The New York City Budget and the Great Recession

Since the financial crisis morphed into the Great Recession in 2008, Americans have been told to pay more for government, accept less, or both.  That has been true in New York City as well, with ongoing service cuts in every budget despite a 7.0% property tax increase, a state income tax increase, and a new MTA tax on all workers (but not the retired or investment income).  Along with fare increases, toll increases, and other increases.  The recession, as officially measured, is long over, and New York City’s private employment is not only higher than it had been before the recession started, but also probably reached a historic high in 2012, finally surpassing the level of 1969.  And yet New Yorkers are still being told to accept less and/or pay more to the government.  This post and those after are about the reasons why.

A look at NYC budget documents, however, shows that austerity for the people hasn’t exactly meant less spending by City of New York. According to “Budget Summary” documents from the NYC Office of Management and Budget, in the six years from NY 2008, which ended before the real disaster economic hit that fall, to FY 2014, according to the Mayor’s latest budget proposal, total spending by the City of New York will have increased 20.7%, and personal services spending will have increased 11.8%.  New York City’s tax revenues will have increased 16.8%, or less than the increase in spending.  Inflation, as measured by the Consumer Price Index with a projection to next July, increased just 12.0%.

The numbers I will be citing come from the Mayor’s Financial Plan, issued early each year, and do not reflect ultimate reality with complete accuracy.  The FY 2008 and FY 2011 numbers, for example, are projections made half way through the fiscal year of what the final totals would be.  The FY 2014 number is the Mayor’s proposal.  This information is less specific than the public finance data I usually use, but that data comes out much later.  The latest comparative public finance data from the U.S. Census Bureau I analyzed was from FY 2010.  It came out in September 2012.  Even that data was subject to further modification after I used it.   I’ll be writing about the financial priorities of the Bloomberg Administration in total, in a more final sense, some time in late 2016 at the earliest.

Since the patterns of New York City’s revenues and expenditures are pretty much set by the decisions and deals of the past, however, the city budget numbers can give us a pretty good idea of what has happened and is happening.  The Mayor’s budget proposal, in a broad sense, is pretty much what is going to happen, since it involves allocating pain – not what the usual local politician wants to do.  The usual dance is for the Mayor to propose a few extra budget cuts, and the City Council to “fight for the people” by “finding” the money to put them back, while assuring access to the little handouts they get to make that in the end matter more to their re-elections that to the people they represent.

The numbers referred to in this post come from the Budget Summary documents from January 2000, p. 48, February 2011, p. 49, and January 2013, p. 40.  They are in the spreadsheet linked below.

NYC Budget FY2014

In past recessions, New York City and State used gimmicks to defer most of the fiscal pain until after the recession ended.  This may be considered a repeating pattern.  In the devastating late-1980s/early 1990s downturn, for example, New York City was on the brink of bankruptcy not in 1991, the year with the greatest private sector job loss, but in 1994 as newly-elected Mayor Rudolph Giuliani took office.

Despite the Great Recession, the city’s budget documents show, total spending increased 10.1% in the three years from FY 2008 to FY 2011, during the worst of the it, while personal spending increased 9.9%, and agency “other than” personal service spending (on contracts and supplies) increased 12.2%.  Tax revenues increased 9.2% during those years.  The Consumer Price Index rose just 4.7%.  Pain was postponed as the city and state drained reserves and borrowed money while increasing spending by more than the inflation rate.  With a 7.0% property tax increase the city’s tax revenues increased by more than inflation.

Times have been tougher since, but not because total spending has fallen.  In the three years from FY 2011 to FY 2014, according to the latest budget proposal, spending will have increased 9.8%.  But personal services spending (on NYC employees) will have increased just 1.7% and agency “other than personal services” (on contractors and supplies) will have increased just 0.2%.  City tax revenues are expected to have risen 6.3% during the period, or slightly less than the 6.9% rate of inflation. Again, not the big decrease in tax revenues one would expect in association with service cuts.  New Yorkers are not paying less to the City of New York.

