in the IBO projection in every year. On the other hand, the Mayor’s forecast is more optimistic in its projection for employment growth, particularly for 1999, when OMB’s forecast calls for employment to increase by 1.2 percent.

New York City tax revenues will total $20.4 billion in 1998, reflecting growth of 5.7 percent over 1997. The sharpest growth will be found in personal income and business taxes, both of which will increase by more than 10 percent over 1997. Those increases reflect the remarkable performance of the local economy, particularly in the financial sector. IBO expects that tax revenues will increase very slightly in 1999, as a result of slower economic growth and already enacted tax cuts. Total baseline collections—before accounting for the impacts of tax reductions proposed by the Mayor—are projected to equal $20.7 billion for 1999, a growth rate of 1.2 percent. For 2000, 2001, and 2002, IBO expects slow growth, with total tax revenues reaching $22.5 billion in 2002.

It should be noted that the forecast of total tax revenues presented here includes personal income tax receipts dedicated to the Transitional Finance Authority (TFA), which are scheduled to increase substantially during the forecast period to over half a billion dollars by 2002. From the preliminary to the executive budget, the administration eliminated TFA-dedicated receiptss from the presentation of tax revenues, making analysis of the budget more difficult. Comparisons of IBO's and the Mayor's baseline revenue projections made here control for the different treatment of TFA revenues.²

While baseline tax revenues are expected to grow at an average annual rate of 2.4 percent over the forecast period, the rates of growth among the four major tax groups vary widely. Property tax revenues are predicted to increase at an average rate of 3.3 percent annually over the forecast period. After a long lag, property tax revenues are beginning to reflect the growth the local economy has experienced in recent years. Some of the growth in 2000, however, results from the scheduled sunset of the coop and condo abatement program, which will cost the city $159 million in 1999. After a very strong 1998, IBO projects modest growth for personal income tax (PIT) revenues in the coming years—average annual growth of 1.6 percent. Growth for the PIT will be reduced by the increasing tax cuts prescribed in New York State’s School Tax Relief (STaR) program.³

IBO’s baseline forecast of general sales taxes show a steady increase over the forecast period for an average growth rate of 4.3 percent. In the last three years of the forecast period, much of this growth is expected to reflect rising prices rather than increasing sales. IBO projects business income taxes to grow at an average rate of 0.4 percent between 1998 and 2002. These cyclically sensitive taxes are forecast to rise at the very strong rate of 12.6 percent in 1998, but their growth will slow as a reflection of weaker growth in the national economy and in the profits earned by the city’s financial sector firms, as well as already enacted tax cuts.

Property tax collections are projected to total $7.3 billion 1998 and then increase by 1 percent to $7.4 billion in 1999. For the three subsequent years, revenues are projected to grow by nearly 4.1 percent annually, reaching $8.3 billion in 2002.

Property tax revenues are made up of payments for liabilities under the current year’s levy and payment of outstanding liabilities from prior years. The 1999 levy will be based on the assessment roll that was released by the Department of Finance in January 1998. Following Finance Department and Tax Commission adjustments in response to taxpayer appeals, the roll becomes final later this month. After accounting for the state’s recent enactment of an accelerated senior citizen exemption under the STaR program, the final 1999 assessment roll is expected to show taxable billable assessed value of $77.7 billion, an increase of 2.2 percent over 1998.

Assessments for Class 1 properties (one-, two-, and three-family homes) will fall by 0.5 percent, although they would have grown by over 2 percent without STaR. Despite the impact of STaR, assessments in Class 2 (apartment buildings with more then three units) are expected to grow by 3.2 percent. Most strikingly, assessments in Class 4 (office buildings and other commercial properties) are expected to show their first increase since 1992, with billable assessed value growing by 2.4 percent. The overall growth in assessments on the 1999 roll will yield an estimated levy of $8.1 billion, 2.1 percent higher than 1998.

The 1999 levy largely reflects the state of the real estate market in calendar year 1997, a year in which recovery become apparent in virtually all sectors of the city’s real estate market, finally reflecting—after a long lag—the improvement in the rest of the local economy. IBO’s forecast of continued growth in the city’s economy over the next several years is expected to produce steadily growing assessments and tax levies for fiscal years 2000 through 2002, with the levy increasing from $8.3 billion to $8.8 billion over that period. Growth in the levy will be constrained by the impact of the STaR exemption, which is projected to reach $189 million by 2002. Although property tax assessments and revenues decrease due to STaR, the city will be reimbursed by the state for the lost collections so that there is no impact on the city’s overall budget.

Revenue growth due to the increase in the tax levy is partially offset by scheduled increases in the cost of two tax abatement programs. The lower Manhattan commercial revitalization program includes a partial property tax abatement for qualifying buildings with new leasing activity. For 1998, the cost is projected to be $7 million, rising to $29 million in 1999 and $52 million in 2002. The cost of the coop and condo abatement, which helps bring the property tax burden of apartment owners closer to the burden on Class 1 properties, is projected to increase from $92 million in 1998 to $159 million in 1999.

IBO’s estimate of the 1999 real property tax levy is virtually identical to the Mayor’s. In contrast, IBO’s estimates are 0.4 percent, 1.2 percent, and 2.2 percent lower than the Mayor’s in 2000, 2001, and 2002, respectively.⁴ These differences are attributable to IBO’s less optimistic forecasts of market indicators, somewhat higher estimates of the impact of STaR, and our differing methodologies for translating market value growth into assessment growth.

IBO’s property tax revenue projections are slightly above the Mayor’s for 1998 and 1999 due to higher forecasts for collections (both current and prior years) and lower estimates for refunds. For 2000 through 2002, IBO’s revenue projections are slightly below the Mayor’s, with the difference largely attributable to differences in the underlying levy forecasts.

As a result of a series of tax reductions in recent years, commercial rent tax (CRT) revenue has fallen by 45 percent since 1993 to $345 million in 1998. Nevertheless, underlying growth in the tax base has remained strong; despite an additional 13 percent rate cut being phased in during 1999, CRT collections are forecast to decline only 6.6 percent to $322 million. Over the 2000 through 2002 period, as a result of rising office rents and continued robust demand for Manhattan retail space, the tax base will continue to grow 3.8 percent annually. For 2000, that underlying growth will offset the impact of the final year of the enacted rate reduction, leaving collections virtually unchanged at $321 million. Collections are then projected to rise to $334 million in 2001 and $347 million in 2002.

IBO’s forecast for 1998 CRT collections is 2 percent below the Mayor’s because of differences in seasonal adjustments for current year collections. The differences between IBO and the Mayor in the final two years of the forecast are due to differing cost estimates for already enacted tax cuts and differing assumptions on rent levels.

Collections from the real property transfer tax (RPTT) and mortgage recording tax (MRT) often vary widely from year to year, because of volatility in the city’s real estate market. So far in 1998, revenue growth for both taxes has been very strong and final collections are expected to be well ahead of initial projections, with the RPTT expected to close the fiscal year at $280 million and the MRT at $240 million. IBO expects this growth to moderate in 1999, with projected RPTT and MRT revenues of $297 million and $255 million, respectively.

For 2000 through 2002, further increases in the number and value of residential transactions, combined with more improvement in the commercial sector, will help sustain continued moderate growth in these two taxes. The RPTT is projected to increase from $309 million in 2000 to $345 million in 2002. For the same period, the MRT is forecast to grow from $265 million to $297 million.

Differences in seasonal adjustments used to project current year collections lead IBO to forecast stronger RPTT and MRT receipts than the Mayor for 1998. From 1999 on, most of the difference between IBO’s and OMB’s estimates for these two taxes is attributable to IBO’s forecast of higher interest rates that will act to dampen increases in the number of real estate transactions.

A number of factors have combined to make PIT collections soar in recent months: sustained local economic growth; high levels of year-end bonuses paid by securities firms; and an extraordinary level of realized capital gains due to both record-high prices in stock markets and the cut in the federal income tax rate on income from capital gains. Whether from employers' withholding payments, taxpayers' quarterly estimated payments, or payments made with final returns, city receipts of the personal income tax (PIT) in the last half year have greatly surpassed the prior expectations of all revenue forecasters. Accordingly, IBO has raised its 1998 PIT forecast by $252 million and now predicts revenues net of refunds will exceed $5 billion—a record amount that is 14.8 percent greater than in 1997. IBO's forecast is $81 million greater than the Mayor's, the latter estimate having been made before April's very strong collections were known.

