Financial Control Board Meeting
Thursday, July 31, 2003
633 Third Avenue
New York, New York

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

The City has overcome its budget problems for the moment. I would like to give credit to the Mayor and the City Council for the job they did in addressing the deficit in the Adopted Budget for Fiscal Year 2004. The $43.9 billion budget was balanced through a series of tax increases, spending cuts, and the use of a $1.3 billion FY 2003 surplus. As the report my office released yesterday on the FY 2004 budget and the Financial Plan for Fiscal Years 2004-2007 indicates, the budget charts a reasonable and responsible course toward current-year balance. My analysis also concludes that although there are risks in this year's budget, we can be reasonably confident that the City will end the fiscal year in balance.

That said, my office projects multi-billion dollar budget deficits in the out-years of the Financial Plan. The multi-billion dollar budget gaps that begin in FY 2005 loom especially large because of the drastic steps the City has already taken to close massive budget deficits in each of the last two years. Given the tax increases and service cuts the Mayor and the City Council have already implemented, the City's options going forward are limited. As my report indicates, in both calendar years 2003 and 2004 the tax burden on New Yorkers will grow at a faster pace than personal income- the first time that has happened since the 1970s. In 2003, personal income is expected to rise by less than 1 percent, while total taxes will increase 7 percent. In 2004, personal income is expected to increase 4.3 percent while total taxes will increase 12 percent. Because taxes are rising while incomes are stagnant, the city tax burden for the average New Yorker will increase by 13 percent over two years. Finding a way to close these projected deficits without further taxing City residents and significantly reducing core services will be no simple task.

It should also be noted that while the City projects that the FY 2005 deficit will exceed $2 billion, my office believes that gap will approach $3 billion and that the deficit will approach $4 billion by FY 2006.

The fiscal problems now facing the City are primarily the result of the embedded structural imbalance between the City's revenues and expenditures. This imbalance has been exacerbated by the ongoing impact of the September 11th terrorist attacks as well as the City's economy, which continues to lag that of the nation. The major sources of growth in the City's budget are well-known: Rising pension costs due to the combination of benefit increases and investment losses, rising debt service costs due to capital planning decisions made in the former City administration, and rising medical costs reflected in increased Medicaid and employee health insurance costs. Spending on these areas will rise by almost $6 billion by 2007. As a result, spending in all other City functions- including salaries and wages, services, police, fire, and sanitation services - is projected to decline by nearly a billion dollars over the same period of time. Unless the structural imbalance is addressed, the citizens of New York will face years of difficult budget deficits

Over the past year, the City crafted credible solutions to the FY 2004 budget deficit by acting expeditiously and decisively once the FY 2003 budget was adopted. To adequately address the FY 2005 shortfall, the City must adopt a similar sense of urgency in devising solutions. The extent to which these initiatives are recurring will help determine whether the current budget problems will be contained, or will be ongoing.

Thank you.