Part of the reason for the increase in spending during the worst of the recession, and the slowdown in most types of spending thereafter, may be seen on the revenue side (bottom of the spreadsheet), and in “Welfare and Medicaid” outlays.  Federal categorical aid (aid for a specific purpose, such as welfare or education) increased by 38.8% from FY 2008 to FY 2011, providing the city with an extra $2.75 billion dollars.  This was a result of the federal “stimulus package” passed in early 2009.  State aid was essentially unchanged, with a 4.4% increase in categorical aid offset by a near wipeout of unrestricted municipal aid.  Moreover, the combination of welfare spending and aid to New York State for its Medicaid program fell by 8.1% from FY 2008 to FY 2011, while city funding for the Health and Hospitals Corporation fell by 12.3%.  Not because actual spending on the poor and public subsidies to health care went down, but because the federal government picked up more of the tab for Medicaid through the stimulus package.  The same stimulus package that increased aid to New York City, mostly for public schools.

Property tax revenues also increased 29.6% from FY 2008 to FY 2011.  In part because the city raised the property tax rate by 7.0%.  In part because increases in assessed value phase in over time, allowing the city to reap the benefits of the big increases in property values during the 2000s bubble, in part, after it had ended.   NYC homeowners, partially protected from property tax increases by limitations on the increase in their assessments, nonetheless paid more in property taxes.  Renters and businesses, without such limitations, paid far more as landlords passed on higher property tax charges to them.  For rent regulated tenants, the pass on was part of the changes in landlord costs used to set annual rent increases.

While property taxes were going up during the worst of the recession, personal and business incomes were not, as reflected by the fact that NYC tax revenues other than property tax revenues increased just 0.4% from FY 2008 to FY 2011.  Meanwhile, Miscellaneous Revenues, which includes fees and fines, fell 1.1% from FY 2008 to FY 2011.  Many have accused the Bloomberg Administration of nickel and diming people with fees and fines, but both long-term data from the U.S. Census Bureau, and more recent projections from NYC OMB, show that isn’t true.  But of course the City of New York’s miscellaneous revenues don’t include the toll and fare increases of the MTA, one of the places where New York City and State have shifted their debts over the years.

The city’s debts have soared.  Despite historic low interest rates, the burden of repaying them increased 32.9% from FY 2008 to FY 2011 and is projected to rise another 25.3% from FY 2011 to FY 2014.   With more to come.

Some of this debt is expected to be paid by others.  The money the city borrowed to build three stadiums is expected to be paid by the sports teams.  The money it borrowed to build the extension of the #7 Flushing Line to the Far West Side is expected to be paid, eventually, by taxes on development that area.  After being stalled by recession, development on the Far West Side is finally moving forward.

By providing an improved quality of life over many years, in fact, capital improvements can attract taxpaying businesses, residents and development, providing the revenues to pay for themselves even without a formal link.  In some cases the Bloomberg Administration’s investments in new and improved parks appear to have done so.  And some of the current financial debt is a replacement for what was a de facto physical debt left over from the past.  Interests on debts associated with the Department of Education, for example, will have increased 85.9% over the last six years of the Bloomberg Administration, according to the budget proposal.  This merely monetizes an inherited condition of deteriorating schools with inadequate capacity that is not yet fully remedied.

But some of the debt was used to postpone pain, in this recession and in the prior recession, and will provide no ongoing benefits to New Yorkers.  It was just a means to spend the taxes of future New Yorkers in the past.  Indeed New York City is still paying for the $billions it borrowed to get past the recession associated with the end of the stock market bubble and 9/11.  Despite the mid-2000s boom it didn’t pay that money off, but instead borrowed more.

The bills have begun to come due during the FY 2011 to FY 2014 period, and not just for the City of New York.  As I’ve noted before, local government accounts for most of the work of government, with the federal and state governments generally merely passing money on to local governments, to individuals, and to the private sector (as under Medicare for health care).  The federal stimulus package expired, and from FY 2011 to FY 2014 federal categorical aid is projected to have increased just 5.6%, or less than the rate of inflation.  With the federal government taking in only half of what it is spending more reductions for federal aid to state and local government are likely.

