New York City's Fiscal Problems:

A Long Road Still Lies Ahead

GGD-80-5: Published: Oct 31, 1979. Publicly Released: Oct 31, 1979.

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Like many major, older industrial cities, New York City seems to require ever-growing infusions of Federal and State aid in order to avoid chronic, and ultimately fatal, budget deficits. The City made some specific programmatic cuts early in 1976. Since then, it has been relying essentially on a strategy of containing costs and using Federal and State aid to close its budget gaps. The City's current financial plan continues the strategy of relying heavily on the latter remedy. Obviously, outside help is beneficial from the City's perspective, but local officials may be relying too heavily on others. The City's chances of continuing such a policy are questionable in view of the fiscal "belt tightening" that is expected at the State and Federal levels. The City's latest financial plan, approved in June 1979, projects a balanced budget, on a State legislative basis, for 1980, and budget gaps of $464 million, $830 million, and $854 million for 1981, 1982, and 1983, respectively.

The City's financial plan does not appear to be realistic. Most of the current labor contracts between the City and its employees expire in June 1980. Except for a provision of $82 million for fiscal year 1981, the impact of probable increases in labor costs was not considered in calculating the projected budget gaps. The City's latest financial plan acknowledges that a wage increase similar to the last one would increase the projected budget gaps by $43 million, $295 million, and $465 million in 1981, 1982, and 1983, respectively. In addition, the City's revenue projections are based on economic assumptions which may be overly optimistic. Depending on the severity and nature of the expected economic downturn, City revenues could be reduced. Reductions could be about $69 million in 1980, and $122 million in 1981. The City has not yet included the impact of such estimates in its projected gaps, preferring to wait until the economic outlook becomes clearer. Although the City's long decline in employment ended in 1978, the City's economy is not expected to improve markedly. A stagnant economy could limit tax revenue growth to less than the rate of inflation. The City needs to take further actions to improve its business climate, induce more investment in the City, and lower the tax burdens on its corporate and individual residents.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of the Treasury should: (1) encourage the City to revise its financial plan to reflect the need for additional budget cuts; (2) monitor closely the implementation and use of the milestone system; (3) urge early negotiations between the City and its unions to give the City a more precise picture of how the settlement will affect its financial plan; and (4) encourage the City to take further actions to improve its economic base.

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