Good morning. It is a pleasure to be here with you.

Three-and-a-half years ago, terrorists struck the City of New York with a devastating and deadly blow. We lost some 3,000 lives on September 11, 2001 as a result of the attacks on the World Trade Center , and our City also suffered enormous economic damage as well.

In the aftermath of the attacks, which cost New York between 83 and 95 billion dollars, the City was gripped by a stubborn recession that lasted 10 quarters. Between 2001 and 2004, the City shed nearly a quarter-million jobs. And in Fiscal 2003, we faced a 6.7 billion dollar budget deficit.

In that period immediately after the attacks, the City's fiscal situation frequently was compared to the budget crisis we endured in the 1970s. The enormity of the deficits we confronted after 9/11 made that comparison most apt.

Yet the true legacy of the 1970s is in the way the reforms adopted during that period enabled the City to craft responsible solutions after 9/11.

Through a prudent mix of service adjustments, tax increases and borrowing, the City managed to persevere through the worst of the post-9/11 budget problems. Now, we are entering a brief window of relative fiscal stability. We are on track to end the current fiscal year in balance. The budget for Fiscal Year 2006 charts a course toward balance as well. Our economy is showing some promising signs of growth.

Over the next several years, however, large budget deficits will re-emerge because the City's expenses continue to outpace its revenues. As was the case thirty years ago, the City faces difficult choices about its future. Because we are in this moment of calm, we should begin to contemplate those choices.

To help frame this discussion, it is instructive to look back at the decisions the City made prior to 1975. Going back as far as the 1950s, the City employed a series of fiscal gimmicks – such as borrowing from the bond market to pay for operating expenses – to bridge the growing gap between revenues and expenditures.

It reached the point that by Fiscal 1975, half of the City's capital budget, or 850 million dollars, was spent on operating expenses.

This fiscal house of cards predictably collapsed in March 1975, when the public credit markets turned their backs on the City, leaving New York , the financial capital of the world, unable to refinance more than 6 billion dollars in short-term notes.

As the crisis unfolded, it became clear the City required a number of solutions, including building budgeting and accounting systems essentially from scratch. As part of its response, the State enacted into law the Financial Emergency Act in September 1975.

Among other steps, the FEA created what is now known as the Financial Control Board. The FEA's passage signaled the beginning of the City's fiscal renewal.

The Act gave the FCB the authority to take over the City's finances if the City ran a budget deficit of more than 100 million dollars. The presence of this stick over the City's head helped impose the fiscal discipline New York needed. The Act also required annual presentations by the City of a four-year plan that included the current year's budget and the next three years of future operations. These provisions remain in place today.

It is worth taking a moment to compare the City's and State's budget processes. The differences are a direct result of the ‘70s era reforms. In New York City , the Mayor must submit a balanced budget, the Council must adopt a balanced budget, and the budget must be balanced at the end of the year. At the state level, the Governor submits a balanced budget, but the adopted budget doesn't have to be balanced.

In fact, the State of New York is one of only 5 states that do not require the adoption of a balanced budget.

Not only that, but the City's budget is balanced according to Generally Accepted Accounting Principles, which is a stringent standard. The lack of the discipline imposed by GAAP allows the state to pull rabbits out of hats on a regular basis by raiding various reserve funds.

The other critical contrast is with regard to transparency. Reporting requirements for budget data are extensive in the City, so fiscal shenanigans are more difficult to conceal.

On the other hand, the State reports much less information and therefore is able to withhold much more information.

As a result of these rigorous budgeting requirements, when the City faced an immense new fiscal challenge after September 11, 2001, we knew exactly what we were up against. We were able to forecast just how big a problem we had. And the threat of the FCB taking over our books if we failed to balance the budget effectively meant that, at the end of the day, our budget would be balanced.

And thanks to those reforms, we know what the next several years will bring. The out-years of the City's most recent Financial Plan contain multi-billion dollar budget deficits.

The City is confronting budget deficits of 3.7 billion dollars in Fiscal 2007, 3.6 billion dollars in Fiscal 2008, and 3.2 billion dollars in Fiscal 2009. (These gaps do not reflect some additional substantial risks the City faces in the coming years.) We face these deficits because the City's expenses continue to exceed the growth of revenues.

From Fiscal 2006 through 2009, the City's expenditures are expected to increase 8.9 percent. Over that same time period, revenues are projected to grow just 6.9 percent. Particularly because the City's economic recovery remains fragile, finding a way to address the embedded gap between revenues and expenditures is crucial to our long-term financial stability.