Also in part as a result of the expiration of the federal stimulus program, the city’s welfare and (more prominently) Medicaid aid to New York State soared 18.6% from FY 2011 to the proposal for FY 2014.  Aid to the Health and Hospitals Corporation soared 30.1%. In part this increase also represents an increase in Medicaid services to people under Obamacare.  But much of it reflects a rising share of services being paid for in city, not federal taxes, rather than more benefits received.

Expect more cuts in federal aid to come, as New York State has been found to have stolen $15 billion in excess Medicaid spending from the federal government.  It is stopping the theft, cutting $1.1 billion, and wants its $15 billion back. According to the Albany Times-Union the state’s Medicaid service providers want other services to share the burden of that cutback.

Having raided the MTA and other agencies with supposedly dedicated tax revenues, the State of New York also cut categorical aid to New York City 2.3% from FY 2011 to FY 2014, while finally cutting unrestricted aid to zero.  Despite keeping a higher income tax rate on the wealthy, and imposing deep cutbacks in state services, with public higher education his particularly hard.  Over the entire FY 2008 to FY 2014 period categorical state aid to New York City increased just 2.0%, far less than the 11.8% rate of inflation for the period.  Unrestricted aid was cut 100 percent.

A word here about that lost municipal aid.  It may be fair and reasonable for the state to cut of unrestricted aid to New York, a city that has had a stronger than average economy in recent years.  Certainly there are upstate cities and rural areas that are more needy.  What is not reasonable is that while New York City was cut off, suburban jurisdictions throughout the state, which have both lower poverty rates and higher median incomes than New York City, continue to receive such aid – paid for by New York City taxpayers.

That is redistributing income upward, but no one will say so.  Mayor Bloomberg rattles his tin cup and skulks away, while in the State Legislature Sheldon Silver exults in sticking it to the Mayor by hurting the people of the city.  And the Governor says “New York City has other sources of income.”  Which means that since other parts of the state don’t impose a local income tax on themselves like New York City does, New York City taxpayers should also pay more state taxes so other parts of the state can get more aid.

As for taxes, they increased 10.2% from FY 2011 to FY 2014, as a slowdown in the increase in property tax revenues was offset by stronger gains in other tax revenues, as the economy recovered and more people were employed.   Real estate transaction tax revenues, inflated during the mid-2000s bubble but virtually absent during the financial crisis, have returned to normal levels.  Miscellaneous revenues increased at the inflation rate. New Yorkers are not being asked to accept less because they are paying less in city taxes.

But thanks to the hit from the State of New York, and the end of extra-ordinary aid from the federal government, along with the cost of past debts, spending on actual city services (as opposed to aid to the state for Medicaid) lagged behind inflation from FY 2011 to FY 2014, as personal services spending is expected to have increased just 1.7% and “other than personal services” just 0.2%.

For a further indication of why services are being cut, moreover, look within the “personal services” category of spending.  Total spending on wages and salaries, affected by both the number of public employees and how much they get paid, increased 5.3% from FY 2008 to FY 2011, or more than the rate of inflation.  Even as city residents were told to expect less, and public employee union leaders asserted that they deserved less.

But from FY 2011 to FY 2012 spending on the wages and salaries of city employees fell 1.6%, even as total spending on city personnel rose. For the entire period, total public employee wages increased less than the rate of inflation.  That isn’t unheard of – the wages of most Americans have been falling behind inflation for more than 40 years.  But it is unusual for public employees to end up in that category.  And one of the reason is there are fewer NYC public employees today than there were in FY 2008.

Even though the total wages of NYC public employees has been falling behind inflation, however, total spending on NYC public employees has been going up.  In part because taxpayer pension contributions increased 21.7% from FY 2008 to FY 2011 and 17.3% from FY 2011 to FY 2014, for a total increase of 42.8%.  Taxpayer pension contributions equaled 21.4% of employee wages in FY 2008, a higher contribution level than anywhere else in the U.S.  That increased to 32.8% of employee wages in FY 2014, under the Mayor’s proposal.

