WILLIAM C. THOMPSON, JR.
NEW YORK CITY COMPTROLLER

Testimony before the Finance Committee
New York City Council
Executive Budget Hearings
Fiscal Year 2004

(As prepared for delivery)
Tuesday, March 4, 2003

Speaker Miller, Committee Chair Weprin, honorable members of the Finance Committee, good afternoon.

Last year, I came before you to deliver the sobering news that the City faced a budget gap of more than 6 billion dollars for Fiscal Year 2003. I expressed the hope that if we worked together, we would be able to confront the extraordinary challenges before us and achieve fiscal balance. I am pleased to report that thanks to the actions of this Council and the Mayor, the City of New York will in fact end Fiscal Year 2003 in balance. Indeed, we will enjoy a surplus.

But as we undertake the task of crafting the budget for the next fiscal year, we once again must confront a harsh reality. While the actions of city leaders have cut the projected Fiscal 2004 budget gap nearly in half, we still have a way to go. The Mayor's Preliminary Budget puts the deficit for next year at $3.4 billion. As I indicate in the report my office issued yesterday, the actual deficit may be $3.9 billion -- a half-billion dollars higher than the Mayor's estimate. This analysis accounts for the risks and the offsets provided by the Mayor's recent agency gap-closing initiatives and the impact of the Governor's Executive Budget.

Let's be clear: the City has done its share to reduce the budget gap. It has addressed the impact of the current recession with a major tax increase and large spending reductions. The time has come for Albany and Washington to stand by our side.

I want to emphasize a crucial point: the deficit we now face is a direct consequence of 9/11. If we had only a recession to deal with, the actions taken thus far would have been sufficient to balance the budget. Terrorists targeted New York City because we serve as a symbol of this country. Our nation as a whole must help us bear the cost of 9/11. The Federal government shares the responsibility of helping the City manage this fiscal crisis.

This year's budget problems will not be fixed by economic growth. Both the national and local economies continue to sputter. Consumer demand, which propped up the economy while other economic pillars sagged, is now weakening. The financial services sector, by far the largest source of the City's tax revenues, continues to struggle. With both the crisis of credibility that has engulfed the stock market since the collapse of Enron and increased uncertainty stemming from the country's move toward war in Iraq, Wall Street is in no position to lead the City's recovery.

In calendar year 2003, my office is projecting a decline in Gross City Product of 1.5 percent. While we project meager GCP growth of 0.9 percent in 2004, the Mayor is forecasting growth of 3.7 percent. My office concludes that the upside potential for the City is smaller than the downside risks from war, continuing market troubles and weak consumer demand.

The national economy is faltering as well. My office is forecasting an increase in 2003 Gross Domestic Product of 2.7 percent, somewhat below the Mayor's estimate of 2.9 percent. For 2004, we project GDP growth of 3.5 percent, well below the Mayor's assumption of 4.5 percent.

These economic forecasts will directly result in diminished City revenues. The City anticipates that revenues will shrink by $2.4 billion in Fiscal 2004. My office believes the decline may be $179 million more than that. The drop is largely due to the infusion of extraordinary one-time revenues to balance the budget in Fiscal Year 2003.

The City's expenditures, on the other hand, continue to increase. This year, expenditures will increase $511 million, reaching $45.5 billion. That growth is being driven largely by the escalating costs of pension contributions, debt service, health insurance and Medicaid. Together, spending in these areas is projected to increase by 1.8 billion dollars in Fiscal Year 2004, reaching $13.3 billion.

To address these challenges, the Mayor has proposed a gap-closing plan for Fiscal Year 2004 based on a series of assumptions that requires the participation of others. State, Federal and Labor initiatives account for $2.9 billion, or 85.6 percent, of the City's $3.4 billion gap-closing plan. The remaining $487 million would come from a series of agency spending reductions and non-tax revenue increases.

The Mayor's plan also assumes that New York State will approve a different commuter tax in the form of personal income tax reform that would generate $962 million in additional revenue. Since last spring, I have advocated for reinstatement of the commuter tax as an equitable means of reducing the City's burden. It is only fair that the weight of that burden be borne by all those whose livelihoods rely on the City's long-term strength, stability and vitality. Reinstating a commuter tax with a reasonable sunset provision would do just that. Yet the Governor is flatly opposed to bringing back the commuter tax, and the prospects for its passage appear, for the moment, to be mixed at best.

The Mayor is also relying on regional transportation initiatives, including tolls on the East River bridges, to produce another $200 million in Fiscal Year 2004. I generally oppose tolls on the East River bridges because they would unfairly single out those New Yorkers who live in the boroughs outside Manhattan.

These actions would require state approval. All told, the Mayor is requesting and relying on $1.7 billion of help from the state.

The Governor has responded to these requests by completely ignoring the plight of New York City. The Governor's Executive Budget is structured to increase the City's financial burden rather than reduce it. Instead of cutting our deficit by $1.7 billion as requested by the Mayor, Governor Pataki's proposals would widen the Fiscal Year 2004 budget gap by $844 million.

The Governor is severely reducing funding for crucial programs. Under his plan, school aid appropriations to the City would be cut by $753 million. Funding for public assistance would also be reduced by $61 million. And based on a change in the formula for Medicaid funding, the Governor would increase the costs of Medicaid to the City by $255 million.

While he says he will not raise taxes, the Governor proposes reinstating the sales tax on clothing and increasing fees and license costs. These proposals would produce an estimated $225 million in additional revenues. The tax on clothing purchases under $110 clearly falls on working families. And since the state portion of the sales tax would also be reinstated, it raises the tax burden on City consumers by $368 million, of which the state would receive half.

We must now turn to our legislative leaders in Albany to undo the damage that the Governor's budget would inflict on the City. New York City is the engine that drives New York State's economy, and Albany must recognize that our futures are intertwined.

The spending cuts and revenue enhancements initiated by the City Council and the Mayor have gone a long way toward reducing next year's budget gap. I am concerned, however, that the Mayor's plan relies heavily on non-recurring revenues to address the rest of the coming year's shortfall. The City, for example, is assuming it will receive a one-time payment of $600 million from the Port Authority for back rent from JFK and La Guardia airports. These solutions may appear to help the City in the short-term, but they do nothing to solve the long-term problems we face.

The fact is, persistent and ever-widening budget deficits plague our fiscal landscape in the years that follow. The fiscal crisis will only get worse in 2005. The projected budget gap for fiscal 2005 already exceeds $4 billion. To put things in perspective, think about this: Even if the Mayor's Fiscal 2004 gap-closing programs were enacted exactly as proposed, the City would still have to grapple with a deficit of $1.5 billion in Fiscal 2005 and $2 billion each in Fiscal Years 2006 and 2007. Those deficits demand that we take the long view in solving the problems we face this year.

If we do not get the help from Albany and Washington that we require, the City will be forced to adopt draconian budgetary measures such as further service cuts and revenue enhancements.

It must be stressed that the current crisis impacts us all. Only by working together can we implement sound and effective policies and ensure the future economic prosperity of our City.

Thank you.