IBO expects the growth rates of personal income and employment in New York City—along with increases in the stock market and securities firms' profits—to moderate in calendar years 1998 and 1999. As a result, IBO forecasts that PIT revenues will increase just 3.5 percent to $5.2 billion in 1999—the smallest rate of increase in four years. While withholding collections will continue to rise, albeit at a slower pace, estimated payments remain flat and collections from final payments net of refunds will actually decline. A small portion of the decline in final returns payments and the corresponding increase in refunds from 1998 to 1999 is due to the first-year impact of STaR's (New York State's School Tax Relief program) phased-in PIT cuts. Our 1999 forecast is $271 million greater than the executive budget estimate, which is premised on even slower personal income growth in 1998 and 1999.

In the out-years of the forecast, the increasing impact of the STaR program will dampen PIT growth. IBO projects that PIT revenues will remain flat in 2000, though if the STaR cuts were not to take effect collections would grow by 3.2 percent. For the entire 2000 through 2002 period, IBO projects 1.6 percent annual growth in collections, or 3.9 percent expected growth without STaR's impact. The IBO forecasts exceed the administration's by an annual average of $312 million over the same period.

IBO expects general corporation tax (GCT) revenue to reach $1.5 billion in 1998, or 7.5 percent of total revenues. The GCT forecast reflects growth of 3.5 percent over 1997, and it comes in spite of four recent GCT tax reductions that together are estimated to cost $96 million this fiscal year. Underlying that impressive performance are continued growth in the earnings of local firms, particularly in the financial sector, and continued growth in the profits of corporations nationwide.

The impact of the tax reductions, however, is expected to grow in coming years. The gradual elimination of compensation paid to officers as a basis for determining GCT liability, which reduced GCT revenues by $24 million in 1998, is expected to cost $76 million in 2002. Together, the cost to the city of the three GCT tax reductions begun in 1997 will increase from $63 million in 1998 to $130 million in 2002. Increasing use of the limited liability company form of business, which New York State made available in 1994, will also reduce GCT collections by $122 million in 2002. Much of that revenue, however, will be recaptured through the city’s unincorporated business tax.

The increasing impact of the recent tax cuts, combined with the slower projected growth for the national and local economies, leads us to expect that GCT collections will generally decline over the next few years. IBO forecasts that GCT revenue will decrease 5.6 percent to $1,444 million in 1999. GCT collections are expected to continue to decline, reaching $1,412 million in 2001, before rebounding to $1,492 million in 2002. The Mayor’s estimates for GCT revenue are an average of 3 percent below IBO’s, as a result of a slightly less optimistic economic outlook.

Continued local economic growth and last year's unprecedented earnings in the securities industry (which accounts for 14 percent of UBT liability) have fueled collections of the city's unincorporated business tax (UBT). IBO expects 1998 net UBT revenues (gross collections minus refunds) will equal a record $641 million by the end of the fiscal year, 14.3 percent greater than in 1997 but slightly lower than we forecast in March. Still, IBO's forecast is $38 million greater than the Mayor's executive budget estimate, which was generated prior to very strong April collections. (April is a particularly telling month for UBT collections because most partnerships and sole proprietors make their first quarterly payment on the new year's tax liability in addition to making payments with their final returns.)

The 1998 UBT increase marks the third consecutive year of double-digit percentage growth. But with slower growth both of the economy and securities firms' earnings expected in calendar year 1998, a further increase in UBT collections is unlikely for fiscal year 1999. Specifically, for 1999 IBO estimates UBT revenues will remain at $641 million, with $24 million of this year's revenues attributable to new limited liability companies (LLCs) whose formation (in lieu of new corporations) shifts funds from the city's general corporation tax into the UBT. When the expected stream of tax collections is adjusted for the impact of the LLC form of business organization, IBO's 1999 forecast represents a 1.4 percent decline in UBT revenues. Because the executive budget assumes a weaker economy and, therefore, a greater decline in UBT revenues, IBO's 1999 forecast exceeds the administration's by $59 million.

For the out-years of the forecast period, IBO expects growth of UBT revenues to resume, with collections rising to $795 million by 2002. The estimated annual average growth rate is 8 percent, leading IBO's forecasts to exceed the Mayor's by an annual average of $94 million in the 2000 through 2002 period.

Based on collections to date, IBO expects banking corporation tax (BCT) collections to reach $532 million in 1998, reflecting 48 percent growth over 1997. This revenue will account for 2.6 percent of total tax revenues. Like the general corporation tax, the BCT also yields a good deal of audit revenue—$87 million in 1998.

The BCT has been an unstable and unpredictable revenue source. That results from the underlying volatility of bank profits, the fact that a relatively small number of payers account for much of the revenue, and the ability of payers to move income from one year into another to minimize their tax liabilities.

In spite of strong earnings growth in the banking sector, BCT revenue was flat in 1997, with collections of $360 million net of refunds and audits, a slight decline from 1996. The surprising weakness in 1997 BCT receipts underscores the unpredictability of this revenue source, and it may be one reason collections have been very strong in 1998.

Because earnings in the banking sector are expected to slow in the coming years and because 1998 collections have been so strong, IBO expects BCT collections to decline by 10 percent to $481 million in 1999. For 2002, BCT revenues are expected to be $454 million, another 6 percent below 1999 revenues. In spite of these declines, IBO’s forecast is optimistic relative to the Mayor’s, particularly in 1999 when OMB projects $390 million in BCT receipts—$91 million less than IBO. IBO’s forecast is based on the assumption that the strong BCT performance in 1998 was partly due to underpayments relative to current profit levels in 1997.

Continuing the robust performance of the last five years, general sales tax collections will again post strong gains in 1998 and 1999. Even with collections flat in March and April, IBO expects annual sales tax revenues to total $3.0 billion in 1998, 4.7 percent above 1997. Revenues are projected to increase another 5.0 percent in 1999, rising to $3.2 billion. In both years collections will grow at twice the rate of inflation. Excluding the impacts of proposed clothing tax cuts (discussed below), sales tax revenues will continue to grow at a better than 4.0 percent annual rate over the rest of the plan period. But with expected inflation rising to 3.0 percent, the collections increases forecast in 2000, 2001, and 2002 will be more a function of rising prices than of expanding sales.

The major sources of city sales tax collections are retail apparel sales (close to 11 percent of total collections), auto-related sales and services (10 percent), electric and gas utilities (9 percent), eating and drinking places (between 8 and 9 percent), and business services (8 percent).⁵ In the early 1980s, manufacturing generated nearly 10 percent of taxable sales and business services less than 5 percent, but today these positions are nearly reversed. Retail trade overall has accounted for a fairly constant 45 percent of total taxable sales over the past two decades.

IBO’s baseline sales tax growth projections are nearly identical to the executive budget’s in 1998 and slightly exceed the budget over the rest of the forecast period. As a result, IBO’s baseline projections are $10 million higher than OMB’s in 1999, $23 million higher in 2000, and $42 million higher by 2002.

IBO’s baseline sales tax revenue forecast for 2000 and after are considerably higher than our March projections. But these increases ($163 million in 2000, $235 million higher in 2001, and $256 million higher in 2002) are mostly explained by the fact that the preliminary budget incorporated the costs of a $100 clothing exemption into the baseline, while the executive budget does not baseline any of the proposed permanent apparel exemptions. Excluding all clothing tax cut impacts, IBO’s current baseline projections exceed the March forecast by $34 million in 2000, $48 million in 2001, and $62 million in 2002. These increases reflect slightly stronger forecasts for the economic variables used in our sales tax model.

The Mayor’s executive budget proposes new or considerably revised tax reductions for the commercial rent tax, the sales tax, and the personal income tax. In addition, the Mayor’s proposals for reductions in the property tax on cooperative and condominium apartments, the child and dependent care credit, and the tax on subchapter S corporations remain largely unchanged from January’s preliminary budget. As shown in Figure 2-3, IBO estimates that the total cost of these tax reductions would be $278 million in 1999 and grow to $693 million in 2002, about a third of the expected increase in baseline tax revenues.

