Net Loss: Secondary Effects of City Budget Cut Proposals

Chapter 1. The Budget Cuts and the City Economy

The City of New York FY 1996 Executive Budget (April 1995) acknowledges a $3.1 billion budget gap, close to the Comptroller's March estimate of $3.2 billion. The crisis requiring the City to address its budget imbalance stems primarily from declines in economically sensitive taxes and Federal and State reductions in certain kinds of aid to the City.[1]

The Budget in a Broad Economic Context

The State and City budgets are about 10 percent of their gross products (i.e., their total economic activity), so at first glance it appears that only about $1 in $10 goes to the government (see Chart 1):

But City residents pay taxes to State and Federal Governments as well as to the City. So while the City's economy is a part of the State's, and the State's is part of the nation's, the budgetary burdens of all three fall on City taxpayers.

Chart 1. Gross Products, 1994, and Budgets, FY 1996, NY State and City

Source: NYC Comptroller's Office, based on: (1) For Gross State Product, U.S. Department of Commerce, Bureau of Economic Analysis; (2) for Gross City Product, NYC Comptroller's estimates reported in Economic Notes, (3) for NYS budget, Governor's Executive Budget FY 1996, (4) for NYC budget, the City of New York FY 1996 Executive Budget (April 1995). Gross-product data are converted to current dollars.

The announced cuts in the State and City budgets (see Chart 2) understate the true impact of the budgetary challenge facing the City. In the case of the State the FY 1996 budget gap amounts to 8 percent of the budget and the cuts to under 7 percent; in the case of the City the FY 1996 gap of $3.1 billion amounts to 10 percent of the budget.

But some planned State budget cuts (and Federal cuts, not shown) will affect City residents independently of a loss of the intergovernmental aid that is already reflected in the City's budget, so that the combined impact of cuts from all levels of government is likely to be more than the City's budget cuts alone.

Chart 2. Proposed FY 1996 Budgets and Budget Gaps, NY State and City

Source: NYC Comptroller's Office, based on: (1) for NYS budget, Governor's Executive Budget FY 1996, February 1995, (2) for NYC budget, the City of New York FY 1996 Executive Budget (April 1995).

Chart 2 might indicate to some that the cuts being proposed by Gov. Pataki and Mayor Giuliani can be absorbed by the City without a crisis -- in conjunction with Chart 1 it shows that in both cases the cuts amount to only about 1 percent of the State and City economies.

The challenge facing the City is especially severe for six reasons:

  1. Cuts are coming from all three levels of government at the same time, so that the economic losses to the City are much greater than the budget cuts.
  2. The cuts are cumulative, on top of FY 1995 cuts.
  3. Cuts take effect immediately and with months rather than years to adjust.
  4. The burden of cuts falls heavily on people who are dependent.
  5. Compared to the rest of the nation, the City has far more than its share of dependent people.
  6. With a weak economy it is less likely that these dependent people can be readily absorbed by the private sector.

Overall Economic Losses from the Budget Cuts

Even without estimating the indirect effects of the cuts, the economic loss from the proposed budget cuts is much higher than $3.1 billion.

To close the $5 billion State budget gap, the Governor has proposed an FY 1996 budget with reductions in State spending of $4.1 billion,[2] through cost containment, agency restructuring and cuts and a freeze in aid to local governments. The Governor's Executive Budget includes reductions to mandated entitlement spending for social-services programs of $1.9 billion. Because of mandated matching requirements by local governments for most forms of social-services spending, the City projects that social-service program reductions included in the Governor's Budget will help close its FY 1996 budget gap by $700 million.

The combined impact on City funds from these entitlement reductions from the Governor's and Mayor's proposals requiring State action is $2.5 billion (see Table 1, Subtotal 1).

Table 1.
Mayor's FY 1996 Executive Budget Cuts and Contingent Aid Losses

Proposed Program
City Funds to Be
Saved, $mil.
Total Govt. Funds
Lost to City,* $mil.
Share of Total Funds
Lost, percent
Medicaid 506 $2,016 72.4
Public Assistance 194 508 18.2
Subtotal 1 $700 $2,524 90.7
Probation Aid** $4 $4 0.1
CUNY Aid** 6 6 0.2
Revenue Sharing** 31 31 1.1
Foster-Care Block Grant** 76219 7.9
Subtotal 2 $117 $260 9.3
Total $817 $2,784 100.0
*City reduction in spending plus loss of matching State and Federal aid or spending in the City.
**The Mayor's Executive Budget assumes that the State will restore aid for these programs.
Source: New York City Comptroller's Office based on City of New York FY 1996 Executive Budget (April 1995).

The net loss to City spending is estimated at $2.8 billion when losses from other program cuts, and State and Federal matching funds, are included (see bottom line of Table 1).

Budget Cuts and The Economy

Although the City is one of the richest in the world, with a gross product per capita in 1994 of $40,000,[3] it has more than its share of dependents -- it has one of the lowest employment rates[4] among the nation's cities. The employment rate measures what proportion of all residents (whether employable or not) are working; the remainder are dependent on those who are working. The City's employment rate reached a low of 50.6 percent in 1994, compared to 62.5 percent nationally.[5]

In other words, for every City resident who is working, another is not. In the United States as a whole, by contrast, for every three people who are working, two are not. The difference is not accounted for by the age composition of the City, because the proportion of elderly in the City is only slightly higher than the national average, while the proportion of children (under 18) is substantially below the national average.[6]

The point is that the proposed City program reductions are serious enough on their face, but are much more serious given the time frame within which they are being imposed and given the fact that they are directed at services for poor dependents.

In mid-1989, the City entered a long and protracted recession as economic slowdowns in the rest of the world further exacerbated the impact on the City's economy that had been weakened by the stock market crash of 1987 and the onset of the national recession in 1989. The dramatic decline in economic activity, combined with an increased demand for City services, produced both a shortfall in tax revenues (an unanticipated decline in the rate of growth of revenues and in 1994 an actual decline in revenues) and a rise in the number of people requesting government services. These developments exerted tremendous pressures on the City's budget, resulting in widening gaps between revenues and expenditures.

To deal with these budgetary problems, the State and City sent negative signals to business executives by instituting half-hearted programs to curtail the rate of growth of spending and by increasing taxes. The City's recession lingered for years after the national economy turned up, and the City lost more than 300,000 jobs between 1989 and 1994.

Those in Albany and City Hall who are proposing deep budget cuts in FY 1996 are correct that the budget laxity in the State and City in the first half of this decade contributed to the City's poor economic performance. But the current radical entitlement reductions have their own set of problems. The budget-cutters want to change the behavior of recipients of government aid, but evidence suggests that behavioral changes require alternatives and time.