Balancing the New York City Budget

New York State’s Budget Gap originated from Wall Street and dot.com financial bubbles that led the economy into a recession. Other activities that activities that led to financial gap are the September 11^th attacks , natural recession and overly ambitious multi-year tax reduction that could not be sustained through a downturn in the economy on Wall street. The budget projects we are going to look at illustrate fiscal consequences and alternative decisions to be implemented in operational and capital investment. The period illustrated in the projects are not necessarily the time in which new financial policies need to be implemented but guidelines to be faced over in longer periods of time in order to eliminate the transition for the multiple stakeholders.

The root cause of budget problems facing the New York State and other few states has been the eruption of two companies Wall Street and dot.com fiasco. The tidal wave that hit the states in the year 2001 impacted heavily on the developments of state tax revenue. For instance, in 1990, California’s taxable capital gains grew from $20 billion to $118 in 2000. And 2001 and 2002 the figures dropped drastically to tax revenues of $48 Billion and $40 billion respectively. On a recent budget report submitted by governor Pataki of calendar years of between 200 and 2001, shows that net amount of capital gains taxable on New York personal income tax returns dropped 54.3% from 62.3 billion to 28.4 billion and this bracket of income that was expected further dropped to $17.1 billion in 2002 and $14.7 in 2003 (Fiscal Policy Institute, 2003, p.4) (The City of New York Independent Budget Office, 2001).

There has been a reduction of New York State’s personal income tax receipts from the amounts it received of $26.9 billion in 2000 to 2001 to an equivalent of $23 billion in the years 2002 to 2003 and 2003 to 2004 state fiscal years. On a close look, during the late 1990s personal income tax receipts grew by double digits of 12.5%, 12.7% and 16.2% on the subsequent years. The growth compensated for other lesser taxes and later allowed the total revenues to grow that enabled to finance major programmatic expansions. An example of financed company was STAR and homestead which boosted its current status and grew from nothing in 1997 through 1998 fiscal year to $2.8 billion. Child Health Plus expanded and Family Health Plus was established (Fiscal Policy Institute, 2003, p.5).

September 11^th attacks made state tax revenues to drop by billions because (a). The loss of thousands of people’s lives and a loss of 26 million square office space worth of destruction (b). Losses suffered indirectly from other industries such an s hotels and manufacturing companies. Careful analysis into the NYC and NYS revenue loses by the U.S General Accounting Office (GAO) revealed that an estimated of $1.4 billion in revenue was lost during 2001-2002 attacks and $ 4.2billion of state revenue loses during 2002 through 2003.The growth in the personal income tax base contributed to capital gains and wages collected from Wall street that redeemed for the deep cuts in its revenues. (Fiscal Policy Institute, 2003, p.7) (The City of New York Independent Budget Office, 2002).

The year 2002-2003 gaps that attributed to the 2003-2004 gap generated from the time New York State faced $6.8 billion budget less $1.1 billion during the time and the end of the fiscal year and $5.7 billion during 2002-2003. Getting through the year was pretty tough, so the Governor proposed a low tax and fees increase, taking $2.8 billion in various reserves and other resources and it stopped spending on other services such as funding higher education. Later the legislator restored the some of the proposed cuts and provided an increase of $2.1 billion in school aid from additional non-recurring resources. The results is that New York State would have a budget gap of the fiscal years between 2003-2004 of $4.2 billion if revenue increase had returned back as projected Government in the beginning of the year 2002 but instead it had lost and the government now approximated next year’s gap of 2003 at $9.3 billion (Fiscal Policy Institute, 2003, p.10) (Fuerbringer, 1987).

The States fiscal dilemma had been consolidated further by the fact and while 2002 to 2003 budget had anticipated a fall in revenues, the actual decline turned out to be $2.1 billion greater it had anticipated. It meant that the State now had a $2 billion and more to fill the gap in closing its current fiscal year. It also meant that 2003-2004 gap would accumulate to $6.3 billion unless the rate of revenue growth was greater than previously anticipated. From this facts, the years revenue growth would be less that 5.25% as compared to Last January’s , further increasing the projected gap for next year (Fiscal Policy Institute, 2003, p. 11) (The City of New York Independent Budget Office, 2004).

