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.
: 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.
: 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.)