CityEconomist 

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CONTENTS

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Foreword by Comptroller Hevesi

New York City faces serious and continuing budget problems. After closing a gap of $2.3 billion in fiscal year 1995, the City now must find a way to close a fiscal gap in 1996 that the Administration in April estimated at $3.1 billion, close to the Comptroller's Office estimate of as high as $3.2 billion.

The City's current fiscal problems are as serious as those the City faced in the mid-seventies and may be tougher to solve. The City's economy remains weak, sharply limiting the City's resources. And, unlike the 1970s, now the state and federal governments are cutting back on their support for the City.

To create a long-term balance between New York City's spending and its revenues, major cuts will be necessary. Those cuts will undoubtedly cause pain for many New Yorkers.

Ideally, all the savings needed to close the gap could be gained by eliminating waste and fraud in both services and entitlements. Though we need to redouble our efforts to reengineer government to make it more efficient and effective, in the short term there is no alternative to some level of service cuts in both programs and entitlements.

The goal of this report is to identify and quantify to the best of our ability the service impact of some of the proposed cuts and their secondary effects. It does not cover every aspect of the budget, but selects major components -- for example, in the health-care area, home health care and Medicaid. It describes how some of our citizens may suffer from those cuts.

Our purpose is not to suggest that because a cut is painful that it therefore should not be made. Rather, we believe that informed public discussion is the only way to decide which cuts to reconsider and which ones to make and to gain the broadest possible acceptance for those cuts. When we are asking some New Yorkers, especially the least powerful, to sacrifice, it is important that we be honest and open about our choices and their consequences.

This report shows that the budget cuts may have some serious ramifications for the City beyond the first-round effects. These losses add up to a removal of a significant portion of the safety net that New Yorkers have woven over the years to protect the City's least privileged citizens.

We hope this document contributes to the public debate. We will present our own list of preferred options and alternatives shortly.

Alan G. Hevesi

May 1995

This report looks at the secondary effects on the City budget of proposed cuts in State and City spending, data that have not been provided by the Administration. This analysis does not include the additional cuts in the City's contingency plan.

Secondary effects, particularly in future years, are often ignored in a routine budget process. However, the City is not faced with routine budgeting. The cuts are enormous. Some of the secondary effects will begin to appear in the second half of FY 1996, while others may not be felt until FY 1997. They could not only hurt many New Yorkers, but also threaten the City's ability to balance its budget.

The savings projected from the spending cuts assume that people deprived of one service will not require another, sometimes more expensive service. In some cases, that may be a risky assumption. To test that risk, we analyzed the breakeven point for a number of cuts -- that is, the point at which secondary spending equals and thus wipes out the savings from the initial spending cut.

Under the Governor's proposal, there are no savings to the City if one of every seven people deprived of Level 1 personal care, the lowest level of home health care, goes to a nursing home or if one of every four people deprived of personal care is hospitalized just once during the year. The City's share of the costs are $608 of the maximum $6,080 a year cost for Level One personal care, $4,119 a year of the average $41,190 per year cost of a nursing home and $2,181 of the average $8,723 cost per hospitalization. This analysis uses the average Medicaid hospitalization, though elderly patients may be hospitalized for longer periods, require more expensive treatments and may be hospitalized more than once a year.

The Governor's proposal will save the City $26.3 million by providing less home health care, but those savings could generate $44 million in additional costs. The report estimates that about 19,000 people now getting care at home will need to be institutionalized. If 1,267 take the only available nursing-home vacancies and if the remaining 17,733 are hospitalized for an average general-care stay only once a year, the cost to the City would be almost $44 million.

Alzheimer's patients need almost constant care. Most of that care is now provided by family members. The Governor's proposal would cap care at 100 hours a month, a bit more than three hours a day. With an inadequate amount of home care provided by Medicaid, some family members would have to give up their job or the Alzheimer patients would have to be institutionalized.

Seniors and other patients can leave a hospital and recuperate at home thanks to a home-health aide program that gives patients medical care at home. Cuts in the program will keep patients in hospitals longer, increasing costs. For example, tube feeding costs $16,000 per month in a hospital, but $6,000 a month at home.

Adult Day Care allows seniors to live at home and get nursing home-like services during the day. This program maintains family ties, while allowing family members to work during the day. Cutting it would force seniors into nursing homes.

There are not enough data to analyze the separate State Senate proposal for personal care in the same way, but it would effectively force the City to eliminate as much as 75 percent of the home-care and community-care hours now being provided by the City. This reduction would have an effect similar to the Governor's proposal in terms of service reduction, pushing more seniors into nursing homes and hospital emergency rooms.

The blind or arthritic senior, who now lives with some independence and dignity thanks to his or her home care, will be left at much greater risk of illness and accidents.

SERVICES FOR CHILDREN--FOSTER CARE & DAY CARE

If one of seven children in foster boarding care through voluntary agencies spends an extra year in foster care or if one of five children now in congregate care spend one extra year in care, there are no savings to the City.

