If recession occurs, Hub can ride it out

16 April 2001

In the 1970s, New York City nearly went belly up. At the end of the 1980s, a beleaguered Washington, D.C., cooked its books to make ends meet. And in the early 1990s, Boston slashed its budget, slicing deep into critical city services like police and fire.

Recessions aren't pretty.

These last few years have been fun, but the wolf may now be at our doorstep. Boston Mayor Thomas Menino has just released his proposed budget for 2002. In most years, the focus is on how the city plans to spend its nearly $1.8 billion. But this year, perhaps the better question is: Will Boston even have the money to spend?

The answer, happily, is that the city is in good shape, better prepared than ever to ride out even a severe recession.

To a large degree, the reason for optimism is two-fold: Future property tax collections look bright and a tightfisted city finance office has socked away large amounts of cash into its reserve fund.

Let's start with the property tax. Boston depends on it for over half of its revenue, meaning that any significant drop in collections could be disastrous. State law limits the total tax municipalities collect to no more than 2.5 percent of their assessed valuation. The natural fear is that if property values were to fall, tax collections would also decline.

But that's not much of a worry for Boston. Right now, the city's tax levy is only 1.8 percent - not the legal maximum of 2.5 percent. Work out the math and you discover that even if real estate values dropped by a quarter, tax collections would be unchanged.

But even better, new growth - from the development and construction of new buildings - means that property tax collections will continue to increase over the next several years. A number of buildings, such as Millennium Place on Boylston Street and 111 Huntington Ave., are already financed and under construction. Indeed, the pipeline of new construction is so large that it is expected to add another $30 million to the city's coffers over the next two years - even if there is a recession.

On top of that, Boston has been frugal.

The natural inclination during good times is to spend, spend and spend. Instead, Boston has built up its reserves, taking them from less than 8 percent of its annual budget to over 10 percent. It's a comfortable cushion, and one that has won the praise of rating agencies such as Moody's, which now grades Boston's bonds Aa2, one of the best ratings for a major city.

"Overall the city has managed its finances in a prudent fashion," says Sam Tyler, head of the Boston Municipal Research Bureau, an independent fiscal watchdog.

Moreover, Boston's finance department, led by Edward Collins (who is now on sick leave), has become progressively more professional. Departmental spending is increasingly measured against concrete targets (such as, how much is spent for every pothole filled). And the city now tracks spending on a monthly basis, giving it the ability to react quickly to any adverse financial changes. That's the good news. But there are danger signs as well.

After the property tax, the most important source of revenue for the city is state aid, which accounts for about a third of annual spending. The fear is that a recession, combined with the state income-tax cut passed by referendum last year, will put pressure on the commonwealth to start reducing its aid to cities and towns.

At a minimum, Boston officials figure, it doesn't seem likely that state aid will rise in future years by as much as it has in the last few years.

In addition, although Boston's new budget shows an annual increase of 4 percent, those new dollars are going to fund existing expenses, which have been rising faster than the inflation rate.

For example, the school department's budget will climb by $24 million this year. But that money isn't going to kids; instead, $21.5 million is needed to fund salary increases agreed to in the most recent teachers' contract. Similarly, the city is now implementing the so-called Quinn Bill, which gives police officers salary boosts for educational course work. Next year that program will cost the city (with the state paying half) an additional $15.9 million. Disturbingly, budget officials don't know how much the Quinn Bill will cost in later years.

The effect of these rising expenses is such that even this year - with tax collections still soaring - the city is describing its new budget as tight.

Still, while the worries are genuine, the fundamentals are strong. There's an important lesson here. Good financial stewardship is not glamorous. In fact, it's often a political liability; few people on the campaign trail thank you for NOT spending money. But the recession may hit hard, with cities and towns laying off employees and cutting services. At that point, Bostonians will discover just how important such stewardship can be.