The largest proposed reduction in 1999 is the acceleration, at the city’s expense, of the state’s STaR personal income tax credit. By 2002, however, the state would reimburse the city for the full amount of the credit to city tax payers. In the out-years of the plan, the proposed exemption from the sales tax for clothing sales under $110 would be the costliest of the new tax programs, accounting for 38 percent of the Mayor’s tax cuts. The proposed reduction in the CRT, projected to cost $86 million in 2002, is much smaller than the reduction proposed in the Mayor’s preliminary budget. Rather than eliminate the CRT, the Mayor now proposes to gradually reduce the rate to 3.0 percent. The difference between the larger cut proposed in the preliminary budget and the more modest cut proposed in the executive budget would be used to fund the city’s contribution to sports facilities. These revenues are removed from total city funds in the executive budget and allocated to a proposed off-budget public corporation. IBO, as discussed above, continues to include all city tax revenues in the primary city budget.

The Mayor’s preliminary budget included a proposal to eliminate the commercial rent tax (CRT) by 2002.⁶ In the executive budget, total elimination of the tax has been postponed indefinitely, replaced with a smaller tax reduction and a proposal to dedicate the "savings" from the smaller tax cut for construction of new sports facilities, including new or refurbished stadiums for the Mets and Yankees.

The CRT is paid by commercial tenants based on the amount of rent they pay to their landlords. Tax liability is determined by a single flat rate applied to the base rent. A sliding-scale credit which phases out as taxable rent increases helps to moderate what would otherwise be a steep rise in the marginal tax paid on rents just over the zero-liability threshold.

Although the CRT tax burden has been lowered several times since its peak in 1977, in the last four years the city has made much more dramatic changes, significantly reducing both the number of firms subject to the tax and the liability of the remaining taxpayers. Since September 1995, only leases in buildings south of 96th Street in Manhattan are subject to the tax, and since June 1997, only tenants with base rents above $100,000 are liable.

For tenants still subject to the tax, the most important change has been a reduction in the effective tax rate, which has fallen from 6 percent to 4.5 percent. Under legislation enacted last year, the effective rate is scheduled to be cut further to 3.9 percent in September 1998. OMB estimates that the cumulative value in 1998 of the cuts enacted since 1995 is $328 million. These reductions account for most of the precipitous fall in CRT revenues (excluding audits) from $629 million in 1994 to $345 million in 1998.

Those enacted changes have greatly reduced the number of CRT taxpayers while increasing the share of large firms still paying the tax. Nevertheless, tenants with relatively modest rents still account for the majority of the remaining taxpayers. Based on rent distributions supplied by the Department of Finance, IBO estimates that over 75 percent of the remaining taxpayers have annual rents of $500,000 or less, paying an average rent of $200,000. Unfortunately, information about the type of firms and the space rented is not available. (For illustrative purposes, however, consider that $200,000 in rent would pay for roughly 13,500 square feet of office space at $15 per square foot, or 2,700 square feet of retail space at $75 per square foot.)

Proposed Changes. The executive budget calls for reducing the effective tax rate on the CRT to 3.4 percent in December 1999 and then to 3.0 percent in June 2001. The estimated costs of these reductions are $20 million in 2000, $44 million in 2001, and $86 million in 2002.⁷ The CRT owed by a firm paying $200,000 a year in rent would fall from $7,800 in 1999 to $6,000 in 2002. Although reducing the effective rate benefits all taxpayers, the dollar value is concentrated at the higher end, with over 60 percent of the benefit flowing to taxpayers with annual rents of $1 million or more.

The proposal in the executive budget to reduce the effective rate rather than eliminate the tax entirely means that CRT collections would be $87 million higher for 2000 than they would have been under the preliminary budget proposal, $200 million higher in 2001, and $305 million higher in 2002. Those differences would form the stream of contributions from the city to the new Sports Facilities Corporation.⁸

Clothing tax cuts make up the largest part of the Mayor’s proposed tax program after 1999. The state government has already enacted a law exempting sales of clothing and footwear priced under $110 from both state and local sales taxes [including the Metropolitan Commuter Transportation District (MCTD) surcharge] as of December 1, 1999. The law strengthens the original legislation, which exempted clothing items only up to $100 and excluded footwear. IBO estimates that the approved exemption would reduce city sales tax revenues by $166 million in 2000, $242 million in 2001, and $252 million in 2002. In addition, the city would be liable for a share of the MCTD surcharge revenues lost from the exemption. This would increase the total city cost of the exemption by $5 million in 2000 and $8 million in 2001 and 2002. The $110 clothing exemption line in Figure 2-3 includes this added cost.

The Mayor is also proposing that the city sales tax on all remaining clothing and footwear sales be eliminated, also as of December 1, 1999. IBO estimates that this would reduce city sales tax revenues by an additional $64 million in 2000, $94 million in 2001, and $98 million in 2002. The proposal does not anticipate comparable further changes in state or metropolitan district taxes; thus the city would incur no additional MCTD reimbursement costs.⁹ As yet there has been no legislative action on this proposed additional cut.

All together, the Mayor’s proposed clothing tax cuts would directly cost the city a total of $234 million in 2000, $344 million in 2001, and $358 million in 2002. These cost estimates (which include the MCTD reimbursements.) are somewhat higher than those contained in the executive budget. There are three reasons for this. First, IBO’s estimate for 2000 assumes a substantial postponement of purchases that would ordinarily occur in autumn 1999 as consumers anticipate the December 1 drop in tax rates. This would boost the share of the fiscal year’s total clothing sales that would fall in the December-to-June period and be tax exempt. In addition, IBO assumes slightly stronger overall sales tax revenue growth and attributes a slightly higher share of overall revenues to apparel sales than does the financial plan.

One of the main arguments for the clothing tax cut is that it would stimulate the city economy, in part by recapturing apparel sales now being lost to New Jersey. It is also argued that the income, property, business, (non-clothing) sales, and other city tax revenues generated by the increased economic activity would offset much or even all of the direct costs of the tax cut. IBO examined this claim in a fiscal brief issued last year (Would Clothing Sales Tax Cuts Pay for Themselves?, June 1997). We found that the tax exemption would indeed significantly boost New York City apparel sales, but because most of the clothing retailed in the city is produced elsewhere, these new sales would have a relatively minor impact on other sectors of the city’s economy and on secondary tax revenues.

IBO currently estimates that the $110 exemption from all state and local taxes would yield secondary city tax revenue increases of $15 million in 2000, $22 million in 2001, and $26 million in 2002. When all tax impacts are fully felt—around 2007—the revenue offset would rise to about $51 million, or 17 percent of direct costs. The proposed city-only sales tax exemption on all remaining apparel sales would generate additional secondary revenue offsets of $3 million in 2000 and $5 million in the next two years (increasing to $11 million annually, or 9 percent of direct costs, when fully felt).

Note that the $110 exemption would be accompanied by larger secondary city revenue offsets relative to direct costs than would the proposed exemption on remaining (over-$110) apparel sales. This is because with the $110 exemption, the city’s economy and secondary city tax revenues would be boosted by both city and state sales tax cuts; with the proposed city-only exemption for items costing more than $110, the extra stimulus provided by a state cut would be absent.¹⁰ However, if all sales taxes were cut on items costing over $110 instead of just city sales taxes, the additional boost to secondary city revenues would initially barely cover the city’s additional MCTD reimbursement costs.¹¹

The Mayor's tax reduction program features a new proposal to accelerate the phase-in of the state's already enacted STaR personal income tax (PIT) credit. If enacted, the proposal would enable taxpayers to receive the credit's full amount three years sooner than currently scheduled.

Under current law, the STaR tax reduction begins this tax year by providing city households a $12 credit against their PIT liability.¹² The credit is scheduled to increase in each of the next three years until it reaches its full value—$125 per household for joint filers and $62.50 for all other filers—for tax years 2001 and beyond. Under STaR, the credit is refundable if its value exceeds pre-tax liability. In addition, the state will reimburse the city for PIT revenue foregone by the STaR tax cuts, with state funding increasing each year along with the size of credit.

Under the Mayor's proposal, taxpayers would receive the full amount of the STaR personal income tax credit beginning in the 1998 tax year instead of 2001. Joint filers would enjoy $125 in the form of a tax reduction, a refunded credit, or some combination of both. For tax year 1998, the state would provide $12 of the credit and the city would assume the remaining cost of the credit—$113.¹³ After tax year 1998, the city's share of funding the credit would decline as state funding increases, with the full cost of the credit borne by the state in tax years 2001 and beyond. Thus, the cost to the city of accelerating the credit is greatest in the short run, when state reimbursement is at its minimum.

