Mayor Michael R. Bloomberg
Testimony Before the Joint Legislative Fiscal Committees
January 26, 2004

Chairman Johnson, Chairman Farrell, distinguished members of the Senate Finance and Assembly Ways and Means Committees:

I want to thank you for the opportunity to address your committees regarding the proposed Executive Budget for State Fiscal Year 2004-2005.

This is the third time that I have appeared before you. In 2002, and again in 2003, I asked for your confidence in, and support for, the Big Apple. You gave us both—and they have been crucial to the City’s recovery.

Today, I am happy to report to you on your “investment.” New York City’s economy is growing again. Unemployment, while still too high, is substantially lower than it was a year ago. Building permits are at record levels. Property values are up significantly. After 9/11, many people predicted Wall Street firms would flee the city. Not only have they stayed; they just completed their best year in three.

Our hotels are full, and international tourists are coming back to the city. In August, we will host the Republican National Convention, which will bring 50,000 visitors—and the attention of the world—to New York.

This recovery is all the more remarkable because it comes on the heels of the two worst years, with the two largest deficits, that the City has ever experienced. When we took office in January 2002, we faced a $5 billion budget gap. A year later, that gap had grown to $6.5 billion.

Our Administration responded by cutting some $3.4 billion out of City tax levy expenditures over the last 24 months, the difficulty of which I know you appreciate. Then, so as not to decimate the most-needed City services, we proposed, and our City Council enacted, an 18.5% increase in the rate of the only tax that we directly control: the City property tax. The people of New York City dug deeper into their pockets. They paid more out of their already-strained household budgets. But they maintained the essential services that make New York City attractive and economically competitive.

The City’s allies in Washington, and here in Albany, also rallied to our side. During 2002, the State Legislature approved $400 million in aid to the City. And last year, we successfully worked together to restore more than $600 million of projected budget cuts to education and social services, to develop more than $500 million of no-cost fiscal relief initiatives, and to pass legislation relieving the City of $500 million in annual MAC payments—an issue whose resolution is now up to the courts to decide.

In total, you approved $2.7 billion in measures that were instrumental to our budget-balancing efforts and to our recovery.

You have every reason to be proud of those actions. All the 57 other counties in the state helped keep NYC—the greatest city in the world—safe, clean, and economically attractive. They have helped refuel the economic engine for the Empire State in a city—our city—that now annually pays some $2.6 billion more into the New York State treasury than it receives in State spending. That surplus of funds, as you well know, is distributed by you back to all the same people that helped the City in tough times. Talk about a great investment!

Today, New York City is the nation’s safest large city. Over the last two years, we’ve driven crime down more than 10%. So far this year, crime is down an additional 4%. The subways are safer than at any time in modern memory. Our streets are cleaner than they’ve been in 30 years.

All our City agencies have learned to do more with less. For that reason, the quality of life in New York is, by virtually any measure, better now than it was in 2001. That’s why people continue to want to live in New York, and why businesses are expanding in our city. They’re confident about New York City’s future—and with good reason.

This brightening economic picture has increased City tax collections. As a result, we expect to close out our current fiscal year with revenues running ahead of expenses. These revenues will be used to help balance the City’s budget in Fiscal 2005 and 2006, as required by State law—and reduce any needed future aid to the City by the State down the road.

The improving economy is also why we fashioned a budget for Fiscal 2005 that takes into account the scheduled “sunset” of the tax increases enacted last year. Like the Governor, we oppose job-killing taxes, and we believe they should be phased out as promised. Sunseting the surcharges on the personal income and sales taxes benefits everyone who, as wage earners and consumers, helped pull the City through the fiscal crisis. That’s a principled position that you, the Legislature, took when you approved those surcharges.

Following that principle, we also have proposed an annual property tax rebate of $400 to the owners of single-family homes, co-ops and condos—including seniors on fixed incomes. For these are the people who were hit hardest by the higher property taxes that helped get us through our fiscal crisis.

That rebate requires your approval—an action that I believe is principled, progressive, and prudent. The $400 rebate we propose amounts to $250 million—only nine-tenths of one per cent of our total tax revenues of $25.9 billion, and less than 2% of our property tax revenues. We are not cutting our overall tax revenues. But in most cases, the proposed rebate is 100% of the 18.5% tax increase that homeowners paid—a real reward for carrying the City in its time of need.

