Insights Blog

Urban Matters, a publication of The New School's Center for New York City Affairs, featured an update on the post-pandemic city budget crisis facing New York City from James Parrott, director of economic and fiscal policies at the Center. 


Covid-19 has created a severe New York City fiscal crisis with a lot of moving parts. We asked James Parrott, director of economic and fiscal policies at the Center for New York City Affairs at The New School and a seasoned observer of City and State finances, to help make sense of it all for us.

Urban Matters: The Covid-19 recession has, in your words, torpedoed New York City’s finances. Mayor Bill de Blasio, the City Comptroller, and the City Council Speaker all agree that this is an emergency and the State should give the City the authority to borrow by issuing bonds to cover its operating expenses.

First off: The City expects to have lost a total of about $9 billion in tax revenues in its budgets for the last fiscal year, which ended June 30, and the current one. Just how bad is that, and what is likely to happen if the City can’t raise enough money to close the gap between its expenses and revenues?

Parrott: Not surprisingly, both the City and the State budgets have been in a holding pattern for the past several months, waiting for the Federal government to provide significant State and local fiscal relief to make up for reduced tax collections. It’s unlikely that Congress and the president will act before the November 3rd election, and not clear if relief will be provided before a new Congress is sworn in come January.

There is some uncertainty regarding City tax collections during the current FY 2021 budget year, and also about the potential of the City losing significant State aid if the governor resorts to steep local aid cuts to balance his budget. The City did get some needed breathing room in the recent agreement with the teachers’ union to postpone part of the backpay settlement that was due on October 1st.

Nevertheless, it is prudent for the City to have a fallback plan in the event sufficient Federal fiscal relief does not materialize. The reality is that the mayor needs to propose a balanced FY 2022 budget in January when he releases his preliminary plan. Since the City does not have enough remaining reserves to close a projected $4 billion budget gap, time-limited borrowing authority to cover operating expenses is preferable to needlessly slashing expenditures and compromising essential service delivery.

UM: But what about cutting expenses? Editorial boards and the reforms have suggested budget-balancing remedies like a hiring freeze, cutting back on overtime, renegotiating salary and health benefits in union contracts with City workers, and salary caps on non-union workers. Would those measures do the trick?

Parrott: We need to keep in mind that the City’s budget problem is entirely due to the Covid-19 related business restrictions. Since this is the result of a national public health crisis, the Federal government has a responsibility, in my opinion, to make up for lost State and local tax revenues, pay for additional Covid-19 related State and local expenditures, and also provide greater economic assistance to dislocated workers and businesses. A Federal failure to do this shouldn’t be a cause for slashing necessary local government services.

The City has frozen hiring and made several cuts in areas like summer youth employment, sanitation pickups, and social service contracts. There has been considerable resistance to such cuts. The current year’s budget also builds in significant savings from reduced police overtime. And it calls for $1 billion in labor savings. If an agreement is not reached with labor regarding those savings, the mayor says 22,000 layoffs would be needed to fill that hole. The mayor also reduced the labor reserve [the money set aside to cover workforce pay raises] and indicated that any wage increases in the first two years of the next round of municipal labor bargaining would be funded through productivity improvements.
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UM: Ok, but why does the City need to get State approval to borrow, anyway? Why can’t they just do it?

Parrott: States are featured prominently in the U.S. Constitution; all non-Federal government authority is vested in states. Local governments, including New York City, derive their governing authority, including all tax and spending powers (and borrowing authority), entirely from their respective states. I do think, given the economic and fiscal responsibility the City has demonstrated in recent decades, that the State should delegate greater discretionary revenue authority, within clearly proscribed limits that would not encroach on State revenue needs. (And I strongly think that Albany should approve local property tax reforms as recommended by City leaders.)

UM: Back in the 1970s, the City did borrow money pretty regularly to meet operating budget shortfalls. The conventional wisdom is that that led to undisciplined, extravagant spending, caused banks to stop lending the City money, pushed New York to the edge of bankruptcy, and resulted in huge layoffs and service cuts. Isn’t City borrowing to cover expenses flirting with a return to those bad old days?

Parrott: Many Washington observers expected Congress to provide significant State and local fiscal relief by the end of September. When that didn’t happen, on October 1st, the Moody’s bond rating agency downgraded New York City and State bonds by one notch to Aa2, the third-highest investment grade rating. It was the first downgrade for either in nearly 30 years. As recently as March 2019, Moody’s had upgraded the City’s rating based in part due to what it considered “strong ongoing financial management.”

