Forget the high-profile fights over library funding and the like and focus on meaningful structural reforms
The annual New York City budget dance is over; a financial plan for the 2024 fiscal year has been adopted. Total spending will top $107 billion, which is about $13,000 per resident of the five boroughs.
Yet all the attention and back and forth between Mayor Adams and the City Council focused on relatively small amounts of money for a few programs. While the debates may have been somewhat more intense and performative this year, the basic steps in the dance were the same as usual: The mayor announced what he described as unpleasant but necessary cuts, advocates protested, councilmembers denounced the cuts as daggers to the heart of the city — and then many were restored in the adopted budget. The total restorations and additions by the Council are usually in the vicinity of $450 million, as was the case this time. So all the fighting was about less than 0.5% of the budget.
Meanwhile, elements of the budget with vast, ongoing implications were, as is routinely the case, approved without in-depth examination or critique. In particular, the cost of personnel accounts for the largest portion of the city budget — $55.5 billion — and is largely driven by collective bargaining contracts with the public employee unions. The mayor is in the midst of negotiating new contracts with all the unions; those with DC 37, the Police Benevolent Association and the United Federation of Teachers have been finalized so far. Annual raises are in the 3-3.5% range with various one-time payments added on; unfortunately, so far none of the contracts include any offsetting savings from productivity improvements. If the pattern of the negotiations holds, once all the contracts have been finalized, annual raises for all city employees will cost an additional $16 billion over what had already been budgeted for the next four years — with little to show for it in terms of building a more productive local government.
You don’t need to be a fiscal hawk or catastrophist to understand that changes to the post-COVID world of work and consumption have put the city’s economic future at risk. In order to have a sustainable city government that can adapt to possible significant losses of revenue (e.g. from commercial property taxes and the end of federal COVID relief) we must find ways to slow the growth in expenditures, and this simply has to include our personnel costs. Failure to address this challenge will hurt all New Yorkers, including workers whose wages and benefits will be at risk, as well as the rest of the city’s residents whose services and quality of life will be impacted if drastic cuts have to be made.
The total restorations and additions by the Council are usually in the vicinity of $450 million, as was the case this time. So all the fighting was about less than .5% of the budget.
The mayor made a start by eliminating 8,300 vacant positions since he took office for a saving of $700 million, but after adding new positions, the net reduction is only 6,500 out of a workforce of 330,000. And he worked with the Municipal Labor Committee to save $600 million a year by moving retirees to a customized Medicare Advantage Plan — now on hold due to litigation. It would have been better if the healthcare savings had gone into the budget instead of a labor-controlled reserve fund, but the model of labor/management cooperation established was a good one and should be used to find more opportunities for savings.
Change is hard and there is a constituency for everything, but if the mayor and the leadership of the public employee unions can invoke the spirit of the late Richard Ravitch and Victor Gotbaum and come together, ways can be found to bend the cost curve so we are not repeatedly teetering on the edge of a fiscal cliff.
Here are half a dozen ways to get started:
1. The city makes per-employee (and often per-retiree) contributions to 74 distinct welfare funds administered by individual unions. These funds most commonly provide prescription drug coverage and offer medical and dental plans, but also provide a variety of other benefits, such as scholarships, determined by each collective bargaining unit. Many funds incur excessive administrative expenses, build unnecessary reserves, or suffer from mismanagement, including running deficits.
The City and the MLC should agree to consolidate welfare funds to leverage economies of scale for prescription drugs and other medical benefits. City payments to welfare funds are projected at $1.35 billion in fiscal year 2024; consolidation could reduce costs by more than $160 million without a benefit cut.
2. Most engine companies at the Fire Department (FDNY) operate with a crew of four firefighters and one officer; however, up to 20 engine companies can be staffed with five firefighters and one officer under an agreement negotiated between the de Blasio administration and the Uniformed Firefighters Association. The City could make four firefighters the standard staffing for engine companies and also seek state authorization to reconfigure the staffing of ambulances to allow one EMT and one paramedic per ambulance, cutting down on paramedic overtime without in any way hindering emergency services.
City payments to union welfare funds are projected at $1.35 billion in fiscal year 2024; consolidation could reduce costs by more than $160 million without a benefit cut.
3. Sanitation routes should be lengthened so that by the time the trucks go to the waste dump to be emptied they are full of trash, not only partly full because there is not enough trash collected along outdated routes. This could save more than $120 million annually but can only be done in cooperation with the Uniformed Sanitationmens Association. Also, sanitation workers continue to receive a range of differential payments, many of which were intended to incentivize what have become standard operating procedures or in some cases, even when productivity targets are not met. For example, an “efficiency” differential for operating two-person trucks is paid even though this has been the standard operating procedure since the 1980s. This differential should continue only if tied to new productivity increases, such as one-person automated collections on appropriate routes.
4. Unions for uniformed employees, skilled trade workers and some others manage annuity funds to which the City contributes per member annually. These contributions totaled $129 million in fiscal year 2023 in addition to the more than $9 billion in pension contributions made by the City. The City offers its employees defined benefit pension plans that are generous, even as compared to those provided to State workers. City contributions to annuity funds should be reduced, if not eliminated.
5. Similarly, Variable Supplement Funds which pay retired Police, Fire and Corrections personnel an annual payment and in some cases, a lump sum in addition to their pensions should be eliminated or reduced. VSFs are distinct from pension funds and have their own significant assets, estimated at $4.8 billion for the police, $785 million for fire and $1.1 billion for corrections. When these assets are insufficient to make payments to retirees, the VSFs are funded with a transfer from the pension funds, effectively reducing the investment return of the pension funds.
In light of attrition and remote work, city office space could be reconfigured and reduced, for significant savings in the annual $1.4 billion in lease expenses.
6. Teachers and other pedagogical employees can deposit funds into a tax-deferred annuity (TDA) that offers a fixed return investment option, guaranteeing either a 7.0% or 8.25% return. The fund is similar to a money market account that allows participants to withdraw money freely, but the returns paid are immensely larger than would typically be paid for such an account in this persistently low-interest rate environment. The Citizens Budget Commission estimates the value of this taxpayer-provided guarantee is approximately $1.2 billion annually.
The guaranteed return on the fund should be sharply reduced through state legislation. The UFT and the City agreed to reduce the rate to 7% in 2009 in the course of collective bargaining, and the change was codified later that year (the rate remains 8.25% for non-UFT members in TRS and BERS).
Alternatively, reforms could be implemented to reduce the risk (and cost) by converting the fixed return to a variable return or a similar plan offered to federal employees.
In addition to measures that directly impact compensation and benefits, there are other things the City can do to lower costs which would require cooperation from employees. For example, in light of attrition and remote work, city office space could be reconfigured and reduced, for significant savings in the annual $1.4 billion in lease expenses.
No one knows more about how to reduce costs than the agency managers and employees themselves. If they were tasked with making a serious, concerted effort they could find many more long-term savings.
Let me anticipate and rebut the response some will give to these ideas: The way to handle our growing expenses is not to raise taxes on the wealthy. We are already the most highly taxed city and state in the country. COVID has dramatically demonstrated to residents and businesses that there are other viable places to live and operate. We cannot rely on a very small group (i.e. less than 28,000 households with an annual income of more than $1 million) to fund a rising share of anything and everything because these incomes are volatile (dependent on fluctuating sources like capital gains) and they can all too easily leave. New York City government is bound to be costly — but it doesn’t have to cost this much. Find smart savings.