Hopefully, the economic rebound will continue, and we’ll be able to extend this concept at a future date to renters. Fortunately, they generally have the benefit of fixed lease terms and rent stabilization that has delayed, or prevented, the full impact of the 18.5% tax increase from filtering through to them.

New York City’s tax burden is roughly one-third higher than the average tax burden in the rest of the State. That’s the reason that we have been able to provide the rest of the counties with $2.6 billion in annual financial support that has enabled those counties to keep their own tax burdens down. Last year, I asked for your help in reforming New York City’s personal income tax as a way to strike a fairer tax balance among all the State’s taxpayers. This rebate does that by providing tax relief for some of those who pay a higher share of the State’s taxes, just as the sunsets of the P.I.T. and sales tax surcharges do for many others.

The people who would receive this rebate have ensured a future for themselves and their children. They are the heroes of our fiscal crisis. They deserve a reward now that the economy is improving. We will not stand by and let anybody deny them a rebate. It’s their money. They should be able to enjoy it and spend it as they see fit.

Because of their help and yours…because we’ve made the choices we have…New York City is in a better, more competitive position economically than it has been in years. Our long-term prospects are excellent. That optimism—tempered by caution—is reflected in the City’s latest financial plan, which I presented 11 days ago.

I sound a note of caution because of two factors: the volatility of the economically sensitive tax income that makes up so much of the City’s revenue; and the steadily mounting expenses that are out of the City’s control, but which we must pay.

We project that expenses over which we have control will remain essentially flat through Fiscal 2008. But our non-discretionary expenses, including debt service, pensions, and the local share of Medicaid, are expected to grow by $2.1 billion, or 13%, next fiscal year. This will bring these expenses to a total of $18.1 billion. And they will grow by another 10.4% in Fiscal 2006.

Such rising costs are nothing new. During the late 1990s, the go-go economy generated revenues that permitted the City to meet them. But no one expects a return to such heady days anytime soon. That makes it imperative that we address our long-term, structural problems, now.

The City is doing just that. Our budget for Fiscal 2005, for example, calls for containing our debt service costs despite a $2 billion increase in the school capital program. We’re doing this by funding $200 million a year in pay-as-you-go capital. In addition, fringe benefit costs will be contained through an historic, already-negotiated agreement with the City’s labor force, which calls for greater employee participation in health care costs.

Now we also need the help of our labor unions and of the State government to bring other non-discretionary expenses under control. That assistance is required to balance the City’s budget for the next fiscal year, and to put our finances on a sound footing in the years ahead. We will also ask you to address with fairness and foresight the most important long-term responsibility that we face: the education of our children.

Let me begin with the City’s budget for Fiscal 2005. It calls for $400 million of gap-closing assistance from the State government. We have provided you with a list of more than $900 million worth of such initiatives. In addition, we’ve also asked the MTA to take over operation of private franchise bus lines in the five boroughs—an action that would save the City $150 million in annual subsidies. This is an eminently reasonable request; every other transit system in the world wants to expand services. After all, it’s what they are established to do. Before the MTA enhances adequate services elsewhere, they must take on the basics that are the essence of their mission—providing safe, reliable, affordable transportation for everyone in the City.

Many of the initiatives on our list would result in no cost to the State treasury. Others seek to reform State cost-shifts and caps in such areas as home health care savings, detention of State-ready inmates, and probation services. The initiatives at the top of our list focus on controlling and reversing mandated costs. And exhibit “A” is Medicaid reform.

The Medicaid program is one of the largest and fastest-growing expenditures in the City budget—and in every county budget in the state. New York City is expected to spend almost $4.4 billion on the State Medicaid program in Fiscal 2005, an increase of 11.5%, or $453 million, from the current fiscal year.

With Medicaid and its out-of-control growth, the State mandates the provider rates, program eligibility, and the level of services. City taxpayers just foot the bill.

From New York City to Nyack, from Long Island to the Niagara Frontier, you have heard Democrat and Republican county officials call for real Medicaid reform. I add my voice to that call.

I applaud the Governor for setting the stage for this reform. His proposal to take over the local share of Medicaid long-term care is one that is long overdue. Long-term care costs New York City more than $600 million a year, a figure that will steadily increase as our elderly Medicaid-eligible population continues to grow.