Credits for tax year 1998 will be received by taxpayers in fiscal year 1999 when the cost to the city of accelerating the credit would be $203 million. The city's cost would fall by roughly one-third in each subsequent year until it is entirely eliminated by 2002, when the state's credit is fully phased in. IBO's estimates of the city's cost of accelerating the STaR credit are $109 million higher than the Mayor's over the 1999 to 2001 period.

The executive budget retains the previously presented proposal to give resident taxpayers a personal income tax credit for a portion of their child and dependent care expenses, though it redefines the way in which the credit (referred to simply as the child care credit) would be calculated. While the credit was defined as a percentage of the existing New York State credit in the Mayor's preliminary budget, in the executive budget it is defined as a percentage of the federal child care credit, which itself is the basis of the state credit. This redefinition, however, does not change the amount of a credit that a given taxpayer would receive for tax year 1998, when the credit would take effect.¹⁴

The amount of a credit that taxpayers could claim would equal a percentage of the corresponding federal child care credit, with the percentage varying inversely with income. Specifically, taxpayers with New York State adjusted gross incomes (AGIs) of $17,000 or less would be able to claim a credit equal to 50 percent of the federal credit. For incomes greater than $17,000, the applicable percentage decreases by a little over 3 percentage points for each $1,000 increase in income. Finally, the credit remains a constant 10 percent of the federal credit for households with incomes above $30,000.

Under federal law, eligible expenses are capped at $2,400 for one dependent and $4,800 for two or more dependents, and the percentage of eligible expenses that taxpayers may claim as a credit varies with income: 30 percent for AGIs of $10,000 or less, declining to 20 percent for AGIs greater than $28,000. Thus, under the current proposal, the maximum amount of city credit a taxpayer with two dependents could claim would be $720 (30 percent x $4,800 x 50 percent). Unlike the federal credit, the city child care credit would be refundable, meaning a taxpayer with a credit exceeding pre-credit tax liability would receive a check for the difference.

IBO estimates that the proposed child care credit would reduce city PIT revenues by $23 million in 1999, 0.1 percent of total city tax revenues. An estimated 180,000 households would benefit, receiving an average credit of $127 against their tax year 1998 liabilities. The cost to the city would diminish over time, reaching $19 million by 2002, due to inflation. The underlying federal credit is not indexed for inflation, yet inflation boosts taxpayer incomes (in nominal dollars), which in turn makes the credit less generous for many taxpayers. Because the executive budget projects a larger number of beneficiaries and a higher average credit, the administration's estimate of the program's cost is somewhat greater than forecast by IBO.

The Mayor's tax reduction program also retains the proposal to allow resident shareholders of subchapter S corporations (S corps) a credit against their personal income tax liability for a share of New York City general corporation taxes paid.

Subchapter S corporations are a special type of small business whose earnings are exempt from federal corporate income tax.¹⁵ The earnings of S corps in New York State are subject to the state's corporation franchise tax, but most S corps are entitled to pay at a far lower rate—1.125 percent rather than the regular 9 percent. In contrast to federal and state law, under city law S corps receive no preferential treatment and they are subject to the city's GCT like other corporations. The Mayor's proposal would not alter the city's corporate taxation of S corps, but it would benefit city residents who are shareholders in S corps subject to the GCT. These taxpayers would receive a credit against PIT liability equal to the percent of GCT payments attributable to the taxpayer's stake in the S corp.

Modeled after the PIT credit for unincorporated business taxpayers enacted last year, the percentage of GCT liability that could be claimed as a PIT credit would vary with taxpayer income. Residents with taxable incomes up to $42,000 would get a credit equal to 65 percent of their share of S corp liability. The applicable percentage gradually decreases for those with higher incomes, until it reaches a constant 15 percent for shareholders with incomes above $142,000.

With this specification of the proposal, the Department of Finance calculates that the credit, if enacted, would reduce the city's PIT revenues by $34 million in 1999—roughly 0.7 percent of projected PIT revenues—with slightly greater reductions in subsequent years.¹⁶

The tax program calls for extending the existing coop-condo property tax abatement which is scheduled to expire after 1999.¹⁷ The abatement is designed to reduce the disparity in tax burdens between owners of cooperative and condominium apartments on the one hand, and owners of one-, two-, and three-family homes on the other. Although the abatement was intended to last for only three years while the city developed a comprehensive plan to gradually reduce the effective tax rate on class 2 coops and condos to the class 1 rate, no such plan was forthcoming. The Mayor’s tax program now includes only a proposal to extend the abatement at its 1999 level.

The 1998 cost of the current abatement is $92 million. With an already enacted increase in the abatement percentage scheduled for 1999, the projected cost grows significantly to $159 million. IBO estimates that extending the abatement would cost the city $171 million in 2000, $182 million in 2001, and $191 million in 2002. These estimates, which are somewhat higher than the Mayor’s, take into account IBO’s estimates of assessment growth for different types of properties and a gradual increase in the number of qualifying properties. In 2002, the reduction in city revenues accounts for 27.6 percent of the tax program’s cost and equals 2.3 percent of baseline property tax revenues.

The city has many other revenue sources in addition to taxes. This group of non-tax revenue sources—forecast by IBO to bring in $15.1 billion in 1999—includes miscellaneous revenues, state and federal categorical grants, and other anticipated revenues.

Approximately 10 percent of the city’s own-source revenue (revenues excluding state and federal grants) comes from so-called miscellaneous revenues, which comprise nearly 300 different non-tax sources. Miscellaneous revenues are essentially of two types: the recurring portion from sources such as licenses, fines, fees, and water and sewer charges; and a non-recurring portion that includes the sales of city assets and airport back rent from the Port Authority. While recurring revenue can be forecast with reasonable accuracy, there is much greater uncertainty surrounding the non-recurring portion of miscellaneous revenues.

As in March, IBO has identified two items currently planned to provide significant revenues—sale of the Coliseum and airport back rents—that pose considerable risk both in terms of the timing and the realization of receipts. The administration continues to assume that the sale of the Coliseum will be completed in 1998. Because there is so little time remaining to complete the transaction during the current fiscal year, IBO has shifted the $200 million the city expects from the sale into 1999.

Although the administration has moved the planned receipt of airport back rents from 1999 into 2000, IBO still sees little evidence to suggest that this issue will be resolved in the near future or even that it will be resolved in the city’s favor. Therefore, IBO expects airport rent payments to total $35 million in 1999 and subsequent years—considerably below the $365 million, $155 million, and $185 million payments OMB forecasts for 2000 through 2002.

With these reestimates, IBO projects that miscellaneous revenues will equal $2.7 billion in both 1998 and 1999, and then fluctuate between $2.4 billion and $2.5 billion in the out-years of the forecast. Much of the decline after 1999 is directly attributable to the non-recurring nature of receipts generated from the larger items in this revenue category. Based on past experience, however, it is likely that additional assets will be identified for sale in the future years, bringing miscellaneous revenues closer to their recent levels.

The largest revenue item in the city's budget is state and federal categorical grants, which IBO projects will account for $11.2 billion of non-tax revenue in 1999. Categorical grants are monies received from the state or federal government to fund specific expenditures. For some types of categorical aid, most notably education and welfare, IBO has based its forecasts on programmatic changes and caseload projections that affect the level of aid received from the state and federal governments. Forecasts of other types of categorical aid were made on a an agency-by-agency basis using a methodology that takes the grant level in the current year and applies growth factors developed from recent historical trends.

IBO forecasts higher state and federal categorical aid for the 1999 through 2002 period than estimated by the Mayor. For 1999, our forecast for state categorical grants exceeds the Mayor's by $185 million. By 2002 this difference grows to $691 million. IBO's estimates of state education and transportation aid account for nearly three-quarters of the variance in the two 1999 forecasts. Similarly, IBO's forecast of federal categorical grants is $619 million higher than the Mayor's in 1999, a difference that increases to $980 million in 2002. IBO's projections of education, police, and healthcare account for half of the 1999 difference, while social services, children's services, and housing comprise nearly a third.

