City's Looming Budget Crisis in 'Post-Recession' Economy

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The National Bureau of Economic Research may have declared the great recession over, but the road ahead is still quite rocky for the New York City budget.

Even in New York City, where private sector job creation outpaced the region and the nation, Mayor Michael Bloomberg is imposing a hiring freeze. He is also looking for hundreds of millions of dollars in budget cuts for the current year and more for the next. The city currently is looking at more than a $3 billion budget gap for next year. And up the Hudson in Albany they state is facing an even bigger multi-billion dollar gap for next year.

For public budgetmakers, faced with a flat line “recovery” the reality of balancing the books without federal stimulus looms larger everyday.  

“While the local economy has done better than we had forecast when the recession first began, we have still suffered from serious declines in tax revenues,.” wrote Mark Page, the city’s Budget Director, in a letter to all city agency heads. So far the city’s annual tax revenues are $4 billion down from their pre-recession levels. The bottom line is that the Bloomberg administration wants managers to identify $2 billion in cuts over this year and next. All agency heads have to have their budget cutting plans in by October 8.

The mayor continues to try and shield emergency services and education from the worst of the cuts. Police, fire and the Department of Education have  to cut 2.7 percent of their current budget  and 5.4 percent for the following year. Other agencies like the Parks Department, Administration for Children's Services and the Department of Transportation need to identify four percent this year and eight percent the next.

With each new round of cost-cutting, it gets harder to avoid layoffs in the ranks of the city's workforce of 300,000. Since 2008, the city says it has handed out 1,400 pink slips. By the end of this month, city budgetmakers will have a better idea of just where they stand with revenues when they book the latest tax collections.

But those numbers are not the only anxiety producing uncertainties. Up the Hudson, Albany has a $8.2 billion projected deficit for next year thanks in part to the phasing out of both the state’s temporary income surcharge on the state’s richest households and the evaporation of stimulus funds from Washington. To get a sense of what that shortfall could mean for the city, consider that this year, more than $11 billion of the city’s $63 billion budget came from the state.  

Buried in the sea of red ink is the ticking time bomb that is the city’s pension and retiree health care obligations. Much of those benefits have been conferred by the state legislature but are the responsibility of city taxpayers. Bloomberg argues that now with tax revenues flat or declining, the exponential increase in the cost of municipal employee benefits will force the downsizing of the existing workforce.  

“If you want to know why we have to cut back the size of our workforce, when I came into office the city’s pension costs and health benefits were one and a half billion dollars a year. Nine years later, they are seven and a half billion dollars a year.” Bloomberg told reporters at a press conference after his latest budget cutting letter went out.

The Bloomberg administration did have a breakthrough with the city’s teacher’s union when the UFT agreed to a new pension tier for new hires, but it has not been able to address the rest of the city’s workforce when it comes to pensions. According to the mayor’s office some of the uniform services are reaching a critical tipping point that is not sustainable. They point to the Fire Department where salaries run $1.45 billion annually, while pension and other fringe benefits cost the FDNY $1.6 billion.   

Add to all this the unknown variabies of the impact the Obama Administration’s health care reform on the city’s rising health care costs. And perhaps the biggest question of them all, will New York City be able to retain the title of being the planet’s business capital. Ronnie Lowenstein with the Independent Budget Office says it all rides on how well Wall Street and the financial services sector, the city's economic engine, responds to federal regulation and the push by the Basel Committee on Banking Supervision to rein in mega-banks.

“We don't know what those regulations are going to be yet," Lowenstein says. "There is also the whole international aspect of international bodies seeking to rein in the extent to which large financial institutions leverage, borrow money to invest."

So the recession in over, right? But just what will we call this next phase?