However, the Governor’s proposal must be the beginning, not the end, of State action on Medicaid. There have been many other reforms discussed in recent months, from the Senate Task Force proposal of a State takeover of the costs of Family Health Plus, to the Association of Counties’ plan to cap all increases in the Medicaid program. Each of these proposals would provide significant budget relief that would ultimately benefit local taxpayers; each deserves your consideration.

Medicaid cost containment must be a priority this year. But it must not take the form of a cost-shift to New York City. The Executive Budget includes several such well-meaning but expensive cost-shifts that would require the City to pick up additional costs.

For example, the State sets a limit on the average hours per client it will reimburse the City for home health care expenses paid by Medicaid. A few years ago, the City was told that the average hours of service per client must be lowered enough to save $33 million per year. The Executive Budget now proposes further restrictions to save an additional $11 million, for a total of $44 million annually. However, the number of hours per week each client receives is determined by a medical evaluation that prescribes the number of hours per week of service the clients receive. Under the Medicaid statute, we are obliged to perform this level of service. By setting this new target, the State Division of the Budget would shift costs to New York City, and call it a cost containment for the State.

There are similar problems with the budget’s proposals on containing costs of providing funding to New York’s teaching hospitals. The Executive Budget would shift more of the funding for the Graduate Medical Program from the State to the Medicaid program—which means that more of the costs would now be shared by localities, including New York City. In fact our share would increase by $25 million.

We also have to be careful in imposing Medicaid cost containments on our public hospitals and clinics. These facilities are the City’s medical safety net; they provide critically important services to people who in many cases have nowhere else to turn for health care.

Imposing an assessment of seven-tenths of one per cent on hospitals, as the Executive Budget proposes, does not sound like a major problem. But for New York City’s Health and Hospitals Corporation, it is. It will create an annual cost of up to $30 million for HHC. It also will, in essence, create an unfunded mandate. Our public hospitals and clinics are required, under the State law that established HHC, to provide a full continuum of comprehensive health and mental health services to New Yorkers, regardless of their ability to pay. But the new assessments included in the budget would make it impossible to meet that standard.

The excellent quality of care our public hospitals afford—and the equally high standards of management they have achieved—are reflected in the consistently outstanding accreditation ratings they have received over the last two years. Cost containment should not jeopardize the vital services they perform.

Enacting Medicaid cost containment is a difficult undertaking, one that I am sure you do not take lightly. We all know that everyone wants services, but no one wants to pay for them. I look forward to working with you, the Governor, and with county officials around the Empire State in finding ways to innovatively and effectively control Medicaid spending without sacrificing quality of care.

We also need to work with the State and with our municipal unions to reform a pension system that is spiraling out of control. Just to give you some idea of the magnitude of this problem: In the current fiscal year, the City’s pension payments total not quite $2.4 billion. These costs are expected to grow by more than 25%, or $600 million, in Fiscal 2005, and more than 26% in Fiscal 2006. By Fiscal 2008, pension expenses for the City will reach more than $4.1 billion, an increase of better than 70% from current levels.

Even without granting a salary increase to the municipal workforce, pension and fringe benefit increases will drive the City’s overall labor costs up by 5% in the next fiscal year, and another 5% the year after that. Workers won’t see it in their checks, but we are legally required to pay these costs.

Other cities and counties around the State also face similar mounting costs. They create for local governments what the Manhattan Institute has rightly described as a “pension time bomb.” The time to start defusing that bomb is now. This is a problem that State government has helped create, and that State government and the municipal unions must now work with us to solve.

Many ideas have been suggested for reforming the pension system. The Manhattan Institute has, for example, advocated moving from a “defined benefit” to a “defined contribution” plan. That idea, and other variations, are worth considering. Any pension reform you enact, however, must reduce pension costs, not raise them, for future generations of taxpayers.

To accomplish this, you must stop voting raises we can’t afford, “presumption qualifications” that abuse any measure of fairness, and binding arbitration requirements that thwart democracy. We also need a new tier—Tier Five—in our municipal pension system. There is ample precedent for doing this; the pension structure has been similarly reformed three previous times. We need to revise that structure again, to reflect current economic and demographic realities.