In the executive budget, other anticipated revenues from state and federal legislative initiatives total $100 million a year from 1999 to 2002, down from $390 million in the preliminary budget. But IBO does not expect any of these additional revenues from legislative actions to be realized. Two initiatives accounting for nearly all of the $25 million in anticipated state funds were rejected in the adoption of the 1998-99 state budget. The remaining $75 million of anticipated revenue is from two federal initiatives to increase revenue sharing and Medicaid reimbursement to urban areas. Neither initiative is included in the President's budget or Congressional budget resolutions, making enactment over the next year unlikely.

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Chapter

IBO estimates that total spending under the policies proposed in the Mayor's executive budget would decrease from $35.6 billion in 1998 to $35.0 billion in 1999. Under the four-year financial plan proposed by the Mayor, spending would rise to $39.9 billion in 2002.

The portion funded with city-generated revenues would be $24.4 billion in 1998 and $23.7 billion in 1999, rising to $27.9 billion in 2002. As discussed in Chapter 1, the rate of growth of city-funded expenditures exceeds that of city-generated revenues resulting in significant budget gaps in the out-years of the financial plan period.

Spending from state and federal categorical grants would be $11.2 billion in both 1998 and 1999, increasing to $11.9 billion in 2002. IBO's estimate of categorical aid, while similar to current year levels, is substantially higher than forecast in the Mayor's budget. Although some of this additional aid may be anticipated by the Mayor, it will not be reflected in the financial plan until received.

In addition to our reestimates of spending, IBO's presentation of the city's operating budget differs from the Mayor's executive budget in two respects. First, the IBO continues to present debt service expenses and personal income tax revenue associated with the New York City Transitional Finance Authority in the city's budget. Second, we continue to present a portion of commercial rent tax revenues, which the Mayor proposes to dedicate to a future New York City Sports Facilities Corporation, as a city revenue. While the Mayor's budget presentation complies with law and does not affect the size of the city's budget gap, it makes it more difficult to evaluate the city's debt burden—particularly for the general public—and obscures the fact that the Mayor is proposing to finance stadiums with general fund revenues.

Figures 3-1 and 3-2 provide details of our reestimate of the spending proposed by the Mayor. (Agency expenditures have been adjusted to reflect an allocation of the labor reserve). A discussion of our reestimates, major initiatives in the Mayor's budget, and other program issues is provided throughout this chapter.

The Mayor’s executive budget includes public assistance caseload projections at the same levels reflected in the preliminary budget. Those projections assume that city welfare policy changes combined with favorable economic conditions will continue to generate caseload declines through 2000 and limit increases thereafter.

Mayor’s Projections. The Mayor’s budget projects that the number of persons on Family Assistance (FA) will decrease from 631,000 in March 1998 to 623,000 in June 1998, 578,000 in June 1999, and 548,000 in June 2000. Similarly, the number of Safety Net Assistance (SNA) recipients is projected to decrease from 160,000 in March 1998 to 155,000 in June 1998, 140,000 in June 1999, and 130,000 in June 2000.

Based on the expected caseload reductions, the Mayor projects that total expenditures for FA will decrease from $1.4 billion in 1998 to $1.2 billion in 1999, and $1.1 billion in 2000 and thereafter. Similarly, total spending for SNA is estimated to decline from $479 million in 1998 to $418 million in 1999, $382 million in 2000, and $370 million in 2001 and 2002.

IBO Projections. Our estimates remain unchanged from our analysis of the preliminary budget. We expect the Family Assistance program to experience a slower but more extended pattern of caseload decline, with the number of FA recipients reaching 618,000 in June 1998, 588,000 in June 1999, 572,000 in June 2000, and 570,000 in June 2001. In contrast to the Mayor’s budget, however, IBO’s projections assume that the Safety Net Assistance caseload will soon bottom out, reaching

156,000 persons in June 1998 and declining slightly to 150,000 in June 1999. After that decline, the number of SNA recipients will begin to increase, reaching 155,000 in June 2000 and 160,000 in June 2001.

For both FA and SNA, we expect federal, state and local welfare reform efforts to result in a caseload that is smaller but increasingly needy and difficult to place in private employment. Moreover, provisions in the federal welfare law restricting the eligibility of persons arriving in this country after August 22, 1996, and placing a five-year limit on assistance, will shift thousands of individuals from FA to the state- and city-funded program, particularly when the time limit becomes effective in 2002.

As a result of higher caseload projections, our estimate of total expenditures for public assistance are expected to exceed the Mayor’s projections by $37 million in 1999, $101 million in 2000, $141 million in 2001, and $176 million in 2002.

The executive budget forecast for Medicaid expenditures at the Human Resources Administration remains largely unchanged from the levels contained in the preliminary budget.

The Mayor continues to estimate total city spending of about $2.2 billion in 1999. Figure 3-3 contains the Mayor’s projections compared to our estimates. While there has not been a major change since January, there have been two programmatic developments discussed below.

The Administration revised its estimate of spending related to the city’s share of Medicaid payments for "waived services" to reflect an increase in the local share. Waived services are services that are not on the list of items generally eligible for state and federal coverage under Medicaid. Hence, the city must receive a waiver in order to receive state and federal funding for providing such services. Among other things, these services can include residential therapy, supportive employment, and case management.

Prior to 1998, the city was not required to make any payments for providing these services. A change in program funding requires it to now pay 25 percent of waived service costs. However, since the developmentally disabled account for most waived services users, the city qualifies for an overburden credit and becomes eligible for reimbursement by the state for most of the services provided. Thus, while this change increases gross Medicaid costs by about $20 million, the net impact is only about $1 million annually after the reimbursement.

The Mayor’s executive budget also reflects the cost to the city of a failed savings initiative enacted by the state. At the beginning of state fiscal year 1997-98, Albany established a statewide savings target for Medicaid-financed personal care. Personal care is the most basic form of home care and provides assistance to Medicaid recipients for daily living activities. Current year spending data indicates that the city will fall short of its share of the savings target by about $14 million. City funds will need to be used to make up the difference. That expenditure, however, does not recur in the out-years.

Notwithstanding the developments discussed above, IBO’s projection of executive budget Medicaid expenditures is largely the same as our preliminary budget estimates. We still anticipate that the cost of certain services—intermediate care facilities, home nursing and prescription drugs—will outpace the growth rates reflected in the Mayor’s budget. In addition, while the Mayor expects zero growth for home attendant and house keeper services, we expect that expenditures will grow 1.0 percent each year of the financial plan. Overall, IBO estimates that city Medicaid expenditures will rise 2.3 percent in 1999, 2.9 percent in 2000, 2.5 percent in 2001, and 3.1 percent in 2002.

The Mayor’s executive budget for the Police Department (NYPD) projects total expenditures of $2.6 billion in 1999. This represents an increase of $41 million over the level of expenditures proposed in the preliminary budget and reflects additional funding provided for the following items: $18 million in city funds to cover civilian personnel costs previously funded with federal funds and $14 million to upgrade the department’s computer network to a year 2000 compatible system. The executive budget also contains $1.5 million for the purpose of funding a merit pay system aimed at issuing pay differentials to police officers with exemplary patrol duty service records.

According to our estimates, NYPD total expenditures will be closer to $2.8 billion in the budget year. The main difference between our estimates and the Administration’s is that we project higher costs for overtime expenses and a higher level of federal funding. (A number of the new and existing programs proposed to be funded in 1999 are part of various crime prevention and anti-drug initiatives being implemented by the city which we discuss below.)

The Mayor’s executive budget for the Department of Corrections (DOC) proposes expenditures of $835 million in the budget year, an increase of $59 million over the level of spending proposed in the preliminary budget. Most of the increase in proposed expenditures reflects $41 million to cover increased labor costs stemming from collective bargaining agreements, as well as $15 million for anticipated increases in overtime expenditures to support the Police Department’s expanding anti-drug initiative.

In contrast to the Administration, we expect DOC spending to reach $847 million in 1999, based on our estimates. The most significant difference between our estimate and the executive budget is that we expect overtime expenditures to exceed the amount budgeted by the Mayor by an additional $5 million. (Similar to the Police Department, the DOC budget reflects the impact of various crime prevention and anti-drug initiatives which we discuss below.)

The Mayor’s executive budget includes funding for a number of crime prevention and anti-drug initiatives. The City Council has also proposed its own initiatives to supplement the Mayor’s proposals over the past year. The three main categories of the programs are: Law Enforcement/Criminal Justice, Treatment, and Prevention/Education.

