From now through March 24, City Council committees will be holding hearings on the preliminary budget presented by Mayor Bloomberg on Jan. 28. The annual budget gains momentum amidst a civic fog of dismay and uncertainty – dismay over the ongoing chaos in Albany, and uncertainty about how that, and the state's generally poor economy, will affect the city's $63 billion budget.

Council will gather its findings into a report to be delivered by April 8, which should inform the mayor's Executive Budget to be released by April 26.

Economists say the nation's recession is technically over, but whether or not the economy is actually on the mend, the recession's impact on New York City and state budgets is only just beginning. Over the last three months, Gov. Paterson and Mayor Bloomberg have mapped out a set of austerity budgets that would slash billions in spending – with many of the reductions coming from education and social services.

This year marks a watershed for both City Hall and Albany, but for different reasons, says James Parrott, chief economist at the left-leaning Fiscal Policy Institute, which earlier this month issued extensive briefings on both the state and city budgets. The city has until now been sheltered from the worst of declining revenues by years of surpluses squirreled away by Bloomberg during the flush times of the Wall Street boom. Those are now beginning to run out, Parrott says, and will "completely dry up" by 2012. In response, the mayor has presented a city budget of $63.6 billion for fiscal year 2011, which begins July 1, nearly flat-lined from the current year’s budget of $63.1 billion, without any adjustments for inflation or rising expenses.

For the state, meanwhile, the economic slump has pounded receipts for both income and sales tax; even such things as Wall Street's shift from cash bonuses to stock have worked to widen the budget gap. (The city budget, because it relies more on property taxes than sales and income, is less volatile during economic downturns.) And 2011 looks even worse, as the state will lose an additional $5 billion that's been provided by the now-expiring federal stimulus package.

To help close what's now a $9 billion-and-growing projected state budget deficit, Paterson in January proposed billions of dollars in cuts, including slashing funding for education and youth programs, homelessness prevention and job training programs. That would yield a state budget for the 2010-11 fiscal year, which begins April 1, of $134 billion, up less than $1 billion from the current year's figure.

Also included in the Paterson cuts: $300 million in general aid to New York City, plus hundreds of millions more in budget items that would be shifted from the state to the city, including special education and homeless shelter funding. In response, the mayor – who had already announced his own round of "Program to Eliminate the Gap", or PEG, cuts amounting to $1.6 billion over the next two years – commissioned a second series of "contingency" cuts that he said would be necessary if the governor's budget were to become reality. Included are city employee wage and benefit givebacks and layoffs of 3,150 police officers, 1,050 firefighters, and up to 8,000 teachers – as well as the complete elimination of city aid to soup kitchens and food pantries.

'Unacceptable consequences'

"Some of what's in there is certainly theater to dramatize how problematic the state cuts could be," said Doug Turetsky, chief of staff of the city Independent Budget Office. Nonetheless, he says, it should be a warning sign that, especially if the state cuts go through, city services could be dramatically affected.

City elected officials have largely limited themselves to general expressions of alarm, laying low until budget hearings began in earnest this week. Public Advocate Bill De Blasio issued a brief statement saying the mayor's budget proposals would present "unacceptable consequences," while City Council Speaker Christine Quinn declared that "we will make every effort to find ways of generating revenue and seek out additional savings for the city."

The IBO issues an annual Budget Options for New York City report, and this year's includes plenty of gap-filling possibilities, ranging from charging for sanitation services based on how much garbage households generate (which could raise $327 million in new revenues) to increasing public-school class sizes by two children per class ($221.6 million in savings). Other possibilities in the IBO report include raising nearly $222 million per year by taxing sugary drinks at a rate of a half-penny an ounce, and instituting a 40-hour work-week (up from an average of 37 hours) for non-uniform, non-teaching employees, to generate $574 million in immediate savings.

One alternative to cutting services included in the IBO document is raising fees and taxes, and a growing chorus of voices is calling for just that. Tolling the East River and Harlem Rivers, for example, is projected to net a cool $925 million a year – hefty enough to offset all of Bloomberg’s gap-closing cuts, and much of Paterson’s as well.