For future employees, this new tier would establish pensions at reasonable levels, competitive with the private sector, where most city taxpayers work. They might even be without cost of living adjustments or supplemental benefits, things that most of our taxpayers who have pension plans do without. This new tier would require employee contributions throughout active service, and re-institute a ten-year vesting period. It also would increase age and service requirements to reflect the longer, healthier lives that future employees can reasonably expect to enjoy.

Because this reform would only cover future, not current, employees, it would take many years to realize significant savings from it. But the longer we wait, the worse the problem will become. Over time, the savings would be substantial. This is one key way to attack the long-term structural problem of our budget, and free the hands of future generations.

We have another, even more important duty to the future: Providing our children and grandchildren with the excellent schools they need and deserve.

Education reform is the defining issue of our time. Two years ago, I asked for your help in achieving that reform—and you gave it. The school governance law that the Legislature passed and the Governor signed was historic. It has permitted us to fundamentally overhaul the management structure and day-to-day operations of the nation’s largest public school system.

Under Chancellor Klein’s “Children First” program, we’ve established real accountability that runs straight from the teacher’s desk in the classroom to the mayor’s desk at City Hall. Our goal is to give New York the best public schools in the nation. How? By raising standards and improving student performance across the board.

To do that, we’ve used the authority you granted us with the New York City School Governance Reform Law to cut needless school bureaucracy by $250 million. We’ve redirected those funds where they belong: to classroom education.

Again with the help of that law, we’ve turned what were once administrative offices in the schools into more than 8,000 classroom seats—the equivalent of 13 schools that would have cost half a billion dollars to build.

We’ve implemented a citywide curriculum in reading and math, improved the recruitment and training of the next generation of school principals, and put full-time parent coordinators in all the schools.

To give you an example that shows you where we started, and how far we’ve come, consider this. Last September, we accomplished something fundamental—but unprecedented: We delivered more than eight million textbooks and other learning materials to all 1,200 schools before the first day of classes.

We’re also committed to maintaining the orderly, crime-free environment that is essential to learning, and to providing a safe working environment for our teachers. We’ve deployed additional police to our most troubled schools, and established a “zero-tolerance” policy for students who commit the most serious offenses. Students who engage in chronic disruptive behavior—resulting in a third suspension within 24 months—will now be automatically removed to off-site suspension centers. We’re doing everything it takes to ensure the basic right of safety to all our schoolchildren. We will not allow a few people to destroy the education opportunities of all the others.

The City of New York is doing all it can. It devotes a growing share of our own locally levied revenue to the school system. Our local support per pupil is more than 180% greater than the average in the next four largest cities in the State. Despite a deep recession and fiscal crisis, the City also has increased support for schools by $1.2 billion since 2002.

That extraordinary local commitment is necessary in large part because the City’s Department of Education bears responsibilities much greater than those of any other school system in the State. More than 80% of our 1.1 million students, for example, qualify for free or reduced-price lunches. That is more than twice the average of New York State students outside the city. Some 18% of our students have limited proficiency in English, which also puts significant strains on our budget.

Nor do our responsibilities and our aid to our children stop at the schoolhouse door. Nearly one in four New Yorkers is under the age of 18, and many of them face enormous, and even potentially devastating, social and health care problems. In many cases, they lack parents, and the City’s responsibility is to care and provide for them, and do for them what parents would.

For that reason, we provide Medicaid services to more than one million children… public assistance to more than 241,000 children… publicly funded day care to nearly 100,000 children… and services to nearly 100,000 children who are abused or neglected, in foster care, or homeless.

In total, these account for more than two-thirds of children needing health and social services in the entire State of New York. Children make up nearly three-fourths of those in New York City receiving Temporary Assistance to Needy Families. In fact, the concentration of poverty we face is such that 14 cents of every budget dollar spent in the City goes for Medicaid and public assistance. Much of that assistance goes for New Yorkers under the age of 18—and that’s on top of the 32 cents on every budget dollar that goes to education. Thus, the total that the City spends on helping and educating our youth is billions of dollars more than just the funds going through the Department of Education’s budget.

Remember, in other localities, school districts levy taxes to pay for education, and counties collect the taxes that fund social services. In the Big Apple, education, health and social services for children all come from one treasury: the City government’s.