Law Enforcement/Criminal Justice. During 1998, the Police Department (NYPD) intensified its anti-narcotics activities in a number of city neighborhoods. As a result, total narcotics arrests increased by about 5.2 percent in the first half of the year compared to the same period year.

The city has also increased its uniformed police headcount and spending on overtime expenses. This past December, NYPD hired 1,100 police recruits seven months sooner than originally planned. The accelerated hiring added about $23 million to budgeted NYPD salary expenditures for the current fiscal year. Budgeted overtime expenditures for uniformed and civilian employees in the current fiscal year now stand at $142 million, up from actual overtime expenditures of roughly $117 million in 1997. For 1999, we estimate actual expenditures will exceed the Administration’s projections by about $12 million based on our analysis of NYPD overtime expenses.

The Mayor has also provided additional funds for Department of Corrections (DOC) overtime. For the current year, overtime in DOC is costing the city about $51 million. In anticipation of further increases in overtime expenditures as a result of heightened NYPD drug arrest activities, the executive budget has added about $15 million to the DOC budget for 1999 through 2001. Based on our analysis, we expect that overtime expenses will require an additional $5 million over the amount requested by the Mayor for 1999 through 2001, rising to $20 million in 2002.

The executive budget for NYPD proposes total expenditures of $92 million in 1999 to support nine anti-drug initiatives in 29 of the city’s 76 police precincts. That figure includes about $19 million in city funds to cover the salary costs of 1,900 additional police officer positions scheduled to be staffed by August 1998 (in addition to the 1,100 accelerated recruits noted above). The additional positions are also to be supported over the next three years by $142 million in federal funds awarded via the Justice Department’s Community Oriented Policing Services (COPS) Universal Hiring program. Those additional officers would bring the Department’s uniformed headcount to an historic high of 40,210. (For a discussion of some of the issues concerning the relationship between police headcount and crime rates, please see IBO’s publication, Police Staffing Levels and Reported Crime Rates in America’s Largest Cities: Results of Preliminary Analysis.)

The Mayor has also proposed anti-drug programs aimed at juvenile probationers. Operation Night Light, a targeted offender monitoring program, was funded at $854,000 in 1998 and $931,000 from 1999 through 2001. The program assigns 21 probation officers to teams in the Police Department and strengthens the link between NYPD and Department of Probation (DOP). In addition, a curfew program affecting 1,000 drug offending juvenile probationers using beeper and voice tracking technology was funded through DOP for $170,000 in 1998 and $250,000 in 1999.

Treatment. During the current year, the Mayor and the City Council provided funding to increase the number of drug treatment beds in the Department of Correction’s Substance Abuse Intervention Division from 1,058 to 1,558. The Mayor’s executive budget proposes to spend $2 million in DOC for a pilot program to contract with community based residential treatment providers for 50 post-release beds. In the Department of Probation, a proposed increase in its residential drug treatment program would double current capacity from 180 to 360 probationers annually. Currently funded at $473,000, the program would reach $697,000 in 1999 and each year thereafter.

The Administration has also proposed funding drug treatment services for mothers with children in foster care. The Administration for Children’s Services would provide referrals and the Health and Hospitals Corporation would provide treatment services. After being eliminated in 1995, the Family Rehabilitation Program’s funding is about $1 million in 1998 and would increase to $3 million annually from 1999 through 2002.

Prevention/Education. Beacon schools are after-school enrichment programs for children and their families administered through the Department of Youth and Community Development. As a result of the Mayor and City Council providing additional funding during the year, the number of these schools has almost doubled. The executive budget includes budget year and out-year funding of $10 million annually to continue supporting the additional 31 full Beacons and 8 mini Beacons. These new schools are in addition to the 41 Beacons already in operation at an annual cost of about $15 million.

In addition, the executive budget contains a proposal that would fund a Department of Probation program to teach juvenile probationers about substance abuse and offer treatment when necessary. Proposed funding for the program is $475,000 annually from 1999 through 2002.

The Mayor's executive budget for the Department of Sanitation (DOS) proposes to spend $703 million in 1999, an increase of about $54 million from the level contained in the preliminary budget. Most of the proposed increase—$50 million—are for costs related to the closure of Fresh Kills landfill and the exportation of garbage by the city.

Fresh Kills. Due to accounting changes in accordance with City Charter rules, DOS has moved about $40 million from the capital budget to the expense budget in 1999 for Fresh Kills closure costs. Specifically, the costs will cover leachate control and final cover costs for the landfill. Comparable amounts in the out-years are as follows: $34 million in 2000, $30 million in 2001, and $27 million in 2002.

The closure of Fresh Kills will continue to have major budgetary impacts on the city in the foreseeable future. At present, the city is exporting roughly 1,800 tons per day of refuse at a cost of $52 per ton. While estimates vary depending on the level of waste reduction and recycling, it is possible the volume of trash to be exported could total 10,600 tons per day by 2002 when the landfill closes. Assuming existing export prices reach the a range of $55 to $70 per ton, the cost of exporting the city’s waste would be between $182 million and $231 million per year.

Garbage Export. The Mayor’s executive budget provides an additional $9 million for the export of solid waste and monitoring of contracts. At present, DOS exports all of the residential refuse generated in the Bronx and is scheduled to begin exporting refuse from Brooklyn and Queens in December 1999. The additional funds are to be used to cover export and other costs that have exceeded the Administration’s previous estimates.

Finally, a new contract with its sanitation workers union will result in additional costs of about $6 million. The preliminary budget assumed a higher net level of productivity savings than was reached in the final agreement. As a result, DOS will need the extra funds to staff its refuse and recycling collections.

Overview. IBO estimates the Mayor’s executive budget for the Board of Education (BOE) would result in total spending of about $9.4 billion in 1999, an increase of $540 million from the estimated 1998 level of $8.9 billion.

The executive budget funds a number of initiatives consistent with the levels proposed in the Mayor’s preliminary budget. These include Project Read, Project ARTS, night schools for high school students in a sixth or seventh year, and extended school time for failing third-graders. (For more information on these programs, please see IBO’s Analysis of the Mayor’s Preliminary Budget.) Overall, our total spending projections are about $150 million less than our reestimate of the preliminary budget largely due a downward technical adjustment to enrollment and a decrease in projected state aid.

While our overall estimate for 1999 is similar to the Mayor’s, when broken down by source, IBO projects less city spending and more state and federal spending than the Administration. The Mayor projects city spending of $4.1 billion in 1999, an increase of $410 million from the 1998 level of $3.7 billion. We estimate, however, that 1999 city-funded spending will increase by a more modest $267 million.

IBO’s projected increase in city funds reflects our estimate of the cost of various new initiatives originally proposed in the preliminary budget. It also reflects the effect of programs begun in 1998 with one-year funding we expect will continue to be funded. Examples of such programs include Project Read and teacher administrative periods.

The difference between our estimate of city funding and the Administration’s can be explained by their treatment of the year-end surplus projected for 1998. Consistent with past practice, the executive budget proposes to roll the projected surplus of about $200 million into 1999 and use it to provide one-year funding for various programs. While some of the programs begun with surplus funds have been annualized (for example summer school programs and Project ARTS), this practice causes city-funded spending to appear to increase in the budget year and then decrease in subsequent years.

Federal and State Funding. IBO estimates higher intergovernmental aid than projected by the Administration. As with most city agencies receiving aid from the federal and state governments, the Mayor’s budget reflects grant levels that are lower than amounts likely to be received during the year. In 1999, we estimate federal funds of about $1.1 billion, as compared to the Mayor’s projection of $969 million.

State funding for BOE is provided in the form of unrestricted aid (formula grants) and restricted aid (categorical grants). Overall, state funding for the city has increased from $3.7 billion in 1996 to about $4.2 billion in 1998. In the recently enacted 1998-99 state budget, the city is scheduled to receive an increase of $226 million in unrestricted aid above last year’s level.

In addition, the city will receive $77 million more in restricted aid in 1999. The city had expected an additional $157 million until the Governor vetoed several education-related items in the budget passed by the State Legislature. Specifically, the vetoes reduced teacher support aid (used to supplement teacher salaries) by more than $60 million. Based on the net effects of the actions in Albany, we project total state funding of about $4.3 billion in 1999, compared to $4.2 billion projected by the Mayor.

