PERB: Day 6 – December 13, 2007
Mark Page, Director of the City’s Office
Mr. Page, the Director of the City Office of Management and Budget (“OMB”), has held several different positions within the OMB during his 30-year employment with the City of New York. He has testified in all three PBA PERB arbitrations and not surprisingly has offered strikingly similar testimony in each round (i.e., the City does not have the ability to pay).
As he did in all three arbitrations, Page addressed the City’s ability to pay argument and attempted to describe the City’s budgetary and financial management practices, concluding that the City does not have the ability to pay PBA members more than the pattern.
Despite well-documented and unprecedented budget surpluses in the two years at issue in this proceeding, Page once again testified that the City forecasts large budget gaps in the out years in the City’s four-year financial plan, which he estimated to be “about six and a half billion dollars” in FY 2009.
He went on to say that “I don’t believe that we have the ability to pay PBA members more than the pattern settlement. To do so, would further strain our enduring long term and balance between expenses and revenue.”
In support of his assertions, Page described the City’s budgetary and revenue forecasting process, which he described as “extremely difficult to do accurately.” In a very serious understatement, he admitted that the City’s forecasting is “a little bit toward the conservative side.” He also had to admit that the City often ends up with excess revenue, which he said many refer to as a “surplus,” but he carefully characterized as a “positive” not a surplus. He then attempted, not too convincingly, to recast a surplus as something other than a surplus, reasoning that it’s not really a surplus because it’s used to pay forward obligations in the following year, a practice that the City has utilized for many years.
On cross examination, attorneys for the PBA took Page through the OMB’s out year budget gap forecasts over the past several years revealing how inaccurate that they had proven to be. For example, he was asked about a 2.9 billion-dollar budget gap forecast for 2004, which turned into a 1.9 billion-dollar surplus. Similarly, he was confronted with OMB’s inaccurate predictions for 2005 (a 5.6 billion-dollar budget gap forecast which turned into a 3.5 billion-dollar surplus); 2006 (a 2.9 billion-dollar gap forecast that turned into a 3.9 billion-dollar surplus); and (2007) (a 4.1 billion-dollar gap forecast that turned into a 4.6 billion-dollar surplus). His general response when confronted with the disparity between OMB’s forecasts and the actual budget surpluses, was “as I’ve said before, I do not recall specific numbers.” However, he did recall the 2007 surplus was 4.6 billion dollars.
Significantly, Page was asked about a New York Times article, in which he spoke about the City’s current financial outlook and admitted that “the situation was nothing like the City faced in 2002 amid recession when the City’s long and short-term prospects were unclear.” This is significant in that in 2002, during a very uncertain financial period following the 9/11 attack, in awarding the PBA two 5% increases and 1.5 % in additional spending over a two-year period, which exceeded the 30-month pattern settlement received by the uniformed coalition, Arbitrator Eischen concluded that the City had the ability to pay. Here, even Page could not explain away the City’s unprecedented 4.6 billion dollar surplus in 2007, and did very little to convince the panel that the large surpluses over the past several years, particularly the 3.5 billion and 3.9 billion dollar surpluses during the two-year period covering the contract period in question, were anything other than surpluses.
Michael Dardia, Deputy Director, Office of Management & Budget
Mr. Dardia, the Deputy Director of the OMB, principal purpose was to expand on Mark Page’s testimony and explain how the City forecasts its tax revenues. He began by stating that the City’s budget is required by law to be balanced every year.
According to Dardia, the forecasting process, which he explained takes place four times a year, begins with a review of the national economy using commercially available forecasting packages from “reputable” financial organizations. They also consider various surveys to see what they are saying about the future of the nation’s economy. Once they have a picture of the national forecast, they consider the city’s future, which he stated has a different distribution of industries. He also stated that New York has a lot more exposure to the international economy and less to manufacturing. Based on all of the following data, the OMB makes adjustments and develops a forecast for the City.
In an apparent attempt to address the issues raised by the PBA about the ability of the City to raise taxes to pay for increases for Police Officers, he discussed the pros and cons of raising sales and property taxes, emphasizing the balancing act between the need for additional tax revenues and chasing away property owners and high-income earners who account for the greatest portion of the City’s revenues. Interestingly, Mr. Dardia did not testify about the $250 million dollar property tax rebates that the City bestowed on property owners, which alone could have funded close to a 10% raise for New York City Police Officers.
