IBO's Analysis of Mayor's Budget Finds Cause for Short-Term Optimism, Longer-Term Challenges Remain

On March 23rd, IBO released its Analysis of the Mayor's Preliminary Budget for 2000, finding that the city's fiscal fortunes during 1999 and 2000 would remain strong if the Mayor's preliminary budget were adopted. Nevertheless, challenges remain to the long-run fiscal health of the city-including the need to balance revenue and spending growth rates, finance substantial capital improvements, and control the expansion of debt service costs.

IBO projects that the current year will end with a budget surplus of $1.8 billion-the third consecutive year that the city's surplus has exceeded $1 billion-thereby making next year's budget much easier to balance given that the entire surplus would be used to prepay expenses that would otherwise be incurred in the upcoming budget year. Moreover, the Mayor proposes to fund a budget stabilization (or reserve) account with an appropriation of $345 million-in essence allowing the city to end fiscal year 2000 with a surplus of more than $300 million.

The Mayor's budget plan reflects an improving local economy bolstered by the continuing profitability of Wall Street securities firms. Such prosperity has allowed the Mayor to propose relatively modest total spending reductions and a reduction in certain taxes paid by New Yorkers. IBO estimates that the budget would result in expenditures of about $36.4 billion in 2000, including $25.3 billion in city-funded spending-a 5.8 percent increase over 1999 when debt service prepayments are excluded.

Beyond 2000, however, IBO projects budget gaps in the range of $2 billion to $3 billion annually. IBO's gap projections are higher than the Mayor's forecast by $0.9 billion in 2001, $1.3 billion in 2002, and $1.8 billion in 2003. These large gaps result because spending would grow at an average annual rate of 4.7 percent (excluding debt service prepayments) while revenues would grow more slowly, averaging only 1.5 percent each year.

Among the issues highlighted in IBO's review of the preliminary budget are:

Taxes: IBO forecasts higher tax revenues over the near term than does the Mayor, with $526 million of additional revenue in 2000 and $390 million in 2001. Moreover, IBO's estimates exceed those of the Administration by about $350 million each year thereafter through 2003. Most of the difference between the two revenue estimates is attributable to IBO's more optimistic economic forecast.

IBO also reports on several tax initiatives contained in the Mayor's budget, including a proposal to extend property tax abatements for owners of coop and condo apartments. Retaining the soon-to-expire abatement would cost the city $171 million in 2000 and $205 million by 2003, and it does a poor job of targeting benefits to apartment owners being taxed at the highest rates.

Stadium Financing: Although the Mayor has indicated that a portion of commercial rent tax (CRT) revenues will be used to fund the New York City Sports Facilities Corporation, there is no mechanism to formally dedicate the revenues towards the new stadium-building entity. Consequently, any funds provided for stadium construction would come from the general fund.

Schools: IBO estimates that Board of Education spending will be $9.9 billion in 2000, an increase of $340 million over the estimated 1999 level. Spending will grow at an average annual rate of 3.9 percent during the financial plan period, reaching $11.2 billion in 2003. IBO forecasts higher spending than included in the Mayor's budget, about $150 million for 2000 rising to $753 million by 2003, due to differing assumptions about baseline spending levels, new initiatives, enrollment, and the number of teachers required in the system. The city will lose $63 million in 2000 under the Governor's proposal to use a block grant instead of dedicated funding for universal prekindergarten, class size reduction, and minor school maintenance.

Higher Education: CUNY increasingly relies on tuition revenue because the city subsidy has shrunk to 23 percent of the community college budget compared with 43 percent a decade ago. Despite increased need for financial aid, the Mayor and the Governor are proposing to reduce student scholarships and grants.

Debt Service: By 2003, debt service payments will total $4.4 billion - approaching 20 percent of city tax revenues. The constitutional debt limit and the exhaustion of authorized borrowing by the Transitional Finance Authority are expected to seriously constrain the city's ability to borrow over the next two years.

Tobacco Bonds: To avoid being constrained by debt limits, the Mayor proposes to finance capital expenditures from 2000 to 2003 using tobacco bonds backed by revenue from the recent court settlement. IBO has concerns about the tobacco plan and the budget process. The Mayor's plan would substantially impair the City Council's flexibility in deciding what to do with the settlement money.

Police Staffing: While the city's build-up in the size of the police force since 1990 has been accompanied by a very dramatic drop in crime, data from other cities reviewed by IBO raise questions as to the precise relationship between police staffing and crime reduction. The preliminary budget includes a proposal that would bring police staffing levels to an all-time high.

LaGuardia Rail Link: Three-fourths of the $1.2 billion cost of this project would be funded by the city's capital budget. Unless new funding sources are found, the rail link would consume most of the city money planned between 2000 and 2004 for mass transit expansion and rehabilitation projects.

Lead Paint: The costs of implementing lead paint abatement under Local Law 1 and a recent court order could substantially exceed the annual $2 million budgeted.

Copies of the full 54 page report are available by accessing IBO's website at www.ibo.nyc.ny.us or by calling (212) 442-0632.