In addition, the Fiscal Policy Institute estimates that raising the income tax rate by 0.6 percent on households earning over $250,000, and 1.2 percent on those with incomes over $500,000, would raise $1 billion a year for the city, even if the municipal income tax were simultaneously eliminated or those earning less than $40,000. Last month, the Better Choice Budget Campaign (which includes FPI as a member, as well as many unions and social service groups) issued a proposal for bailing out the state that would include a 1 percent state tax surcharge on million-dollar earners, plus restoring one-fifth of the stock transfer tax that the state has been rebating since 1981.

The right-leaning Empire Center for New York State Policy, meanwhile, has proposed its own Blueprint for a Better Budget that mostly proposes alternative cuts, including a freeze on teacher salaries, greater reductions in school aid, and cutting Medicaid spending.

While opponents of tax hikes warn that increases could drive people to other states – it was a proposed income-tax surcharge that prompted Bloomberg's infamous "We love the rich people" remark last year – others argue that with economic times so tough, the only ones who can afford to pay up are the wealthy. "During a recession, when unemployment is so high, it's really to me offensive that the governor and the mayor is saying everyone has to tighten their belts," says Ed Fowler, director of the community center Neighbors Together, in the lower-income neighborhood of Brownsville, Brooklyn. "What about the people who have no more loops left?"

And economists point out that service cuts can have an equally deleterious effect on local economies, both by cutting into people's spending money and by making the city a less pleasant place to live. "Taxes matter, but so do services," says Turetsky. "It's the full basket that affects people's decisions about living or running businesses here."

Civil servants in focus

Speaking of services, those who provide them may bear much of the burden of the city's proposed cuts. The mayor's 2010 gap-closing plan calls for a reduction of 891 employees, most through attrition but 252 through layoffs, at Housing Preservation and Development and the Department of Finance, and in libraries and cultural institutions. In the coming year there would be another 834 layoffs, in those same areas and at the Department of Health and Mental Hygiene. City employees who keep their jobs could also be facing smaller salary increases, as the mayor would set aside less money in the city's labor reserve fund for future collective bargaining increases.

In exchange for pay raises, the mayor is also asking unions for givebacks in health insurance – such as higher co-pays – and productivity. Finally, the mayor’s office notes that instituting a new pension tier – one with lower contributions for new city employees – would save the city $200 million a year. Such a change would require state government approval, but the budget presents city employees with a difficult choice: Close the budget gap with lower pension contributions, decreased benefits, or smaller raises.

That has unions representing city employees up in arms: They argue for other cuts, or generating revenue through a gas tax, for example. Norman Seabrook, president of the Correction Officers’ Benevolent Association, said city employees’ unions should be wary of setting a precedent for concessions. “Unions have got to stick together,” he said, “and not be picked apart by the city of New York by setting a pattern that will cost every other union and its members an increase that they so rightfully deserve.”

Building capital

The city's capital budget would rise to $39.1 billion under the mayor's proposal -- up $791 million, or 2 percent, over the plan that was adopted last June. The vast majority of the increase, $737 million, is city money, and the rest is state and federal funding, which some capital projects receive.

Relatively small additions and subtractions, and delays and fluctuations in projects being funded, are a routine part of the capital budget process, says Turetsky – but the size of the budget, and the proposed increase, are noteworthy.

"Even in a tough budgetary period, the city is continuing to spend at a fairly high level," Turetsky says. "Nobody's going to call $39 billion small change."

One of the city's fastest-growing costs, he adds, has been debt service -- and perhaps the easiest way to reduce debt service is to reduce the amount of debt incurred. So, in a year in which the mayor is seeking major cuts, is increasing the capital budget a surprise?

"Some people would be surprised. Some people would be relieved, depending on your point of view," Turetsky said. "A lot of people would argue that the city has no shortage of needs, whether you're talking about new schools, road repair or affordable housing."

Additional reporting contributed by Jake Mooney and Helen Zelon.