He also testified that the OMB analyzes Wall Street profits and the real estate market both of which he testified are very volatile. Dardia stated that they make their projections by using all of this data and considering the rate of non-tax payment.
He went on to explain a whole host of issues (e.g., employment levels, new firm births and deaths, default and foreclosure rates) that they must consider in making future revenue projections. He spoke about the impact that the sub-prime mortgage issue has had on the city’s revenue projections. Ignoring the fact that the OMB’s forecasts are consistently wrong, as was more fully developed in the cross examination of Mark Page, Dardia said, he did not believe that their office could be accused of being overly pessimistic in putting their forecasts together, but later admitted on cross examination that their projections are conservative.
In an attempt to add some uncertainty into the mix for the future, he said that the City’s commercial real estate market is “cooling.” However, commenting on Wall Street profits, which he said was a concern for the City, he admitted that their projections are not calling for any major collapse in those profits.
Under cross-examination, Mr. Dardia admitted that accurate forecasting is exceedingly difficult to achieve. He also agreed with Director Page’s earlier testimony that the further out you attempt to forecast, the less accurate it will be.
Martin Ives, Adjunct Professor of Public Administration, Wagner Graduate School of Public Service at NYU
The main purpose of Mr. Ives’ testimony was to support the City’s argument that pension and health pension benefits must be included in determining total compensation paid to New York City Police Officers. Toward that end, Mr. Ives’ testimony centered on the major long term debt obligations associated with pension and post-employment healthcare benefit obligations. According to Mr. Ives, these debts are part of the non-controllable costs referred to by OMB Director Mark Page in his testimony.
He went on to discuss the City’s debt obligations at length and compared New York’s debt burden from 2001 to 2007 to that of other City’s concluding that New York’s debt burden is considered to be high. However, on cross examination, he did not know that the City Comptroller had put all of the City’s debt – including increased pension and health costs - at 3.8% between 2008 and 2011. When pressed, he could not say whether the City’s general debt amount was reasonable or not. When asked why he did not use more recent reports for his testimony he responded “[t]hese are the reports I had.”
According to Ives, pension costs have increased three fold since 2001 and continue to increase for the foreseeable future. He testified that stock market declines and benefit enhancements have caused the city’s combined pension debt to go from being over funded in 2001 to only 86% funded in 2005. However, he admitted that the 86% still compares favorably to the 84% funded level of the nationwide funds reported in a recent survey.
Mr. Ives testified that the cost of police and fire pensions was much higher in NYC than in other municipalities in NY State and that NYC fire pensions were significantly higher than police. He believes that differences in the benefit paid accounts for most of the differences.
He then turned his testimony to post retirement health costs that he noted had been a pay as you go situation for NYC. He said that the pay as you go practice shifts the debt burden from today’s taxpayers to future taxpayers who derive no benefit from providing the benefit. He noted that unlike pension funds, there is no pool of money to generate interest that will defray the cost of the post retirement health benefit. He went on to say that because of new accounting guidelines, the City must account for the unfunded debt of paying these retiree health benefits. According to Ives, this unfunded debt amounts to nearly $57 billion dollars that he stated is greater than the tax supported debt of about $53 billion. He said that the city has begun putting funds away each fiscal year to bring the unfunded debt down. According to Ives, the problem is compounded by the ever-rising cost of health care.
He concluded by saying that pension and health care costs are increasing the burden on future budgets.
Undermining the significance of his testimony regarding the impact of the pension and health care related debt on the City’s ability to pay, he admitted on cross examination that several credit rating organizations had increased the city’s rating recently while being aware of the pension and health care debt. He also agreed that more recent Moody’s reports show the City’s debt service dropping from 11% to 9%. When asked why he didn’t use more recent reports for his testimony, which showed the declining debt service, he responded “[t]hese are the reports I had.”
The lengthy cross-examination went on to cite many reports that show different results from Mr. Ives' testimony.
The next hearing date is Friday,
December 14, 2007.