Prior Year Payables. BOE’s current operating budget includes about $76 million in prior-year claims the City Comptroller has indicated he will not book as receivables. That amount is part of a continuing backlog of unpaid receivables owed by the state to the city. If the funds are not booked as receivables, BOE must find alternative funding. At present, BOE has identified about $42 million from prior-year savings accruals from various sources that could be used to defray part of this expense.

The City Comptroller’s current policy holds BOE responsible for receivables more than nine years old. About $4 million will fall into this category at the end of 1998. Although funds have not been appropriated in the enacted state budget, BOE has indicated it will receive payments from the state this year. The Comptroller’s policy begins to have a greater effect in 1999, when the value of receivables over nine years old grows to $39 million. By 2002, the amount will exceed $100 million.

Initiatives for 1998-99. The school governance reform movement is shifting budget planning to the district level for greater local control. As a result, the Chancellor has begun a locally driven budget request process. This year, 341 schools submitted budget requests to their respective districts. The districts compiled and electronically forwarded the local requests to central administration. The requests were then used in preparation of the Chancellor’s budget request which is now finalized for the 1998-99 school year.

A major theme of this year’s request is what BOE has termed "The Expanded Platform for Learning." The initiative includes various programs to expand school days, the school year, and pre-kindergarten. Figure 3-4 reflects the level of funding requested for the Chancellor’s new programs. Some of the major programs are highlighted below:

• Universal Pre-Kindergarten is part of a longer-term state initiative to offer pre-kindergarten as a universal service. The state’s target for BOE is to add about 14,000 half-day slots to existing pre-school services. Although BOE may use the funds to create either half-day or full-day slots based on community need. Funding is only provided at levels to support half day programs.
• Longer Day Programs include various after school programs through partnerships with organizations such as the United Way and the Soros Foundation. For example, the United Way and YMCA will co-sponsor tutoring and homework assistance programs.
• Middle and High School Summer Programs will assist about 55,000 students to make the transition into and out of middle school. They will also provide added preparation to help high school students meet the new higher standards set by the State Regents.
• Summer Literacy: Grade 3 Students at Risk is part of the implementation of the plan to end social promotion. For the next school year, the Chancellor intends to hold back students who have not achieved literacy by the end of the third grade.
• Early Childhood Summer Literacy will address literacy problems with high-risk K-2 students. It is a continuation of last year’s program which served about 17,000 students.

The executive budget proposes to spend $391 million for the City University of New York (CUNY) in 1999, an increase of about $1 million from the level contained in the Mayor’s preliminary budget. According to our estimates, spending for CUNY will be closer to $398 million. The difference between the estimates largely reflect different assumptions related to state revenues.

The city’s funding for CUNY is mainly used to fund the associate degree programs at the six community colleges. To the extent associate degree programs are provided at one of the senior colleges, the city provides a commensurate level of funding. Overall, the associate degree programs are funded by a combination of city, state, and student tuition and fee revenues. While there has been no major change in CUNY funding since the preliminary budget, there are three issues which remain under discussion.

First, the Mayor continues to seek changes in CUNY’s management of the remedial education needs of its students. In conjunction with the Governor, the Administration is working on a proposal that would bar remedial students from four-year CUNY colleges and limit the amount of time students can remain in remedial classes at CUNY community colleges. This initiative appears to have replaced the Mayor’s preliminary budget proposal to privatize community college remedial education. The full CUNY Board is scheduled to vote on the joint proposal on May 26, 1998. (For a more detailed discussion of issues related to CUNY community colleges and remedial education, please see IBO’s Analysis of the Mayor’s Preliminary Budget.)

Second, the Mayor has proposed that CUNY implement class attendance requirements. Specifically, the Mayor has indicated that the city would withhold its funding for CUNY community colleges unless CUNY requires attendance, takes attendance, and requires at least 80 percent class attendance for students to maintain enrollment. At this point, it is not clear that the city could legally withhold funding since state law requires it to maintain a certain level of funding, either in absolute terms or per full-time-equivalent student enrolled in CUNY.

Finally, CUNY indicates city funding proposed in the executive budget is about $11 million short of estimated spending needs for 1999. According to CUNY, the shortfall comprises the following elements: $4 million in 1999 collective bargaining costs not accounted for; $4 million for inflationary increases in existing (non-collective bargaining) salary and material costs; and $3 million in budget reductions applied against the CUNY budget to bring city funding down to the minimum level required by maintenance of effort provisions. To the extent funding is not restored, CUNY indicates services will have to be reduced.

The most significant change between the 1999 preliminary and executive budgets is the removal of New York City Transitional Finance Authority (TFA) debt service from the expense side of the city's operating budget and the amount of personal income taxes used to pay such debt service from the revenue side of the budget. While this treatment complies with law and does not affect the size of the city's budget gap, it does, however, make it more difficult to evaluate the city's debt burden, particularly for the general public. For example, instead of showing a steadily increasing debt service burden during the financial plan period, the Mayor's proposed removal of TFA debt service from the city budget presentation shows a debt service burden increasing more slowly and then dropping in the last year of the plan period.

The city has historically presented city debt service as including general obligation (GO) debt and Municipal Assistance Corporation (MAC) debt. Since creation of the TFA and until now, the city included TFA debt in the presentation of debt service. This format is reasonable because TFA is a transitional response to the city's temporary GO debt crisis arising under an existing state constitutional debt limitation. Without a GO debt crisis, the state would not have created TFA since the city's GO capacity would have been adequate for the city's capital program. State law permits TFA to issue debt only to the extent the city cannot finance its capital program with GO debt. As TFA debt substitutes for GO debt in the financial plan until the earlier of its issuing $7.5 billion aggregate principal amount or the effective date of a constitutional amendment, IBO will continue to include TFA debt in its analysis of city debt.

GO Debt Service. The executive budget proposes to spend $1,239 million in 1999, $620 million less than the $1,859 million proposed in the preliminary budget. This change is largely the result of an increase to the projected current-year budget surplus, which the Mayor proposes to use to increase the amount of 1999 debt service the city would prepay in 1998. Accordingly, the executive budget increases 1998 debt service to $3,464 million, significantly above the $2,665 million planned in the preliminary budget in January. The executive budget also plans to increase the allocation to the budget stabilization account in 1999 from $210 million to $416 million. The budget stabilization account is earmarked to prepay debt service scheduled for 2000.

MAC and TFA Debt Service. The executive budget proposes to spend $469 million for MAC debt service, $42 million less than the $511 million proposed in the preliminary budget. Projected TFA debt service is $144 million, $10 million less than projected in the preliminary budget. The city projects TFA will issue debt up to its statutory limit during the financial plan period—$1.9 billion in 1999, $1.7 billion in 2000, and $1.9 billion in 2001. As a result, TFA debt service as a portion of total city debt service, net of prepayment, will increase over the period—from 4.3 percent in 1999 to 13.4 percent in 2002.

Overall Debt Service Trend. City debt service, consisting of GO, MAC and TFA debt service (net of pre-payment), is projected to increase during the financial plan period (see Figure 3-5 above). As a measure of the overall affordability of city debt service, Figure 3-6 presents city debt service (adjusted to remove the effects of the surplus roll) as a percentage of city tax revenue. As noted in our analysis of the preliminary budget, city debt service is consuming an increasingly large portion of the city's operating budget, competing with other spending needs for funds. City debt service increases from almost 16 percent of tax revenues in 1998 to almost 19 percent in 2002.

A very different picture emerges from Figure 3-7. In this figure, which shows the Mayor's proposed altered debt service, the city's debt burden rises at a much slower pace and begins, in 2001, to fall. In view of the transitional nature of the TFA and the fact that TFA debt merely substitutes for GO debt, the Mayor's decision to present TFA off-budget understates the extent to which debt service rises over time and competes with other spending needs.

The inclusion of TFA debt in our presentation of debt service raises questions about how to treat the debt of "off-budget" agencies. For a number of years, the city has transferred certain functions performed by city agencies to what are called off-budget agencies. Those agencies are usually created by state law to be separate entities performing narrowly defined public functions while enjoying a certain amount of insulation from politics and a certain amount of freedom from governmental restrictions. People tend to view debt issued by off-budget entities, upon separation from the city's operating budget, as distinct from city debt.