Foster care, which costs $11,100 a year at the new reduced rate, is meant to be a temporary solution until a child is either returned to its parents or freed for adoption. This can only be accomplished if rehabilitative services are made available to parents so they have the chance to solve the problems that led to the foster care placement. Cuts will reduce or eliminate rehabilitative services and will force staff reductions that will slow the process of moving children out of foster care.

To avoid foster care placement, some troubled families now get six to 12 months of homemaking services at an average cost of about $15,565 a year per family with three children. Homemaking is provided once, but can keep children out of foster care for years, at a savings at the new lower rate of $33,300 a year for a three child family.

A young child who needs a stable, loving home to develop into a productive member of society will be left in a dangerous home, at risk of injury or death, likely to pass on the same bad parenting to his or her own children.

The City and State budgets propose to cut child care spending by $8 million. Meanwhile, the State's Workfare proposal will create the need to provide care for as many as 68,400 additional children at a cost to the City of between $30 million and $78 million.

Women who could work if decent child care were available will be unable to leave welfare or will have to leave their children in unlicensed and unsupervised child care facilities.

Reductions in State mental health facilities and community mental health programs will push more patients into HHC hospitals. Psychiatric care costs $310 per day in a State long-term facility and $550 per day in an HHC acute-care psychiatric ward. Community-based mental health services, including residential care, for severely ill patients cost $96 per day per person.

A severely mentally ill person, abandoned to the streets and unable to control his behavior, may end up in jail, at the mercy of criminals, because there is no other way to get him off the streets. Besides destroying any hope of recovery, jailing the mentally ill increases the costs of the criminal justice system.

If one of every 11 welfare families suffering a loss of the Jiggetts rent supplement payment is evicted and goes to a homeless shelter, there are no savings. As the result of a law suit in which the plaintiff's name was Jiggetts, families only get these rent supplements if they are threatened with eviction. The City pays $750 per family in Jiggetts supplements. The City's share of the cost to keep a family in a homeless shelter is $8,486.

If one of every six people thrown off Home Relief after 60 days spends a year in a homeless shelter, there are no savings. The City will save $1,465 by not paying 10 months of Home Relief. The City's share of shelter costs for a single adult is about $8,600 a year.

If one out of ten welfare families facing eviction is deprived of back rent assistance and is then evicted and goes into a homeless shelter for a year there are no savings. The City's average cost of back rent assistance is $875 per family. It costs the City $8,486 to keep a family in a homeless shelter for a year.

A welfare mother forced into homelessness may despair of caring for her children and decide to turn them over to foster care.

Much social service spending is matched, so that cuts at one level of government bring cuts at other levels. The City faces a total potential cut of $817 million in City social services spending and other lost aid, which combined with related State and Federal reductions will cost the City a total of $2.8 billion. Most of the reduction is Medicaid, $2 billion in total government spending, of which $506 million is City funds.

The Comptroller's Office estimates that the $2 billion in Medicaid cuts will cost the City economy a total of $3.2 billion in economic activity and between 34,000 and 61,000 jobs. The lost jobs will cost $1 billion in lost earnings. That along with other lost economic activity would cost the City about $270 million a year in tax revenues. Other cuts will mean additional loses of jobs and tax revenues.

Many of the health care and social service jobs that will be lost due to the budget cuts are scarce unskilled and semi-skilled jobs. Thus, the people losing those jobs are likely to have a difficult time finding other employment and some of them will end up on welfare. Also, some of those now on welfare will not be able to get off because of the lack of home health care, day care and other semi-skilled jobs.

The welfare cuts will have a particularly strong impact on neighborhoods where public assistance recipients are concentrated. For example, City Council Districts 15 and 17 in the Bronx will lose $66 million or $67 million a year in economic activity, about 20 percent of their total neighborhood economies. This reduction in economic activity will affect merchants and landlords in those neighborhoods.

CUNY estimates that enrollment will decline by 15,000 because of budget cuts. A college education is the only road to getting the skilled jobs that the City is creating. A community college degree adds $5,000 a year to graduates' incomes, and a B.A. degree adds an additional $7,000 a year. People deprived of college skills are more likely to become dependent on government services.

Some people who lose home care will be lucky enough to be taken care of by family members. But some of those family members will have to quit their jobs. The City already suffers from having a low percentage of its population working, one in two compared to two of three in the nation as a whole.

The Administration expects that reducing the size of government and cutting some business taxes will encourage businesses to locate in New York City and those already here to stay and expand. It is unlikely that business expansion, it if occurs, would create the unskilled and semi-skilled jobs for which most of those who will be hurt by the budget cuts would qualify. Thus, even if the strategy is successful, sections of the City may not benefit from future job growth and the already large gap between the highly paid skilled workforce and the increasingly unemployed unskilled workforce may increase. Sharp social divisions can be a threat to social stability.

This analysis demonstrates that savings are not always as easy to achieve as they seem. Government action often has unintended consequences. The City must make cuts and balance its budget, which will require some sacrifices by people now benefiting from City programs. But the City has to avoid cuts that both hurt people and increase costs.

Economic Impact on City Council Districts of State Welfare Cuts (in $millions)

Sources: See notes to Table 16.