The New York State Financial Control Board issued a report yesterday blasting New York City officials for a series of fiscal 1993 policy decisions that they say will produce budget woes in fiscal 1994 and beyond.
With the report, the control board joins a growing number of government officials, fiscal monitors, and market analysts who have criticized the city's fiscal 1994 budget.
On Monday the City Council ended weeks of haggling with the administration of Mayor David N. Dinkins and adopted a $31.2 billion budget for the 1994 fiscal year, which begins July 1. The budget has been widely assailed by a score of fiscal monitors, including the city comptroller, the state comptroller, and Republican members of the City Council. All of them have said that the financial plan relies too heavily on one-shot revenue raisers and overly optimistic revenue projections, and misrepresents other expenses the city will incur.
City officials maintain that the budget accord reached between Dinkins and Council Speaker Peter F. Vallone closed a $2.1 billion gap for fiscal 1994, and will endure through the course of the fiscal year. Many of the city's fiscal monitors say, however, that the spending plan will ultimately falter, and produce budget gaps of as much as $900 million during fiscal 1994.
Standard & Poor's Corp. has begun to review the budget and its impact on the city's credit rating. The city is rated A-minus by Standard & Poor's with a negative outlook, and Baa1 by Moody's Investors Service. Several buyers of municipal debt say the budget problems and any rating downgrade could force the city to pay higher rates of interest on its bonds.
The control board's report largely attached blame for the shape of the 1994 budget to a series of policy decisions made by the Dinkins administration during fiscal 1993 that provided additional spending and quick fixes to pay for it.
Fiscal 1993 marked the 13th consecutive balanced budget by the city according to generally accepted accounting principles. But the control board, a fiscal monitor created by the state Legislature that is charged with overseeing the city's finances, said the policy decisions have created a "permanent deficit."
The city, the report says, has relied too heavily on nonrecurring revenues to balance recent budgets. As a result, the city will experience "large and growing structural budget gaps" in fiscal 1994 and beyond. The city's official statement for its latest bond issue shows a $1.7 billion gap in fiscal 1995. a $2.34 billion gap in fiscal 1996, and a $2.6 billion gap in fiscal 1997.
Philip R. Michael, the city's budget director, agreed that the city faces a structural budget problem, but he said it does not have the power to address the issue alone. Michael said that to reduce the city's structural budget gap, the state Legislature must take over the city's share of Medicaid costs, a move supported by Gov. Mario M. Cuomo. This action, Michael said, would save the city about $2 billion a year.
But the control board in its report emphasized that the city has much more power over its own fiscal destiny than Michael says, citing a number of recent policy decisions that have contributed to the budget mess.
The issues under fire include a January labor agreement with the city's largest municipal labor union to increase wages and benefits by 8.25%. The board also cited the addition of staff to the Department of Social Services and the Board of Education.
Each of these measures did not ultimately cause the fiscal 1993 budget to fall out of balance only because the city employed a series of one-shots to plug the hole caused by the increase in spending, the board said. Fiscal monitors criticize the use of one-shots because they revenues provide only temporary budget relief.
The report cited the city's method of refunding debt as a quick-fix solution that provides almost no long-term benefit. The city recently used $100 million in savings from refunding debt to help reduce its $2.1 billion fiscal 1994 gap.
The report says the city, instead of reducing debt service costs for the life of its capital program, uses refundings to reschedule principal and interest payments. In this way, near-term budget gaps are closed by the millions of dollars of savings funneled into the city's current budget but principal and interest costs are increased in future years.
As a result, the report says, the city "has not truly addressed the underlying deficit, but rather has contributed to prolonged, permanent deficit."
"[One-shots] do little to contain future costs or to expand future revenues," the report says. The report says that if the city employed fewer one-shots to close gaps from fiscal 1991 through fiscal 1993, it would have faced an $800 million fiscal 1994 gap instead of a $2.1 billion gap.
While only monitoring finances now, the control board could take over day-to-day finances if the city ends the fiscal year with a deficit of $100 million or more. City officials have said they would make whatever cuts are necessary to avoid a control board takeover.