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Commentary By Nicole Gelinas

Token Gesture

Cities, Economics New York City

RECORD Wall Street bonuses and real-estate activity this year left the city with sky-high tax revenues, so Mayor Bloomberg had much that he could have offered the taxpayers yesterday when he presented next year's budget at City Hall. Instead, Bloomberg made only a token gesture toward long-term fiscal responsibility — and it's just as likely as not that the municipal unions will turn the mayor's own move against him.

Gotham's budget will reach $55 billion next year — as always, it's the largest city budget in the nation. In Bloomberg's first term, city-funded spending grew nearly 30 percent, or double the rate of local inflation. The mayor continues this trend in his first post-reelection budget, with a projected spending increase that still outpaces inflation.

The good news? The mayor has billions of dollars in tax revenues at his disposal with which to balance this year's budget: $2 billion from his 2002 permanent property-tax hike, plus more than a billion or so in extra cash from higher-than-expected real-estate-transfer taxes and income taxes.

So Gotham doesn't face a budget deficit starting in July. Indeed, the mayor has some extra taxpayer money — about $3.5 billion — to play with this year.

The bad news? In the summer of 2007, even with those extra revenues from today, the city inevitably will fall into the bud¬get hole again — to the tune of about $3.5 billion. As the mayor noted yesterday, private forecasters expect the city's torrid real-estate market to cool off, cutting into one source of windfall tax revenues. (0ne sign of a slowdown: Apartments are already spending weeks more on the market than similar ones did just months ago.)

Even at best — if the real-estate market doesn't go bust completely (as the tech bubble did six years ago) and Wall Street continues to book healthy profits — the mayor doesn't expect to have any extra money to paper over the 2008 deficit. Thus, the city will be right back where it was in 2002 — eyeing large deficits, and possible tax hikes.

Why does Gotham face such big deficits in just a year or so, when the economy continues to recover and when tax revenues continue to grow? The answer is simple: The cost of pensions and health benefits for public employees and retirees continues to rise at an unsustainable pace, far faster than tax revenues can grow without tax hikes. (In 2001, the cost of employee benefits was about $5 billion, or only 31 percent of those same workers' salaries. Today, it's nearly $12 billion, or 62 percent of workers' salaries.)

Another culprit: Spending on debt. As the city's total long-term debt — used for things like fixing roads and building subsidized housing — reaches nearly $60 billion, the cost to pay the interest and principal on that debt will rise nearly 60 percent over the next three years, to more than $5 billion year.

Bloomberg himself says that this spending growth is "really quite alarming." But his proposals to deal with it don't show much alarm.

Chiefly, he'll set aside $2 billion to create a "retiree health-benefits trust fund" for municipal employees -- that is, money that can't be touched now but that will fund future benefits. Plus, the mayor will take $1 billion and use it to pay for some capital projects up front, reducing the need for future debt.

OK: Bloomberg is right not to use this year's one-time surplus to hike current spending, as the City Council will probably call for him to do. But it's nowhere near enough.

Setting aside some funds to cover growing worker healthcare costs will never be enough to achieve budget stability. To do that, Bloomberg must actually reduce those growing costs. How will the mayor permanently cut back the growth in pension and health benefits for public employees? He gave few specifics yesterday, saying only that the city must work with Albany and the public-sector unions to reform these unsustainable pensions and benefits. He won't say how he plans to get Albany or the unions to go along, or how much he hopes to save.

Asked yesterday if he would advocate for putting new municipal employees in modern, 401(k)-style individual pension accounts rather than outdated (and unaffordable) old-style pensions, the mayor replied that it's "not productive" to get into specifics.

Starting up a trust fund for future benefit payments may seem fiscally responsible at first glance. But it sends the wrong message to the unions that there's plenty of money where that came from.

To get the budget on a sustainable path, the mayor must first acknowledge that's there's lots of dirty work that must be done in Albany and in negotiations with (or against) municipal unions.

Indeed, Bloomberg knows that the unions won't cooperate with him on reform, and, indeed, have no incentive to do so — unless he uses the one stick at his disposal: Start to privatize some city services, structurally cutting the unionized work force from city payrolls unless the unions cooperate on benefit reform.

The mayor has two things going, for him when it comes to starting that dirty work. One: Barring unforeseen events, he's got a year of clear fiscal sailing in front of him. Two: He's got political capital from his land¬slide reelection.

Bloomberg could use this capital to become a trend-setter for municipal unions across the country, by setting clear goals for pension and benefit reform and pledging to work with (or against) union leadership and Albany politicos until those goals are achieved. But yesterday, Bloomberg didn't take a step toward doing that.