The Governor’s approach in closing the 2003-2004 Budget Gaps

Pataki proposed a multi-year plan that would get the state’s finances back into track so that it could have some structural balance. At the time he did not consider the proposal he intended to implement of $9 million of recurring services cuts and revenue increases that would have subsequently harm the state’s economy at the time. The Governor employed two budget balancing actions; 1). A plan that would reduce the anticipated budget gap to a workable proportion through one-shots would include tobacco securitilization, adding federal aid and efficiencies that would stimulate the state’s economy during the current recession 2). Proposition more acute budgets cuts and revenues increases to enable it close the remaining gap. The revenues increases would be generated from increased regressive consumption taxes and fees (Fiscal Policy Institute, 2003, p.12) (The City of New York Preliminary Budget Fiscal Year, 2006).

Governors approach in reducing the budget Gap to Manageable Proportions

The most practical approaches the governor employed in reducing the amount of the gap would be service cut and revenue increases that are categorized into recurring and non-recurring actions. The use of nonrecurring resources to balance the 2003-2004 budgets in a single year would damage the state’s economy drastically. The economy and Wall Street cannot recover on that short period of time and lower Manhattan will not be rebuilt. The problem with this method was that nonrecurring actions to be employed will provide the state with subsequent additional resources in the coming years an also it would reduce the resources already available in the state subsequent years. For instance, the proposed action for tobacco secularization will provide resources that help to balance the 2002-03 deficit of $1.5 billion, 2003-04 $ 2.5billion and 2004-05 $400 million budgets. While the recurring costs dealing with New York’s State’s of the receipts from tobacco manufacture Master Settlement Agreement that currently finances a number of health care programs authorized by Health Care Reform Act (Fiscal Policy Institute, 2003, p.15) (McMahon, E. J. 2008).

Independent budget office

Metropolitan Transportation Authority (MTA) reported a surplus of $1 billion in 2006 that lead to the development of its next year’s financial plan in February 2007. The financial Plan did not take off as it expected but rather there was a dramatic deterioration of its financial situation over the next three years that projected to gap of $799 million in 2008, $1.46 billion in 2009 and $1.78 billion in 2010. After receiving financial gaps, IBO considered MTA’s revenue forecast in closing the anticipated project gaps (Independent budget office, 2007, p.1).

Focus analysis

MTA always plans its financial plan of coming years from previous year’s operating budget, for instance, in 2000 to 2004 MTA Financial plan was released in 1999 and it projected that the deficit would reach $1.3 billion by the year 2004. Although the deficit anticipated in 2004 become a moderate surplus, MTA still forecasted on a $1.3 billion budget gap for the year 2007. By the time the Feb. 2007 Financial Plan were discharged, Metropolitan Transport Authority was expecting $270 million cash surplus for that year and its future financial plans for $1 billion-plus to be forwarded to 2009 (Independent budget office, 2007, p.1-2)

Urban Tax Forecast

Real property transfer tax and the mortgage recording tax collected from commercial real estate transaction of $500,000 in New York City. The forecast of real estate tax revenue collected were fairy stable and accurate through 2003 and the following subsequent years. The resulting “bracket creep” caused revenues form MRT to grow faster ((Independent budget office, 2007, p.4).

Options exploited by MTA for closing the Gap

MTA employed tactics in operating tax budget gaps that included expense reduction, increase revenues or combining both options.

• Expense reduction measures; 1). Service reduction; cost savings will be generated from service cuts. The proposal included abandoning four branches of the Long Island Rail Road; doing away with weekend services, issuing a close ticket window that would save up to $24.1 million in 2006 in about 10 stations and reducing the agency’s expenses by 2%. The service cuts were also affected on 95 NYC Transit bus routes from 1am and 5 am that would save $8.7 million that would amount to one-sixth percent of NYC Transit’s total operating expenses (Independent budget office, 2007, p.5).