This is a critical issue as you begin to address the task of providing equitable funding for New York City schools. As the Court of Appeals has ruled, the State’s failure in this regard has denied our City’s schoolchildren the sound, basic education that they deserve and that the State Constitution requires.

This has been a chronic problem. It’s time to solve it. Justice demands, and now the Court requires, that the costs of that solution not be borne solely by our City’s taxpayers. If the State’s elected leaders fail to act wisely, a judge will seize the authority to make these decisions for us. That will be a sad day for New York State.

On the issue of school finance, the Executive Budget takes several major steps in the right direction. Its proposal to replace the current, Byzantine system of school aid formulas with “flex aid,” for example, deserves high praise. This would give local districts greater autonomy in using State funds to fit local needs, and ensure that money goes directly to classrooms in the most cost-efficient manner.

The Legislature can also help us meet our education needs by correcting an oversight in the Executive Budget. As you know, the Division of the Budget projects that the City will receive a $56 million increase in education funding from the proposed statewide year-to-year increase of $147 million. However, this projection omits a $62 million “fiscal stabilization grant” the City received in the current fiscal year to pay for the additional 20 minutes per day in the teacher workday. Therefore, this budget actually reduces year-to-year education funding to New York City by $6 million. To meet our education needs—specifically to pay teachers for work they are performing—we need you to correct this oversight.

The Executive Budget also proposes creating a dedicated source of funds for high-need districts, including New York City. This would establish a system of State aid that would provide additional dollars to schools that need them most—a laudable and essential step.

However, creating a stable revenue source for this program is key. Education expenses—such as school construction and teacher contracts—are long-term and fixed; they therefore cannot and must not be funded from variable and unpredictable sources. This would only compound the difficulty of keeping the City’s fiscal house in order in the years ahead.

Video Lottery Terminals have been proposed as a revenue source for this program. Personally, I’ve always disliked relying on revenues from gambling, because it is regressive. But an even more basic problem with VLTs as a source of education funds is that they won’t provide the stable, predictable revenues we must have. If the State chooses to raise money that way, so be it. But New York City needs a guaranteed funding source for its schools, or it can’t make long-term construction and labor commitments.

The response to the CFE lawsuit should not be built on a foundation that is unpredictable and objectionable. Instead, the State has an opportunity to do something truly impressive and far-reaching. That is, to help reduce class size in New York City schools—which in our elementary schools is now 30% greater than in the rest of the State.

How, you ask? The City’s proposed $13.1 billion five-year capital plan will upgrade, build, and maintain school buildings in all five boroughs. This includes 63,000 new classroom seats that would go a long way toward ending overcrowding in New York City public schools. City government’s contribution to this plan, $6.5 billion, is an increase of nearly 45% over what we spent on the last school capital plan. It includes $1 billion of pay-as-you-go spending from the expense budget. Now, we need the State to match the City dollar-for-dollar in funding this much-needed plan.

Over the last two years, Albany has played an indispensable role in New York City’s recovery. The actions you have taken on the City’s behalf have often not been easy. But they have been vital, and they have been greatly appreciated.

The decisions you make in enacting the State’s budget can help cement the progress that New York City has made. Our crucial task is continuing to grow New York City’s economy. The benefits of that growth will be felt throughout the State. We’ve shown what a great investment return you get by helping. But to realize that growth, government must continue to make New York a place where people want to live and businesses want to locate and expand.

New York has turned the corner because we’ve kept the streets safe…protected our quality of life…and begun the process of improving our schools. We need to maintain, and even pick up, the pace in all of those areas. To do that, we need City budgets that permit us to hire police officers, build affordable housing, and create world-class public schools—not budgets that are increasingly eat up by unfunded mandates and non-discretionary expenses.

The Division of the Budget has estimated that this Executive proposal will provide the City with the $400 million of assistance that is needed to balance the City’s budget. But the devil is in the details—and as we review those details, our estimates of gap-closing assistance are lower than that figure.

To accomplish our immediate and long-range goals, we need to maintain our strong partnership in Albany. It’s a partnership that provided relief and helped to fuel a recovery. Now it must be a partnership for reform that will make it possible for future generations of New Yorkers to reap the benefits of that recovery. I look forward to working with you to uphold and strengthen that partnership. And now I look forward to taking your questions.