COMPTROLLER LIU: MAYOR'S BUDGET PLAN CONCEALS HUGE FISCAL RISK ON WAGES
Proposes Fixes to Multi-Billion Dollar Gap That May Open in Next Two Years
City Comptroller John C. Liu testified on Monday before the City Council Committee on Finance that Mayor Bloomberg's Preliminary FY 2014 Budget and 2013-2017 Financial Plan contain huge fiscal risks that could open up a yawning multi-billion-dollar budget gap in the next two years. Liu identified the biggest looming risk to the budget as the Mayor's failure to negotiate contract settlements with the United Federation of Teachers (UFT) and the Council of School Supervisors and Administrators (CSA), which could include retroactive wages. Liu also proposed solutions that could provide revenues and savings to partly defuse the risks left by the Mayor.
"The Mayor is leaving a huge mess for the next administration to clean up," Comptroller Liu said. "The actual budget deficit could be billions greater than he's stating because his budget plan assumes zero increases for union contracts long expired, despite a pattern of collective bargaining that includes retroactive pay increases during his administration."
A settlement with the teachers and principals unions comparable to those the other municipal unions received in the last round of bargaining could cost the City $2.595 billion in the current fiscal year, of which $1.67 billion could be funding for retroactive wages, Liu estimated. Going forward, the added cost of such a settlement would be about $900 million a year.
But the UFT and CSA aren't the only two unions working without a contract; all the municipal unions' contracts have expired. Comptroller Liu estimated that the next Mayor may well be greeted with a $4.34 billion budget hole on that score. That staggering amount would stem from the cost of settling the UFT and CSA contracts (which by then would grow from $2.595 billion to $3.045 billion) along with an additional $1.29 billion cost of providing a very minimal wage increase of 1 percent per year for all City unions.
The Mayor's budget plan also has other huge risks. It assumes that the City can count on revenue from the sale of taxi medallion and Federal and State aid. The taxi medallion revenues, some $1.46 billion, are tied up in court appeals. Given the uncertainty of those cases, the Comptroller said, the entire amount assumed by the Mayor's Financial Plan is at risk. The Mayor's Preliminary Budget also makes assumptions about State and Federal aid to the City that may be unjustifiable, especially given the Federal sequester that took effect on Friday.
In all, Liu estimates that these risks would create a budget gap of $2.67 billion in the current year and $1.68 billion in FY 2014.
Liu offered several strategies that would provide hundreds of millions to offset some of the risks. He called on the Mayor to recoup the $163 million that Hewlett-Packard overbilled the City as a contractor on the 911 call center project. He also urged the City to renegotiate its sweetheart lease agreement with the Marriott Marquis Hotel, which could cost taxpayers at least $344.9 million. Finally, he identified $191 million in budget savings through reduced debt-service expenditures.
Following is Comptroller Liu's testimony:
TESTIMONY BY CITY COMPTROLLER JOHN C. LIU
ON THE PRELIMINARY NEW YORK CITY FY 2014 BUDGET
AND 2013-2017 FINANCIAL PLAN, March 4, 2013
(As prepared for delivery)
Thank you, Chairman Recchia, and members of the City Council Finance Committee for providing the opportunity to present testimony today on the Mayor's Preliminary Budget for Fiscal Year 2014. Deputy Comptroller Ari Hoffnung and our Executive Director for Budget Jonathan Rosenberg are here with me today.
I'm here today to present some good news and some bad news, but mostly to warn you about three fiscal risks left in the budget by this departing Mayor.
These risks could jeopardize more than $1 billion in state education aid over the next four years and open up a yawning $4.35 billion budget gap in the next two.
I'll also propose some revenue and saving enhancements the City can go after in order to partly defuse those risks. But more on that later.
The general economic picture in which we must view the Mayor's Preliminary Budget is decidedly mixed. New York City's economy kept pace with, and on some measures outperformed, the National economy in 2012, but Super Storm Sandy dampened the City's economic growth by about 0.2 percentage points in 2012.
While the City's real gross City product (GCP) grew 2.2 percent, about the same as the national rate, total private-sector jobs in the City were up by 77,300, or 2.4 percent, on a year-over-year basis, slightly more than national job growth during the same period.
As in the nation as a whole, the City's residential real-estate market strengthened in 2012, but the improvements were spotty, and the City's housing market remains far from healthy. Unfortunately, national fiscal policy is turning toward austerity, and that will suppress national and local economic growth in 2013.
As a result of the subdued economic forecast, the City is estimating very modest tax growth, averaging around 4 percent per year for the next four years. While my office does not expect to see any large unexpected growth in tax revenues, we are slightly more optimistic in certain areas than the Mayor, as I will describe.