1. Operating Efficiencies; State Comptroller in 2004 issued a report on a proposed staff reductions at the MTA but the proposal failed to quantify because MTA had initially saved for its future projects through share services of $11 million in 2008, $ 42 million in 2009 and $55 million in 2010 from consolidated administrative functions. The money MTA had saved was already embodied into the current financial plan. 3). Labor settlement; labor costs contribute to the majority of MTA’s operating expenses. For example it spent 3.5 billion in wages and salaries in 2006, $400 million on overtime and over $800 million on health and wealth and benefits that totaled to $4.7 billion operating costs. Reduction of labor costs would slow the growth of spending and generate savings for MTA (Independent budget office, 2007, p.8).

• Revenue Options

MTA revenue resource derives from fares, tolls, state and local subsidiaries and dedicated taxes. In 2006 MTA revenues contributed to $9.4 billion and bridge and tunnel tolls contributed to 13 percent that helped subsidize transit operations. Dedicated taxes amounted to 36% of the MTA revenues, state and local budget subsidies were 6% and operating revenues were below 5 percent. In Closing the Gap MTA proposed projects needed to be implemented so that budget gaps would close thereby increasing revenues in sources such as fares, tolls, dedicated taxes and state and local subsidiaries while on the other still keeping shares from each one of them. This approach freezes the shares of fares, tolls, taxes and operating revenues of the 2006 revenue levels and by this way it will be able to determine how much additional revenue is needed to close the budget gaps. to close the gap revenues, 9 percent increase of revenues in the year 2008 over their 2006 level and 17 percent in 2009 and 20 percent in 2001 to be realized (Independent budget office, 2007, p.8) (Transportation alternatives, 2008) (City of New York, 2008).

Citizens Budget commission idea of balancing budget is raising operating expenses such as depreciation that will be covered with operating revenues. Raising operating revenues will be guided by the following; a). Cost of bridge and tunnel facilities expenses should be paid by user fees paid by motorist b). Surplus money received from motorist should be able to cover for a quarter of the cost providing mass transit services. To achieve this, price charged for using highways, bridges and tunnels should be more than the cost to be able to compensate for market failures that may be experienced from auto use. The additional price will be paid to tolls that will cover costs and also indirect expenses charged to users such as fuel taxes and expenses from motor vehicle fees collected by state (Citizen Budget Commission, 2006, p.7).

• Fare paid by mass transit users should cover one -half of the operating costs of those services. It provided private and government goods therefore the costs should be divided between user fees like fares and the government subsidies. d). a quarter of the operating costs of services and fraud should derive from state and local subsidies to mass transit. For instance, if riders pay half of mass transit and a quarter covered by motorist through cross-subsidy and the remainder paid by the public subsidies, the budget will balance. This MTA operating projects can be used to balance the MTA’s budget in the future. CMC is putting other projects underway to meet future costs of capital in 2009 that include capital plan commitment that will foresee new projects expanded that will be incorporated in the MTA’s proposed five year capital plan and cost savings such as reducing operating costs that will reflect its proposed productivity initiatives of 2 percent in 2006 and 2.5 percent annually for the following years through 2009. And reducing major expansion projects from the capital plan hence cut down on borrowing and associated debt serving costs. Also included in the proposal is “cost-saving plus catch-up” that means that the state has to finance the projects from its subsidies in order to equal to the debt service cost for the borrowings (Citizen Budget Commission, 2006, p.9).
•  Savings from productivity initiatives such as cost-savings project that will amount to $900 million in 2009. This cost saving projects will reduce capital costs by $100 million in 2009. There is a lot of savings realized from dropping expansion projects that will save MTA from debts incurred from debts services costs. g). under the project of “cost saving plus catch up”, doubling up the pace of the SOGR will add $100 million to annual debt services costs (Citizen Budget Commission, 2006, p.9) (Citizens Budget Commission, 2002).