So the current fiscal predicament is entirely a function of the Covid-19 crisis and not at all indicative of the budget practices that preceded the fiscal crisis of the 1970s. Certainly, the City’s budgeting pre-fiscal crisis was severely flawed, but many factors should be considered in understanding what gave rise to the fiscal crisis, including the fact that the State’s Urban Development Corporation defaulted on its bonds first. (But that is a subject for some other time.)
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UM: Last question: What’s the state of play on this issue? Are there likely to be layoffs or more budget cuts in this fiscal year, or in the next one, starting next July? Is the State Legislature likely to give the City the authority it wants to borrow now? And will Governor Andrew Cuomo go along with it?

Parrott: Both the mayor and the governor understandably have been holding off making more severe budget cuts while awaiting further Federal assistance. Soon after the November 3rd election, they will have to announce how they will proceed. By then, we’ll already be in the eighth month of the State fiscal year and the fifth month of the City fiscal year.

At this point, the City’s current year budget is not in terrible shape. Overtime spending is greater than projected but better tax collections are offsetting that. The biggest risk to the City budget is the current year’s State budget, which includes $8 billion in local aid cuts that have not yet been allocated. If the City is put in the position of slashing its budget solely because of State cuts, why wouldn’t the State Legislature and the governor give the City needed borrowing authority? I think they will.

The governor was given fairly substantial budget-balancing borrowing authority by the Legislature back in April and he has begun borrowing under that authority. If Federal aid falls short, there will be considerable pressure on the governor from the Legislature and local government leaders from across the state to raise new revenue through progressive individual and corporate tax measures. The case for this gets stronger by the day.

The pandemic’s economic impact couldn’t be more lop-sided in terms of the effects on low- and moderate-income earners relative to higher-income workers. Wall Street is headed for its most profitable year since 2009 when the Federal Reserve and the Treasury thoroughly bailed out the financial sector. Wall Street is again benefiting from Federal Reserve actions that have done little to help small business. The tech sector is also booming as never before. Given this unbalanced economic context, new revenues raised at the State level could preclude further New York City or State budget cuts. July 2021 is too far off to know at this point whether or not there will be significant City budget cuts.

As the impacts of climate change – from wildfires to flooding – become impossible to ignore, calls to adapt our economy are joined by calls to remove and store existing carbon dioxide, a process known as carbon drawdown. In response, market actors have launched profitable ventures in mechanical-chemical carbon dioxide removal (CDR) and sought government support. But just how effective and sustainable are these ventures?

In a recently published paper, New School for Social Research PhD candidate Andreas Lichtenberger and co-author June Sekera, Director of the Public Economy Project at the New School’s Heilbroner Center for Capitalism, review the literature on carbon dioxide removal and find that the use of public funds to subsidize commercial CDR is often counterproductive. They argue that governments should instead approach carbon reduction as a public service.

The paper focuses on the two CDR options which have gained the most legislative traction: point-source capture and direct air capture, which together the authors term “industrial carbon removal” (ICR). The authors review and discuss the effectiveness of each ICR method, asking whether it removes more CO2 than it emits, determining its resource usage at scale as well as its biophysical impacts.


Fig. 1 Full life cycle. Pathways associated with industrial carbon removal (ICR). (Image elaborated from Wikipedia entry on carbon capture and utilization and from Stewart and Haszeldine 2014.) 

The paper reveals that commercial ICR methods incentivized by governments emit more CO2 than they remove and thus do not meet the needs of atmospheric CO2 reduction. Some studies have found ICR methods (both point-source capture and direct air capture) to be net CO2 reductive through methodological choices by ignoring aspects of the process (like the fact that captured CO2 is primarily used for oil production) or assuming low-or zero-carbon power. The authors also find inadequate literature examining the resource usage and biophysical impacts of ICR methods at a significant scale.

The review shows that scientific literature does not support the use of public funds to subsidize commercial development and deployment of ICR, and that policy decisions have thus far been finance-driven, not science-driven. Instead, the authors recommend that governments approach atmospheric carbon reduction as a public service, like water treatment or waste disposal, because storage – not sale – of captured CO2 is the only way to achieve a true reduction of the gas.

Our ongoing video series, SCEPA Responds, brings together expert economists, professors, fellows, and research associates to discuss current economic issues and challenge economic doctrines that create systemic inequity. The series focuses on areas such as race, monetary and fiscal policy, and economic growth and crisis, to provide insights for working families, older workers, the working poor, minorities, and more.

Much like the United States, the Brazilian government was slow to react to the virus, and Brazil joined us as one of the global epicenters of COVID-19 cases and deaths. New research shows that, also like the States, pre-existing inequities in living and working conditions along racial, educational, and class lines are at the root of the higher infection and mortality rates observed in low-income and non-white communities. The research also shows that without government aid, COVID exacerbates inequality.

Research from SCEPA economists studying the economic impacts of climate change and mitigation policies show green bonds have great potential to help countries across the world increase environmental investments and reach emission targets.

While tax increment financing (TIF) is a common tool for municipalities to fund economic development (read how it works here), it is responsive to the legal, political, and economic environments of the locality in which it is implemented.