While legally distinct from city debt, however, both off-budget and city debt create a cumulative burden on the local economy to support local governmental activities broadly defined. For purposes of assessing the burden on the local economy, it matters less whether the city or some state-created local public entity issues the debt. What matters more are facts concerning (i) the correlation between taxpayers and those who pay the fees to support the enterprise, (ii) ownership and operational control of the public assets supporting the public service, (iii) political control of the entity's governing body, (iv) the nature of the public service itself and whether it, at one time, was performed directly by the city, and (v) the extent to which the city relies on the entity's debt to fund a portion of the city's capital program.

Figure 3-8 shows a composite debt burden including debt issued by the New York City Water Finance Authority (Water Authority) and the Health and Hospitals Corporation (HHC). We have added Water Authority debt and related system revenues to the composite city debt burden ratio, on the basis that the rate payers are also largely taxpayers, the Water Authority debt funds a significant portion of the city's capital program, the city owns (but leases) and operates the assets (through the Department of Environmental Protection) as well as controls the Authority, and water and sewer services used to be entirely within the city before the city transferred them off-budget. We have also added HHC debt and related system revenues on the basis that the city owns (but leases) the assets as well as controls the HHC board. Public hospital services were formally considered part of the city’s budget, but they were transferred off-budget in the 1970s, and the city is contingently liable on HHC debt.

As a measure of the overall affordability of city debt service and related off-budget debt service, Figure 3-8 presents the composite city debt service (adjusted to remove the effects of the surplus roll) as a percentage of composite city tax and systems revenues. Like the city debt service burden, composite debt service is becoming an increasing burden on the city's local economy, increasing at virtually the same rate.

New York City’s capital budget is a plan for investment in the city’s infrastructure. It appropriates funds for projects such as the construction of public buildings, construction of sewers and water pollution control plants, improvements to existing buildings, land acquisition, and major equipment purchases. The city takes advantage of a variety of bond issuers to finance its capital projects, as well as state, federal and private grants. These bond issuers include the city itself, the TFA, the Water Authority, the Dormitory Authority of the State of New York (DASNY) and HHC. The debt service payments for some of the issues are carried as expenditures in the city’s expense budget, while the debt service payments for others are paid from revenues outside the city’s operating budget.

The 1999 executive capital budget includes new appropriations of $4.9 billion, of which $4.2 billion are to be funded from city sources. City sources include the proceeds from bond sales issued by the TFA, DASNY, the Water Authority, as well as city general obligation bonds. The 1998 adopted capital budget included new appropriations of $3.6 billion, of which $3.2 billion were funded from city sources. Therefore, the 1999 executive capital budget represents an increase of $1.3 billion in total appropriations, including an increase of $1.0 billion in city funded sources as compared with the 1998 adopted capital budget.

When the city includes a project in the capital budget, there is no guarantee work will actually be done to start or complete the project. Therefore, in order to monitor the activity and progress of a project which has been included in the capital budget, the city issues a commitment plan three times during the year. For all approved and active capital budget projects, the city’s capital commitment plan presents information on appropriations and commitments with implementation schedules covering the four-year capital program.

Figure 3-8 presents a comparison of the 1998 and 1999 authorized capital commitment plans, by program, as of the executive budget.

A commitment represents an approved contract to spend funds appropriated for a capital project. The commitment plan recognizes some agencies will not be able to spend authorized capital appropriations within a fiscal year due to delays normally occurring in the capital construction process. The 1999 executive capital commitment plan totals $5.7 billion, an increase of $1.7 billion or 43 percent as compared to the 1998 commitment plan of $4.0 billion. In order to achieve these targets, agencies have been authorized to commit $5.3 billion in 1998 and $6.6 billion in 1999.

Labor Reserve. The labor reserve provides funds for the costs associated with collective bargaining agreements for city employees and employees of the city’s covered organizations. It also provides funds for the costs of collective bargaining agreements negotiated by organizations whose employees provide services to the city on a contractual basis.

As compared to the levels contained in the Mayor’s preliminary budget, the executive budget proposes to transfer $25 million in 1998 from the labor reserve to fund the cost of collective bargaining adjustments associated mainly with a recent labor agreement with the city correction officers. The executive budget also reflects additional transfers from the labor reserve of $60 million in 1999, $117 million in 2000, $119 million in 2001, and $122 million in 2002 mainly to fund the recent firefighter labor agreement, and the annualized cost of the correction officers contract.

After the proposed transfers, the Administration projects a labor reserve of $178 million in 1998. The remaining years of the executive budget include a labor reserve of $376 million in 1999, $707 million in 2000, $777 million in 2001, and $773 million in 2002. These funds are to provide collective bargaining increases for contractual agreements which end in 2000 and 2001.

Overtime. The executive budget proposes to spend $438 million in 1998 for overtime, an increase of $55 million, or 14.3 percent over the adopted budget allocation of $383 million. Based on our review of overtime spending trends including the additional resources provided in the preliminary and executive budgets, IBO estimates that overtime expenditures will reach $452 million by the end of 1998—an increase of $14 million, or 3.2 percent, over the Administration’s projection. Overtime savings currently being generated in agencies such as the Department of Sanitation, could offset some of the increased costs in 1998.

However, we expect spending will grow to $465 million from 1999 through 2001 and reach about $508 million by 2002. The higher level of anticipated expenditures is largely attributable to anticipated overtime associated with implementation of the Mayor’s anti-drug initiative by the Police Department and Corrections and other initiatives related to social services.

Collective Bargaining Reserves. The executive budget does not include any additional collective bargaining reserves for annual raises after the expiration of current labor contracts in 2000. Each percentage point wage increase after that would add about $190 million to annual city funded personal service costs—and to projected budget gaps—in 2001 and 2002. Thus if the city's labor force received 2 percent compounded raises in 2001 and 2002—well under the forecast rate of inflation—the city funds expense budget would be $385 million higher in 2001 and $775 million higher in 2002. This would increase the budget gaps projected by IBO to about $2.6 billion in 2001 (10.4 percent of city funds) and $2.6 billion in 2002 (9.9 percent of city funds).

IBO is not baselining a collective bargaining reserve adjustment in its own expense budget reestimates because we cannot anticipate with certainty how large the raises given to city workers will be in 2001 and 2002. However, given the current and projected economic and fiscal climate in New York City, IBO believes that the wage rate and gap increase estimates suggested here are conservative.

Judgments and claims expenditures reflect the city’s costs for personal injury and property damage tort claims as well as certain contract liabilities. The city is self-insured, meaning that claims are paid from available resources. It accounts for these costs on a settlement basis—essentially "pay-as-you-go." The executive budget proposes to spend $383 million for judgments and claims in 1999, an increase of $35 million, or 10 percent, from the preliminary budget level of $348 million. The Administration estimates expenditures of $408 million in 2000, $440 million in 2001 and $470 million in 2002.

Spending on judgments and claims has increased from $162 million in 1988 to $327 million in 1997, an increase of $165 million, or 101.9 percent for the ten-year period. This increase can be attributed to a combination of higher settlement awards and an increasing volume of claims filed against the city.

Our analysis indicates that the average cost for personal injury and property damage settlements during the first 10 months of 1998 increased by 10.8 percent, from $26,968 to $29,872, compared to the same period in 1997. The volume of claims settled has also increased significantly. A total of 7,403 claims have been settled in the first 10 months of 1998 as compared to 6,758 claims settled in the same period in 1997, an increase of 9.5 percent. The total number of claims settled for the same 10 month period in 1996 was 6,239. In 1995, about 4,225 claims were settled during the same period.

Due to the higher award amounts and increased number of settlements, the Administration has added about $20 million to the judgment and claims budget during the current year. That level of spending is consistent with our reestimate of the Mayor’s 1998 executive budget last year. Although we will continue to track expenditures during the year, the amount budgeted by the Administration is consistent with our projections for 1999 through 2002.

The Mayor proposes no funding for the Independent Budget Office in 1999 and beyond. Although the Mayor is actively pursuing state legislation to allow the city to abolish IBO, we have assumed that his efforts will be unsuccessful. Accordingly, our repricing of the executive budget includes $2.7 million each year for IBO.

The following Independent Budget Office staff prepared the revenue and expenditure projections in this report:

Douglas A. Criscitello, Director