The financial plan the Mayor has presented to you is the first step in the FY 2014 budget process. The Mayor's Preliminary FY 2014 Budget totals $70.05 billion. The FY 2014 Budget is actually $322 million less than the current modified FY 2013 budget, but the current year's budget includes $1.38 billion of Super Storm Sandy-related spending.
Excluding the Sandy-related spending, the FY 2014 budget is $1.08 billion or 1.57 percent greater than the FY 2013 budget. This increase comes almost entirely from growth in the City-funds portion of the budget, which is projected to rise from $48.9 billion in FY 2013 to $50.7 billion in FY 2014.
In recent fiscal years, the City-funds portion of the total budget has grown as aid from the State and Federal Government has declined. That dynamic is only going to get worse.
In the current plan, nearly 72.4 percent of the FY 2014 budget will be funded by City dollars, as compared to 70.8 percent of the FY 2013 budget. By FY 2015, City-funds will pay for 74 percent of the City budget. And that portion will only get larger.
Here's the first risk: One primary reason why the City will have to shell out an ever-larger percentage of its budget is that our State education funding just took an enormous hit, thanks to the Mayor.
State education aid is the single largest portion of non-City funds supporting City services. In FY 2013, the City budgeted for $8.1 billion of State education aid, increasing to $8.3 billion in FY 2014.
In his budget address last year, Governor Cuomo established an educational policy that would require school districts to implement a new evaluation system for teachers or risk losing a portion of their state funding.
The State Legislature, as part of the adopted budget, agreed to the Governor's plan, which in the case of New York City authorized the withholding of $250 million of aid if a teacher evaluation system was not agreed upon by January 17, 2013.
Sadly, as a result of the Mayor's complete inability to negotiate in good faith with the United Federation of Teachers, the City lost out on $250 million in much needed funding for our schools.
The Governor's 2013-2014 Executive Budget sets forth a new deadline for the implementation of a teacher evaluation system.
While the Governor hoped that a deadline would create an incentive for both sides to negotiate, "My Way or the Highway Mike" saw it as a chance to play a gigantic game of chicken with the UFT. In the end, the students were the roadkill. New York City schools have already lost $250 million in critical aid.
But that decline not only affects funding for our schools in the current fiscal year. Even if an evaluation system were adopted today, the loss of the funding in FY 2013 will reduce baseline State aid provided to the City for years to come.
Unless something is done, the City's schools stand to forgo more than $1 billion over the next four years as a result of the lost $250 million in FY 2013 school aid.
But that isn't the end of it. While the January Financial Plan shows balanced budgets for FYs 2013 and 2014, my office has identified certain risks to the Plan that, if realized, would result in large budget gaps that would require further budgetary belt-tightening or higher taxes.
Here's the second risk: The single largest risk to the Financial Plan is the absence of funding for wage increases for employees belonging to the UFT and the Council of School Supervisors and Administrators for the 2008–2010 round of collective bargaining.
While all of the other municipal unions settled for two-year contracts with wages increases of 4 percent at the beginning of the first and second year of the contract, the City never came to contract agreement with the UFT and CSA.
A settlement with these unions comparable to those our other municipal unions received would cost the City $2.595 billion by the end of the current fiscal year. Going forward, we estimate the added cost of such a settlement would be about $900 million a year.
These amounts do not include the financial risk related to all of the other municipal unions, such as DC37, that currently are working with no contract. In fact, on the first day the next Mayor takes office, he or she may well be greeted with a $4.34 billion problem. This staggering amount stems from the cost of settling the UFT and CSA contracts, which by then would grow from $2.595 billion to $3.045 billion, along with an additional $1.29 billion cost of providing a very minimal wage increase of 1 percent per year for all City unions.
Of course, Mayor Bloomberg has said that the City does not have to give raises.
Here's the third risk: Adding to the risks in the outyears are the City's assumptions on taxi medallion revenues and Federal and State aid. The City has appealed the court's ruling that suspended the sale of taxi medallions, but that is far from a done deal.
Given the uncertainty of the outcome of the appeal, my office thinks that the entire $1.46 billion of taxi medallion revenues assumed in the Financial Plan is at risk.
Federal aid also remains uncertain. Although the passage of the American Tax Relief Act (ATRA) helped avert a fiscal cliff, it did not address the automatic across-the-board cuts to the budget, the so-called sequester, which was to take effect at the beginning of the year.
Rather, ATRA merely delayed the spending cuts until the current month. Given the uncertainties surrounding the Federal budget, the Comptroller's Office estimates that there could be a shortfall of $400 million in Federal and State support.
My office estimates some higher tax revenues that would offset some of the risks in the outyears.