Future MTA revenue requirements

Future expenditure requirements are above the 2005 expenditure, therefore MTA will require to increase over the five year period from 2005 to 2007 ranging from $3.3 billion for the baseline scenario and about $2.3 for cost savings. In baseline scenario where the revenue collected in less than expenditure requirement of $3.2 billion which is almost a quarter of the total projects exp endure to close this gap therefore Citizen Budget Commission requires to; 1). Increase fares by 34 percent. The increase will come from the current $76 to over $102. 2). the government subsidies will need to be increase by $87 million 3). Double up the cross-subsidy from auto users that would come to an increase of $1.5 billion able to close up the gap (Citizens Budget Commission, 2006, p.10) (Citizens Budget Commission, 2002).

Steps employed by CBC in implementing cost-saving project that would reduce the 2009 gap by $1.0 billion thereby reducing the shortfall of $2.2 billion in balancing the budget include; 1) increasing state’s and local tax by 1.5 percent annually, 2).increasing fare by 22 percent or a monthly Metro card price of $93 and 3). Increasing cross-subsidy from auto users by $1.3 billion will help close the budget (Citizen Budget Commission, 2006, p.11).

New York State and its local governments provide their citizens with pension schemes deducted from their salaries and thereafter contribute to retirement funds that cover their future pension schemes. New York and competitive retirement benefits can benefit from government employees by changing from current pension plan known as defined benefit (CD) to the savings-based defined contribution (DC) model. DC plan requires that a certain amount of money be put aside from retirement income. The DC proposal requires that government employees in New York deposit about 5 percent of their salary into retirement account bringing the total minimum savings to 8 percent contribution. The contributions would match up 2 percent additional of the amount previously paid. With this plan, DC retirement scheme, tax payers would no longer have to put up with financial risks. Benefits of using DC plan is that it would cap costs at 7 percent of pay and tax payers will be relieved from risks associated with market down time. High pension costs contribute to the New York’s fiscal crisis that took place in the mid-1970s therefore implementing the DC plan will help balance the New York state’s budget (Independent Budget Office, 2003) (Empire Center for New York State Policy, 2008).

Governor David A.Paterson availed a plan to cut on aids extended to schools and hospitals in the next four months that would reduce budget deficit. The proposed plan will reduce spending and increase revenues by $2 billion by April 2009 and $5.2 billion over the next 16 months. Health care and education consume a large piece of $121 billion budget. He also calls for labor unions to open contracts that would sign them to forgo 3 percent raises of state workers. Tuition increments in state universities that will up by &300 in spring were among his priorities. Reducing Medicaid reimbursement to half and closing juvenile detention that were not actively used would help save up. Raising taxes on health insurers would help close up the budget, however, this cost will be passed on to the public. He also proposed on increasing 5 cent deposit charged on soda, beer and bottled water. Health insurance premiums currently paid by state retirees need to be increased so that the 90 percent would drop to 50 percent under this plan. Granof, (Chapter 13, 2007) also laments reduced that health care, colleges and hospital findings will help balance the budget (The New York Times, 2008) (The New York Sun, online, 2005) (Paterson & Anglin, 2008)

A proposal to divide New York responsibility for financing public services between itself and local government would decrease pressure on local property and sales taxes by a). Increasing state share of Medicaid costs gradually and allocating the increments to its projects b). Restore revenue commitments to “revenue sharing” with the local governments through transparent needs formula that they both should adhere to (Fiscal Policy Institute, 2003, p.57).

The palisade principles of balancing New York budget

New York is required to balance its budget in accordance with generally accepted accounting principles that include a sound economic policy. The state usually operates on deficit that drives it into debts and creates future fiscal problems. In order to balance the budget is for it to apply the Generally Accepted Accounting Principles (GAAP). It currently uses cash basis of accounting that allows certain schemes that include postponement of expenses and delay taxes. New York should make efforts to balance its budget according to the GAAP. Over the years, New York’s budget has always been late due to the delays caused by disagreements between the Legislature and the Governor on the amount of each type of revenue available. To solve this, the two parties should agree on the formal mechanism that will identify acceptable estimates. The state requires performing assessment of its expenditure. In the fiscal year 2004-2005, its expenditure was $100 billion. There’s need to periodically review the program performance of all the departments involved, each unit should account for the projects it accomplished on the funds allocated to them. By agencies reporting on the results of their spending, citizens and the public officials are well informed of the responsibilities of various departments and their performance therefore providing transparency on how the funds are used (Citizens budget Commission, 2004, p.4) (The New York Sun, 2003).