And it isn’t enough.  NYC public employees were retroactively granted huge increases in the value of their pensions in 1995, 2000, and (for teachers) 2008, with smaller increases in most of the years in between.  These were described, fraudulently, as costing the city nothing.  Meaning the city didn’t pay for them at first, putting off the cost onto future taxpayers and service recipients.  Which is one reason contributions levels are so high now, and employment and (in some cases) inflation adjusted wages are going down despite more spending on city employees overall.

There is likely worse to come.  The City Actuary has recently admitted that the city’s pension funds are unlikely to earn 8.0% per year in the future, and cut the projection to 7.0%.  But if that is true, more needs to be put into the pension funds.  The City of New York decided to short the pension funds by $1 billion, because otherwise services would be reduced too much.  What does that mean for the future, when even more will have to be contributed to catch up?

Moreover, the projected 7.0% rate of return for the city’s pension funds is still too high.  As The Economist explained in a recent article, because interest rates are so low and stock prices are already so high, a reasonable expected rate of return going forward is just 2.3% more than inflation, or 4.6% overall given the current inflation rate.   “The outlook for expected returns is as low as it has been in more than a century, with real US returns likely to be 2.3% a year. Overaggressive pension funds (and endowments) beware!”

By the way, that’s the same expected rate of return I calculated on my own, as shown in this post.

Assets became overvalued because, as noted in another article in The Economist, the 1980s and 1990s had the two highest one-decade returns on investments on record.  The public employee unions and the politicians they control, based on those 20 years, awarded themselves vastly richer retirement benefits at a time when most workers were seeing their retirement benefits taken away.  (The top executives who sit on each other’s boards awarded each other vastly higher pay starting at the same time). They took money out of our future, and now say they have an unbreakable contract and we have to pay it back.

Despite the high rate of pension contributions by city taxpayers, with all the sacrifices in higher taxes and lost public services that requires, the city’s pension funds remain desperately underfunded, particularly those for teachers, firefighters, and police officers, as yet another recent analysis once again showed.   Even that analysis, unlike The Economist, assumed both high current asset values AND high future returns from those values, he same double counting used to assert that all those retroactive pension deals would “cost nothing.”

The public employees are grabbing more in other tax-free benefits as well.  Spending on employee fringe benefits, as measured by the city, increased 14.3% from FY 2008 to FY 2011, far more than the rate of inflation, and 6.8% from FY 2011 to FY 2014, about the same as inflation.  Foremost among those benefits is health insurance, not only for those working but also for retirees.

One of the best things Mayor Bloomberg did for the future of the city was to set aside money for the future cost of retiree health insurance during the good times.  But once the recession hit, he started using up that money to balance the budget.   When the next Mayor takes office, it will all be gone.  Yet no one talks about it, let alone objects to it.

Basically, in addition to the soaring cost of past debts, the reductions in inflation adjusted state aid, and the end of extraordinary federal aid, NYC public employees have become significantly richer compared with most New Yorkers.  But only in tax-free retirement benefits, and not in cash.  And having already taken the richer retirement benefits in deals in Albany, the public employee unions only count the cash when deciding how much in services NYC residents deserve.  Far from grateful for getting more, they are doing less for city residents, in part because city residents can afford fewer of them at their higher cost per person.

This is a trend with no end in sight.  So in FY 2015, all the retiree health care money will be gone, and the city will be facing a growing pension debt, and rising costs on official debts.  That, not lower tax payments to the city, is why service cuts are likely to continue even as tax payments continue to rise.  Mayor Bloomberg calls these “uncontrollable costs,” but after he has been in office for more than a decade that is misleading.  A fair description is that these are costs that were imposed by others, and these are revenues of today and tomorrow were taken by others, in the past.  Some of whom have departed with their winnings.  Some of whom, like Mayor Bloomberg, are about to depart after having imposed additional uncontrollable costs on future New Yorkers.  And then there are the real enemies of current and future New Yorkers, those who serve (or rather are served) in the state legislature.  They are there forever.

I’ll follow with a post or two on specific public services.