The fastest-growing elements of the City's budget are Medicaid, pension costs and debt service. My office has worked hard to seek out ways to reduce our pension and debt costs, and our labors have borne some fruit. For example, since I took office, by refinancing some of our existing debt we have achieved some 265 million dollars in savings.

In addition, we have altered the asset allocation of our 85 billion dollar portfolio of pension fund assets to reduce the year-to-year volatility in the City's contributions to the funds and make those contributions more predictable.

Despite these efforts, the combined costs of Medicaid, pension costs and debt service are projected to grow more than 20 percent over the next four years and, in Fiscal 2009, will represent about 30 percent of the City's entire projected budget.

In the coming years, the City will face enormous cost pressures in other areas as well. Let's start with education. It still is unclear whether the City will have to increase its allocation to the Department of Education as a result of the decision in the Campaign for Fiscal Equity case.

Also, the City must confront the financial position of the Health and Hospitals Corporation, which will face budget gaps ranging between 485 million dollars and 636 million dollars in Fiscal Years 2006-2009.

The City's ability to meet its current obligations to its citizens will be hampered by these growing costs. Given all that we have asked of New Yorkers in recent years, from tax increases to service reductions, coming up with additional dollars will be increasingly difficult.

The simple fact is we will have a complex series of choices to make in these next several years. Devising innovative and creative solutions is critical to our future.

As we do so, it is crucially important that we maintain the fiscal discipline that has guided us for these last thirty years. We must be vigilant in resisting the temptations that have gotten us into trouble in the past.

I mention this because some disturbing trends toward a kind a deliberate murkiness in the City's books have emerged in recent years.

For example, the Mayor chose not to include the financing plan for the Hudson Yards development in the capital budget, avoiding City Council approval. Any agreement contemplated for this project that has the potential to jeopardize our future use of tax dollars or potential revenue streams should be part of a public process.

In January, the City Council insisted on the city's paying for costs of the Hudson Yards plan not covered by revenues over the first ten years through the city's capital budget. This new plan is more stable and cost-effective, but the Mayor's initial tactic of attempting to keep the entire project off the books remains troubling.

The Administration has adopted other questionable approaches that obstruct our view of how tax dollars are spent. Take the Department of Education. The Mayor and the Chancellor claim that the Department has saved more than 250 million dollars in the last two years, but my office has been able to identify just 140 million dollars of savings.

Since the Department of Education came under mayoral control, its books have been largely opaque.

This trend toward fiscal sleight of hand and opacity on the eve of the expiration of the Financial Emergency Act, and with it the Financial Control Board, is deeply troubling.

We need to be certain that we are capable of avoiding the same missteps this City made in the 1950s, ‘60s and ‘70s. I am not suggesting that any of the areas I have described are of the magnitude of the decisions that precipitated the 1970s fiscal crisis. I am saying that they are cause for concern.

As a result, I believe when the Financial Emergency Act expires in three years, we should work to renew it in some modified form. I am encouraged that there are some discussions going on to reflect some of these reforms at the local level. In addition, at the State level we should also work to maintain some version of the Financial Control Board.

As part of these discussions, we should consider amending the FEA so that it allows the City to establish a Rainy Day Fund that would require that an amount equivalent to (usually) 1 to 5 percent of revenues be held in a separate account to only be used in moments of fiscal stress.  This account can be funded over a period of years and then used to stabilize City services in a downturn. 

In this regard, New York would join many other local governments and it would be a vast improvement over the City's current “Budget Stabilization Account” because the Rainy Day Fund could only be used when the economy falters. With our Budget Stabilization Account, the Mayor simply prepays the following year's expenses by essentially rolling over a built-up budget surplus.

Indeed, the Mayor is largely balancing the Fiscal 2006 budget by relying on the 2 billion dollars accumulated in the BSA. If the City did not have easy access to this rolled-over surplus, it would be forced into establishing a structurally balanced budget. For this reason and others , c reating a permanent Rainy Day fund would do much more to ensure stability in the City's finances.

The reforms we made in the 1970s have been crucial to the way we have managed our budgetary challenges in recent years. Extending and improving those reforms is the most logical next step for our City to take.

The transparency that is now a part of our budget process allows us to confront our budget problems years in advance. That is no small thing. We must resist any impulse to slide back toward the murkiness in our fiscal affairs that defined our not-so-distant history.

As we plot our future, we must always be mindful of the painful legacy of our past.

Thank you.

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