Our revenue forecasts assume that tax revenues will exceed the Mayor's revenue predictions by $386 million in FY 2014, $508 million in FY 2015, $901 million in FY 2016, and $1.025 billion in FY 2017. The higher tax revenue forecasts reflect an overall more optimistic forecast for the City's economy.
But apart from whatever better times might bring us, my office has offered a number of solutions for augmenting the City's revenue and saving taxpayer money that would add to the budget's bottom line.
First, we call on the City to recoup the $163 million that our audit found that Hewlett-Packard overbilled the City as a contractor on the 911 call center project. We also ask that the City renegotiate its lease agreement with the Marriott Marquis Hotel that could cost taxpayers at least $344.9 million.
Last year's budget was balanced in large part because of the half-billion-dollar settlement with Science Applications International Corporation for its mismanagement and fraud connected with the CityTime project.
Recoupments from HP of what it owes the City and fixing the sweetheart deal the City granted Marriott could help restore the 20 fire companies, more than 30,000 childcare slots, and nearly 1,000 school teachers that face elimination in the upcoming year's budget.
City Hall can't turn back the clock and undo the gross mismanagement of these projects, but it can claw back taxpayer money.
I especially want to thank the Speaker and Council members who, following an audit from my office, signed a letter demanding that the New York City Economic Development Corporation renegotiate the City's lease agreement with the Marriott Marquis Hotel.
Second, City Hall should adopt our proposal for the issuance of Green Apple Bonds, which would rid all New York City public schools of light fixtures housing the known carcinogen Polychlorinated Biphenyls (PCBs) by 2015, six years ahead of the Administration's current schedule and at a savings of $339 million.
News reports last week identified even more City schools with light fixtures leaking these toxins, for a total of 366. These leaks are happening much faster than the old fixtures are being replaced.
Green Apple Bonds work on the same principle as the Capital Acceleration Plan that I announced with the Mayor in the fall and the several bond refinancings undertaken by my Public Finance Bureau, which take advantage of the low interest-rate environment we currently enjoy in order to produce hundreds of millions of dollars in debt-service savings for City taxpayers. Green Apple Bonds would lower the City's greenhouse-gas emissions to guard against climate change, while at the same time creating 3,000 jobs. This proposal is a win all around.
Here too, I would like to thank the Council members who wrote a letter urging the EPA to reject New York City's ten-year timeframe for removing and replacing all PCB containing light ballasts and instead insist on a strict two-year plan.
Third, my office has located some more savings of funds now in the FY 2013 Plan that would provide about $191 million in additional revenue for FY 2014. Through the first half of the fiscal year, the City has spent $26 million on debt service for variable rate bonds. If rates were to continue at this same pace for the remainder of the year, the City would realize about $150 million in reduced FY 2013 debt service expenditures. In addition, this week, we sold a $372.5 million General Obligation bond refunding. When that deal closes later in March, we will realize an additional $40.9 million of budget savings in 2013 and 2014.
Finally, I'd like to thank the New York City Council's Finance division for its assistance with Checkbook NYC 2.0, the website my office developed and launched in January.
This powerful tool allows up-to-date spending activity on a Citywide and individual agency level, and makes New York City the most transparent municipal government in the country, according to the United States Public Interest Research Group.
Checkbook NYC 2.0 empowers and enlists the public to keep an eye on government spending and thereby curtails wasteful and improper dispensing of public funds. While it is hard to quantify what this tool will save us, we believe that it will have a significant impact.
Our office stands ready to offer tutorials or answer any questions members and their staffs have about how to use this powerful tool.
Those are some partial solutions, but we have a glaring problem. In total, my office estimates that these risks I have summarized could create a budget gap of $2.67 billion in the current year and $1.68 billion in FY 2014.
Add those two, and you get the $4.35 billion to which I referred earlier. So while the Mayor's Preliminary FY 2014 Budget and 2013-2016 Financial Plan may look balanced, they contain great risks.
Thank you for the opportunity to submit testimony today. Please reach out to me and my staff if you want to discuss these matters in greater detail at any time.
Background:
Report: Comptroller John C. Liu's Comment on New York City's Preliminary Budget for FY 2014 and Financial Plan for FYs 2013-2017, March 4, 2013
http://comptroller.nyc.gov/bureaus/bud/13Reports/3-4-13_CommentsPrelimBudget.pdf
Press release on Hewlett-Packard's overbilling:
http://comptroller.nyc.gov/press/2013_releases/pr13-02-033.shtm
Press release on Marriott's sweetheart deal:
http://www.comptroller.nyc.gov/press/2013_releases/pr13-02-029.shtm