Remarks at the Financial Control Board Meeting
(As prepared for delivery)

Thursday, July 18, 2002

Governor Pataki, Mayor Bloomberg, Comptroller McCall, Mr. Sommer, private members and observers, good afternoon. I am pleased to have this opportunity to comment on the City's finances.

The Mayor and the City Council deserve credit for the job they did addressing the deficit in the Adopted Budget. They made hard choices, including increasing the cigarette tax and reducing expenditures. This was quite an accomplishment, considering that the City's economy was in recession last summer and has yet to recover. In total, Fiscal Year 2002 tax collections are nearly 1.6 billion dollars lower than in Fiscal Year 2001.

Fortunately, the City has overcome its immediate problems and we expect that the audited financial statements will confirm that Fiscal Year 2002 ended in balance. The past year's economic difficulties, however, combined with the destruction of the World Trade Center and the crisis of confidence in our capital markets, have created an unforgiving environment for New York City's budget.

As I reported earlier this week, review of the Fiscal Year 2003 Adopted Budget finds that, despite the efforts of the Mayor and the City Council, risks of more than one billion dollars are contained in the budgetary assumptions. With appropriate monitoring and corrective action, Fiscal Year 2003 risks can be eliminated. It is important that the City resolve these issues early in the fiscal year, not only to ensure balance in 2003 but to also address the looming problem in 2004.

The Financial Plan projects that the Fiscal Year 2004 deficit will exceed 3.7 billion dollars. This gap represents a shortfall of nearly 13 percent against City-fund revenues. In the two decades since the City achieved compliance with Generally Accepted Accounting Principles, this is the largest next-year gap ever projected, both in dollar and percentage terms. Unfortunately, my analysis finds that the gap will be even larger, exceeding five billion dollars. If the City is to achieve balance in 2004 it must promptly begin its gap-closing effort.

One of the reasons the deficit recurs, in spite of this year's gap-closing efforts, is that the City's recurring revenues are insufficient to support its ongoing expenditures. In the boom years of late 1990's the City reduced taxes and expanded operating and capital spending without regard for future consequences. The City must break the cycle of multi-billion dollar budget gaps and bring the level and growth of its revenues and expenditures into alignment.

We have no choice but to face these significant challenges. Regardless of the causes underlying these large deficits, the City must design initiatives with recurring value in order to close the current year gap and to begin addressing next year's unprecedented shortfall. In doing so it should augment the review of the Program to Eliminate the Gap to ensure swift identification of any shortfalls. Currently, all of the City's fiscal monitors meet quarterly to review the PEG program. This fiscal environment requires a monthly monitoring process with measurable milestones, regular reporting and individual accountability to allow the City to quickly identify and correct problems in its gap-closing initiatives.

We also need additional support from the other levels of government. It is appropriate, for example, that the Federal government adjust its funding formulas to ensure that New York City receives its fair share of Medicaid dollars.

The State also has a role to play. I have called for reinstitution of the commuter tax with a sunset provision. This will generate 400 to 500 million dollars per year in needed revenue. It is equitable that those who earn their livelihood in this City share in support of its immediate needs. An average net cost of a dollar-a day for a three or four year period is a reasonable request to make in this time of fiscal stress.

The State can further assist the City by funding outstanding education aid. There are approximately 547 million dollars in aging education aid receivables on the City's books. State legislation allows the City to reduce this backlog by 435 million dollars using funds borrowed through the Municipal Bond Bank. Although this transaction will supply needed cash, it will not help close the budget gap, since the revenue has been previously accounted for under Generally Accepted Accounting Principles. This reduction of the education aid receivable balance to 112 million dollars will enable my office to recognize an additional 206 million dollars in prior-year school aid which had not been booked as the outstanding balance was deemed too high. The State must promptly pay this remaining school aid balance of 318 million dollars in order to provide the City with necessary cash.

This year will be a difficult one for the City's finances and the next year will be even harder. The bond market and the rating agencies have responded to the City's accomplishments so far and have supported the City in its financing efforts.

By working together this Board can immeasurably assist the City in achieving the budget balance required under the law by assuring that gap-closing measures are closely reviewed. As an independent monitor, the Financial Control Board is uniquely situated to assist the City's financial recovery and help put the City on the road toward structural balance.