Photo credit: Marla Maritzer

New York City Comptroller William C. Thompson, Jr. testifies before the New York City Council Finance Committee on the Mayor’s Preliminary Budget for Fiscal Year 2010 and the Financial Plan for Fiscal Years 2009 to 2013 on March 9, 2009. Pictured with Thompson is Deputy Comptroller for Budget Marcia Van Wagner.

New York City Comptroller William C. Thompson, Jr. today testified before the New York City Council Finance Committee on the Mayor’s Preliminary Budget for Fiscal Year 2010 and the Financial Plan for Fiscal Years 2009 to 2013.

Thompson testified after releasing his analysis of the mayor’s budget and financial plan. That report is available at www.comptroller.nyc.gov. Thompson’s testimony is below:

Good afternoon. I would like thank Committee Chair David Weprin and all of the members of the City Council Finance Committee for the opportunity to comment on the Mayor’s Preliminary Budget for Fiscal Year 2010 and the Financial Plan for Fiscal Years 2009 to 2013.

With me today is Deputy Comptroller for Budget Marcia Van Wagner.

We meet this year under extraordinary circumstances. The collapse of a massive housing and credit bubble in the U.S. has propelled the world into a global recession. The reverberations within the financial sector have drained trillions of dollars of wealth from the balance sheets of U.S. households.

While New York City made it through much of 2008 without feeling the sting of the growing crisis, the city’s economic and fiscal situation deteriorated rapidly last autumn, prompting the Mayor to significantly downgrade his economic and revenue forecast in the November modification.

The January Preliminary FY 2010 Budget and Five-Year Financial Plan presents more bad news, as the mayor has revised his economic and tax revenue forecasts further downward. Since the November projections, tax revenues are expected to decline by over a billion dollars for the current fiscal year, and by close to 2 billion dollars for fiscal years 2010 to 2013.

These contractions have widened the FY 2010 gap to 3.6 billion dollars and increased the out year gaps in the remaining years of the Financial Plan to almost 7 billion dollars before proposed initiatives to close the gap. Among those gap-closing initiatives are additional agency spending reductions, sales tax increases, pension reform, and employee health care restructuring.

As you know, the city is prevented by law from establishing a rainy day “reserve” account for use in later years. Instead, the City uses prepayments of future year expenses, especially debt service, to “roll” its surpluses forward.

This surplus roll grew every year between 2001 and 2008, as city revenues exceeded our expenses. This trend has now reversed. Of a 4.64 billion dollar prepayment made in Fiscal Year 2008, the City plans to roll forward only one and a half billion dollars, using the remaining three billion to balance the FY 2009 budget.

In my office’s review of preliminary FY 2010 Budget and Five-Year Financial Plan, we have identified a variety of risks and offsets to the Mayor’s projections. On net, these factors could result in significantly larger budget gaps throughout the Financial Plan period.

Indeed, instead of budget balance in fiscal years 2009 and 2010, the City may face gaps of 54 million dollars and 1.9 billion, respectively. Net risks are approximately 3 billion dollars in the out years, leading to gaps of 6.7 billion dollars in FY 2011, 7 billion dollars in FY 2012 and 6.9 billion dollars in FY 2013.

My office predicts that the national recession is likely to be deeper than what is anticipated by the current consensus forecast, and that the subsequent recovery will be weak. While we believe that the City’s downturn in 2009 will not be as sharp as the Mayor’s forecast suggests, the local economic recovery will be more tentative, and tax collections more anemic. This more pessimistic view underlies expectations of lower tax collections throughout the Financial Plan period.

For FY 2009, we project that collections of business, sales, and real-estate-related taxes will fall short of the Mayor’s forecast based on current collection trends. Additional risks include 242 million dollars related to partially restored revenue sharing and overtime spending on the order of 111 million dollars.

These risks will be partly offset by restitution agreements worked out by the Manhattan District Attorney’s Office that is 125 million dollars greater than what was anticipated in the FY 2009 budget.

In addition, under the State’s allocation plan for the enhanced FMAP funding provision in the American Recovery and Reinvestment Act of 2009, the City will receive a net offset of $607 million to Medicaid spending in FY 2009. However, the allocation will fall short of the City’s projections by $77 million in FY 2010 and $612 million in FY 2011, resulting in an overall net reduction of $82 million from Plan assumptions.

Getting back to the issue of overtime for just a moment, I want to emphasize that the city routinely underestimates the amount budgeted for this cost, which then widens the budget gap that must be closed. Last year alone, the city’s overtime expenses for police, firefighters and civilian workers exceeded 1 billion dollars for the first time since 9/11. It would serve the city’s budget process greatly if OMB and the agencies were to budget overtime more realistically moving forward.

In the out years of the Plan, most of the risks result from gap closing initiatives that rely on actions by third parties, including an average of 1 billion dollars annually from proposed health insurance restructuring and employee premium contribution, pension reform, and the restoration of State revenue sharing. Until we get more clarity from the State and labor unions on how they will proceed with these proposals, the outcomes remain uncertain.

One gap closing idea the city is pursuing is an increase in the sales tax, which the Mayor suggests could bring in an average of 950 million dollars annually in fiscal years 2010 through 2013. Because that tax is regressive and disproportionately impacts the very New Yorkers struggling to make ends meet in the current downturn, I have proposed an alternative tax on individuals making 500,000 dollars and above.

Specifically, I am recommending a 4.3 percent tax rate on taxpayers with taxable income of 500,000 dollars and a 4.8 percent tax on taxpayers with taxable income of a million dollars or more, compared to the current rate of roughly 3.65 percent. As with the State income tax, these rates would be flat rates rather than applying only to the margin of income. Based on estimates by my office, this would yield nearly 1 billion dollars in calendar year 2009 and a similar amount in the City Fiscal Year 2010.

The City workforce is projected to decline more than 21,000 from FY 2009 to FY 2010 and remain at around 220,000 throughout the plan period. While the bulk of those positions – most of them teachers -- may be restored with Federal stimulus funds, the Financial Plan presents these headcount cuts as permanent. Thus stimulus funds may only delay, not prevent, the reductions.

Complicating the City’s efforts are actions being taken by the State to close a gap of nearly 14 billion dollars that will increase the City’s fiscal challenges. For instance, the State has interpreted the stimulus bill such that the City would receive about 80 million dollars less Federal Medicaid assistance in fiscal years 2009 through 2011 than it has budgeted.

Finally, to reduce debt service costs, the Mayor has proposed a 30 percent cut in the capital commitment plan beyond a 20 percent reduction outlined in the November capital plan. Together, the reductions would result in debt service savings of about 1 billion dollars in fiscal years 2010 through 2013 out of a total debt service expense of just over 20 billion dollars.

We don’t yet know how the 30 percent reduction will be implemented, but it would be entirely appropriate for the city to focus on the preservation of maintenance and a state of good repair. Our experience with the fiscal crisis of the 1970s demonstrated that we defer maintenance at our own risk. Let’s show that we really did learn that lesson.

Indeed New York City has acquired its reputation as a premiere place to live and do business by keeping crime down, by pursuing exciting new economic development initiatives, by luring new industries like motion pictures and high tech, and by expanding a thriving entertainment and hospitality industry.

We must continue to do all we can to maintain that reputation. With careful nurturing and attention to the fundamentals of our economy, New York will continue to represent to new generations that place where dreams are forged and government faces down its challenges with a commitment to innovation, diversity, and progress.

Those are the values our great City was founded upon, those are the values that will see us through our current economic troubles, and those are the values that will keep us strong long into the future.

Thank you very much.

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