State control board hovers like a club over New York City

A Manhattan street is closed to cars because of the coronavirus, which is having a major impact on New York City's finances.
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As New York City wrestles with the economic fallout from COVID-19, budget observers are eyeballing how Mayor Bill de Blasio and the City Council will balance its fiscal 2021 spending plan.

“In the budget negotiations with the mayor, the council going to have to be very nimble to get to where we need to be on adopting the budget,” City Comptroller Scott Stringer told the council’s finance committee on Thursday.

As the council weighs de Blasio’s $89.3 billion executive budget for fiscal 2021 — down $6 billion from the mayor’s January preliminary budget — the revenue losses from the COVID-19 pandemic present a moving target.

The nonpartisan Independent Budget Office envisions a $9.5 billion revenue shortage from lost tax receipts. The Mayor’s Office of Management and Budget has estimated the gap at $7.4 billion. Stringer estimates hit at $8.7 billion, including about $800 million in state-imposed cuts and cost shifts.

“It’s subject to change. I’m trying to keep coming back looking at the numbers,” Stringer said. “We peg it at $8.7 [billion]. We could be more pessimistic, depending on the analysis, but that’s where we are right now.”

Stringer expects the city to balance the budget this year, regardless of whether it gets any rescue aid from the HEROES Act before the U.S. Senate, but warned that without another infusion, the following year would be a “whole new fight.”

"In all likelihood, they will enact a balanced budget next month, but how they balance the budget is important," said Manhattan Institute's Eric Kober.

Budget imbalance could revive the New York State Financial Control Board, a vestige from the 1970s fiscal crisis that city officials would rather avoid. The oversight board has been in sunset mode for 33 straight years, meeting annually to rubber-stamp the spending plan.

By law, the state legislature must seek reactivation of the board.

“The club of the financial control board really exists to make sure that the city balances its budget,” said Eric Kober, an adjunct fellow with the Manhattan Institute for Policy Research, a free-market leaning think tank. “It would be a sort of an unbearable humiliation for the mayor and the City Council to have an unelected state board take over the city’s finances.”

The 51-member council must enact the budget under generally accepted accounting principles by June 30.

Kober, a retired Department of City Planning official, worries about balancing the budget through stop-gap measures.

“In all likelihood, they will enact a balanced budget next month, but how they balance the budget is important,” he said.

“If they balance the budget by draining reserves, including the reserve for post-employment health benefits that the city has set aside, and they do other sort of one-time savings that aren’t recurring in future years, then they might on a technical basis be able to say they passed a balanced budget for fiscal '21, but they’re storing up an enormous deficit for the following fiscal year.”

Richard Ravitch, who helped guide the city through the 1970s crisis, called the pandemic “so fundamentally more serious than what we went through in the 70s.”

“The problem today is we have no way of knowing what the revenue loss — sales tax, income tax and even the property tax revenues — are going to be for New York City and New York State,” Ravitch said during a Citizens Budget Commission online forum. “It’s very, very hard to measure.”

Ravitch, a former lieutenant governor and former chairman of the Metropolitan Transportation Authority, is on de Blasio’s eight-member task force advising the mayor on reopening the city. He sat with Gov. Hugh Carey on May 2, 1975, when major banking executives said they would no longer underwrite bonds and notes for the city.

“Walter Wriston [former Citigroup chief executive] said ‘effective immediately,’” Ravitch said. “I said, 'What is a nice young kid like me doing in this moment in time?'”

Politicians, business leaders and labor worked together and by that October, the city, despite the “Ford to City: Drop Dead” headline in the Daily News, negotiated a $3 billion credit line from the federal government.

Unlike today, said Ravitch, politicians worked things out in the 1970s.

“[Mayor] Ed Koch would go on TV and criticize the control board, but off camera — and I was often with him — Ed Koch often said ‘thank God for the friggin control board.’“

Today, friction during the pandemic, both locally and nationwide, has featured federal versus state and city, Democrat versus Republican and mayor versus governor.

De Blasio and Gov. Andrew Cuomo, both Democrats, bickered often, long before the coronavirus arrived. New York’s multigenerational conflict between mayors and governors has taken on a new dynamic the past few years.

“In recent budgets, Gov. Cuomo has seldom resisted an opportunity to kind of nickel and dime the city in ways that kind of just dings in the city budget,” said E.J. McMahon, founder and research director for Albany-based think tank Empire Center.

Cuomo, said McMahon, “tends to claim that the state is the entity that funds everything, He said repeatedly the past two weeks, ‘I pay for the police, I pay for the hospitals,’ etc. … first-person singular, often.”

Moody’s Investors Service and Fitch Ratings have revised their outlooks on the city’s general obligation bonds to negative, citing the coronavirus impact. Moody’s rates city GOs Aa1, while Fitch and S&P Global Ratings rate them AA.

Under de Blasio’s latest plan, the city will draw down $900 million from the general reserve and $250 million from the capital stabilization fund. Total reserves for fiscal 2021 are now $2.18 billion. It also took $2.6 billion from the Retiree Health Benefits Trust fund, whose balance is now $2.1 billion.

The plan also calls for $2.7 billion in savings, mostly through departmental cuts from a so-called program to eliminate the gap, or PEG.

With further federal aid a variable, Stringer and budget watchdogs have been urging the city to improve from within.

“There’s a lot of fat in this budget. That’s bad news and good news,” Stringer said. “Too much agency spending is on autopilot.”

Critics have also cited the ballooning city workforce. According to data from the Citizens Budget Commission, municipal employment reached an all-time high of 326,739 at the end of fiscal 2019 — up 29,390 or almost 10% from fiscal 2014. De Blasio succeeded Michael Bloomberg in January 2014.

“A longer or deeper recession, slower recovery, and imminent state budget cuts are all credible threats,” CBC vice president Maria Doulis said. “Often the most severe actions for balancing the budget, including service cuts, layoffs and tax increases, are implemented in the years following the recession’s end. Prompt action at a recession’s start improves the prospects for the outyears.”

Stanley Brezenoff — like Ravitch, a longtime troubleshooter in city government — said the city’s recent prosperity has fostered a false sense of confidence.

“Before the virus, up to this point, the city has enjoyed an enormous boom in the economy. That has contributed, to a lowering of the guard, as it were, a sense that everything is affordable,” said Brezenoff, who was president of the city’s Health and Hospitals Corp. under Koch from 1981 to 1984.

He was also executive director of the Port Authority of New York and New Jersey and, under de Blasio, interim president of the New York City Housing Authority.

According to Brezenoff, the efficiency mindset is lacking in government.

“It takes a commitment level that does not today exist, in my view,” he said. “PEG ought to be a given every year.”

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City of New York, NY Coronavirus New York Budgets Bill de Blasio Scott Stringer