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Robust Economy Revives Cities

New York mayor wants to use $856 million surplus to cut taxes, pay debt, aid education.

To Debra Wasser, New York has never looked better. The streets are cleaner, the parks are better tended, and the hotels are packed with people. A talk-show host, she lives on Fifth Ave. and overlooks Central Park.

But Bob Grossman sees a very different city: more homelessness, dirtier subways, and fewer services to help needy kids and the elderly. The retired teacher lives in a single-room-occupancy hotel on the Upper West Side.

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New York, like cities across the country, is experiencing a fiscal revival. Aided by the overall health of the economy, city coffers are filling up with increased tax revenue and producing the biggest budget surpluses in decades - affecting everything from politics to schools.

But the fiscal health belies a growing gap between the wealthy and working class. To keep budgets in balance in recent years, cities have had to cut services that benefit mostly the poor. Moreover, with far less federal aid to the needy coming in and welfare reform shifting more burden to states and localities, cities are entering a new era of financial uncertainty.

"Things are terrific fiscally, but the question is, will the exact opposite happen when there's a long downturn in the nation's economy?" says Frank Shafroth, director of policy and federal relations for the National League of Cities and Towns.

Mr. Shafroth says cities now are far more dependent on the health of the overall economy than they are on the federal government. In 1977, the average city got 12.1 percent of its budget from federal grants. In 1992 (the most recent year available), that was down to 3.6 percent - a 75 percent drop. That shift makes them more susceptible to economic swings.

Yet many cities are happy to have the cushion of a surplus for now. Some of the amounts are significant. In 1996, for instance:

*Los Angeles posted an $89 million surplus.

*Milwaukee, Wisc., was $94 million in the black.

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*Virginia Beach, Va., had $74 million in extra revenues.

In New York, Mayor Rudolf Giuliani (R) is basking in the luxury of an unexpected $856 million surplus - the biggest in history - thanks in large part to the revenue windfall from an investment boom on Wall Street. As in other cities where mayors are facing reelection, the financial boon is expected to solidify the political base of many incumbents.

In a budget released yesterday, Mr. Giuliani proposed income tax cuts and increased spending on education. He'll also use more than 40 percent of the windfall to pay off some city debts. But the city still has what's called a "structural" deficit, which means in an ordinary budget year, its expenses are still greater than its revenues.

Mayoral windfall

"We have significantly reduced the growth of city spending and the size of government," says Giuliani. "The mistakes of past excess spending will not be repeated."

Indeed, experts also credit increased efficiency nationally for some of the cities' fiscal health. Across the country, municipalities have been holding the line on expenditures. On average, they've increased only a half a percent or less, at the same time revenue growth has increased at 2 to 3 percent, according to an annual fiscal survey done for the National League of Cities and Towns.

"They've been able to build those reserves up to levels that are higher than they've been in a dozen years," says Michael Pagano, a political scientist at Miami University in Oxford, Ohio, who conducts the annual survey.

Such reserves are important "rainy day" funds for the cities' inevitable economic cycles. But they're also invaluable when disaster strikes - for instance, helping cities in the upper Midwest cope with the costs of sandbagging and other emergency flood-control measures.

But Wall Street also looks to the cities' budget surpluses and reserves as it monitors their fitness for investors. The better the bond rating, the less it costs cities to borrow money. While many urban areas saw their bond ratings plummet in the early 1990s, most today are in far better shape. The rare exceptions, like Washington and Miami, have entrenched management problems.

"St. Louis, which had a lot of problems in the past, now has shown a lot of improvement. The same thing is true about Detroit," says Claire Cohen, vice chairman of Fitch Investors Service. "It's still a mixed bag, but city bonds are primarily investment grade."

While the budget cutting in recent years has been good for Wall Street, it hasn't translated so well on the low-income end of Main Street. For instance, social services workers in New York have had their budgets slashed as their case loads ballooned. In his current budget, Mayor Giuliani eliminated funding for the SRO Law Project, a group that works to prevent people from becoming homeless. Director Elizabeth Kane is hoping the City Council will restore the funding.

No trickle down here

"These times for our population are very difficult," says Ms. Kane, whose nonprofit agency gets its entire budget from the city. "On top of that, if rent control isn't renewed, we could have a real disaster on our hands."

As the welfare-reform bill goes into effect, the need for social services and increased jobs is expected to grow nationwide. Even cities in the Northwest, with booming economies and plenty of jobs right now, are worried about the impact.

"We know the healthy, strong economy creates relatively good circumstances to have while this is going on," says Paul Sommers, executive director of the Northwest Policy Center in Seattle. "But that's a lot of people to suddenly dump into the labor market and expect it to work well."

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