New York has smaller “rainy day” fund set aside for emergency economic recessions compared to other states. The state should involve other statutes to enable it create a larger rainy day fund that would enable it balance its budget. Secondly; it also requires a four-year financial plan with quarterly updates that would provide discipline and transparency to the budget process currently lacking updates on the state projected financial condition. Third; Eliminating “off-budget” accounts means that New York gets disbursements outside its legislative appropriation, executive approval and external audit reviews. An example of such off budget spending is Health Care Reform Act 1996 that created accounts amounting to $1.7 billion. Other areas involved are regional economic and community developments, block grants and university housing. This off-budget spending does not show the true scale of State’s fiscal activities. The accounts are not also subjected to auditing. All New York’s expenditure should be subjected to annual budget to enable it balance its accounts (Citizens budget Commission, 2004, p.4).

The major public corporations in New York that contribute to New York’s multi-billion projects are Metropolitan Transportation Authority and the Long Island Power and other smaller corporations such as Ogdensburg Bridge and Port Authority. These authorities get their revenues from service charged from their clients and they also issue debt to the public credit markets. Since they contribute financially to the majority of the states projects, they are exempted from civil services and procurement rules. These boards set pay scales for the management and they have the authority to decide on major contracts. Also their budgets are not subjected to public review and their financial plans do not follow common formats. To help balance the budget, higher standards need to be set that would reduce abuses of their power and enhance public confidence in the authorities (Citizens Budget Commission, 2004, p.3).

In conclusion New York’s Budget process lacks timeliness, transparency and responsibility. It usually reports its budget late for the past 19 years, how would you expect the budget to balance if the Legislature and the Governor do not agree on the amount of each type of revenue available. It should keep its financial reports in accordance to generally Acceptable Accounting principles in order to maintain transparency of its operation to the public and investors. Large corporations such as Metropolitan Transportation Authority and the Long Island Power should abide by accounting standards that would require auditing their financial statements regardless of their status since they contributes to large number of New York’s budget and therefore balancing the budget. Granof (2007) emphasizes on the concepts to be used in balancing the budget rather than the rules and plan, so New York should make efforts to incorporate them in their budget plans.

References

1. Citizen Budget Commission. (2006). Danger ahead: How to Balance the MTA’s Budget,  2006, 1-16
2. Citizens budget Commission. (2004). Fixing New York State’s Fiscal Practices. Five Problems That Hurt New York State and Principles For Fixing Them, 2004, 1-28.
3. Citizens Budget Commission. (2002). 10 Myths about Balancing New York City’s Budget and 5 ways to lower the Cost of the Government. 2002.
4. City of New York Independent Budget Office. (2007). A Review of the Metropolitan Transportation Authority’s Financial Outlook and Options for Closing the Gaps. 2007, 1-12.
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8. Granof, M. H. (Ed. 4). (2007). Government and Not-for-Profit Accounting: Concepts and Practices, Austin: University of Texas
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14. The New York Sun. (2005). Bloomberg Unveils Re-Election Budget That Cuts Taxation.
15. The New York Sun (2003). The Palisades Principles. 2003.
16. McMahon, E. J. (2008). New York State’s Fiscal Reckoning. Long addicted to massive Wall street revenues, Albany faces an agonizing withdrawal,18, no.4.
17. The New York Times. (2008). Paterson Calls for $5.2 Billion in Budget Savings. N.Y/ Region, 2008.
18. Fuerbringer, J. (1987). Budget Balancing Law: New Chemistry. New York Times, 1987.
19. Paterson’s, D. A. & Anglin. L.L. (2008). Division of the Budget. Governor Paterson’s Special Session Proposal.
20. Transportation Alternatives. (2008). Bridging Mass Transit’s Budget Gap.