New York City has a balanced budget, strong credit ratings, its lowest unemployment rate in four years, and other positives ranging from lower crime to technology initiatives.

But legacy costs, including pension contributions, retiree health benefits and debt service, hang over the city like a sword of Damocles, and surely will challenge whatever mayor succeeds Michael Bloomberg on Jan. 1.

“I hope the new mayor is not a drinker and if not, maybe they ought to start,” said Anthony Figliola, the vice president of Empire Government Strategies, a Uniondale, N.Y., consulting group.

According to the Citizens Budget Commission, legacy costs will consume nearly 25% of the city’s budget by fiscal 2015, leaving less money for other priorities. The  independent watchdog agency projects pensions to rise from $3.2 billion to $8.2 billion between 2005 and 2015, retiree health benefits to double to $2.4 billion and debt service from major obligations to have spiked from $4.2 billion to $7.2 billion, also during that same span.

The CBC includes general obligation and lease purchase debt, and that of the Transitional Finance Authority if the Municipal Assistance Corp. financing arms. On Monday, the city will begin a two-day retail period for its $800 million GO bond sale.

In a report CBC issued Monday, expired labor contracts may be the greatest first-year challenge for the new mayor. They all had expired as of last July, some as far back as 2009. “There are no resources within the city's budget available to pay for any wage increases for prior years,” the watchdog said.

“Legacy costs are the downfall of many municipalities, without question,” Figliola added. “Unions, in return for less in salary, negotiated other initiatives such as pensions and health care. Now the hens are coming home to roost.”

Pension overhaul has become a hot-button issue nationally and in the Northeast. Rhode Island in 2011 enacted a bill that state officials expect will reduce its unfunded pension liability by $3 billion. The measure, which created a hybrid plan that merged conventional public defined-benefit pension plans with 401(k)-style plans, generated national headlines but also faces a court challenge.

Within Rhode Island, Central Falls cut retiree benefits by as much as 55% before exiting bankruptcy court, while Providence reached a compromise with its police and fire retirees that Mayor Angel Taveras said probably saved the capital city from bankruptcy.

Pennsylvania Gov. Tom Corbett wants to overhaul the state’s two public pension systems amid expected headwinds from unions, the courts and possibly the legislature, where lottery and liquor privatization have taken priority during this session. Inside the Keystone State, Allentown last month agreed to a $225 million water and sewer system lease deal with the Lehigh County Authority that covered an unfunded pension liability estimated at around $160 million.

Cas Holloway, Bloomberg’s deputy mayor for operations, talked about the need to rein in legacy costs at a recent CBC breakfast meeting at the Princeton Club in midtown Manhattan.

“The city’s budget outlook is fragile at best,” Holloway said.

Labor contracts and health care present the city’s most pressing budgetary challenges, according to Holloway.

“Unless we address these issues together, realistically and comprehensively, there simply is no way the city can afford to continue to provide the level and quality of services that New Yorkers have come to expect without fundamentally destabilizing the city’s recovery and long-term prosperity.

“The fundamentals are clear. The city is projected to spend more than it will take in. And with the near exhaustion of roughly $8 billion of reserves that Mayor Bloomberg and the City Council put aside during the economic boom, closing these gaps is going to require some combination of significant service cuts, raising taxes or finding other ways to cut costs,” Holloway said.

Holloway said Bloomberg is prepared to negotiate pay raises for city employees, but not retroactively. The CBC said Monday that as contract end dates become increasingly distant, the financial risk of awarding retroactive pay heightens substantially. "It will upset budget balance and seriously undermine efforts to close out-year budget gaps," the CBC said.

The city faces out-year gaps of about $2.2 billion in 2015, and $1.9 billion and $1.4 billion, respectively, for the following two years.

Also, the city wants employees to contribute toward health care coverage, and into a system that emphasizes preventive health measures, such as smoking cessation or weight loss.

According to Holloway, the city could save about $400 million annually under such a move. The New York City Independent Budget Office, another watchdog agency, estimates even higher, projecting $489 million in such savings for 2014 and $535 million and $587 million the following two years.

“Mounting costs for debt service, pensions and retiree health care will continue to be a challenge,” Moody’s Investors Service said in March, when the city sold $180 million in adjustable rate GO bonds.

Holloway spelled out his intentions to the Municipal Labor Committee, an umbrella group that traditionally has negotiated health benefits for city employees. Committee approval is necessary. The city would also have to amend its administrative code.

A message seeking comment was left with committee chairman Harry Nespoli, the president of the city’s Uniformed Sanitationmen’s Association Local 813. Based on Nespoli’s earlier public comments, it appears a labor accord before Bloomberg leaves office is unlikely.

The city has also issued a request for proposals for a new health-care provider. Workers are now covered under the Health Insurance Plan of Greater New York and Group Health Inc. HIP has covered city workers since 1947; today, HIP and Group Health are subsidiaries of Emblem Health under a 2006 merger.

Nicole Gelinas, a senior fellow at the conservative-leaning Manhattan Institute for Policy Research, said union leaders will find it harder to fight any inclusion for health-care contributions.

“Workers haven’t been receiving pay raises because health care costs are escalating,” she said. “The leadership just thinks that because Bloomberg’s a billionaire, they can keep up the fiction and say he’s mean.”

Even though the mostly Democratic field appears union-friendly, Gelinas said mayoral candidates so far have been treading lightly on bread-and-butter union issues.

“The candidates had their favorite programs – Bill Thompson talked about cops, Bill de Blasio had pre-kindergarten and for Christine Quinn, it was day care tax credits. But none of these people were very bullish about speaking up for the unions,” Gelinas said.

A Manhattan Institute-Zogby Analytics poll released May 13 said many New Yorkers found the city getting too expensive. According to Gelinas, the ripple effect of high legacy costs is resonating. “New Yorkers have clearly noticed the impact of ever-higher spending on pensions and health benefits on the ground and underground; the city’s transportation system is not capable of serving the needs of New Yorkers, particularly New Yorkers in the outer boroughs.”

The poll said only 21% of respondents feel that public transportation adequately serves the outer boroughs – Brooklyn, the Bronx, Queens and Staten Island. About 73% of Staten Islanders called for additional investment.

“That was interesting about our poll. Many of the other responses were typically split down the middle. But the biggest disappointment was from people in the outer boroughs who said they weren’t well served by public transportation,” Gelinas said.

Figliola acknowledged the difficulty of negotiating with unions in New York. “Unions work hard for their memberships. They’re powerful. They have foot soldiers on the ground during campaign time.”

According to Figliola, Andrew Cuomo was better able to implement the more conservative parts of his first-year program as New York governor in 2011 because he was not beholden to unions.

“One of the things interesting to me was that Cuomo took no union support. In his first year he was able to implement the property tax cap and the pension tiers. He didn’t take money. I don’t see that happening this time around,” he said.

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