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Jun 25, 2010

New York Boasts 30-Year Balanced Budget, Shows us the Value—and Return—of Calculated Fiscal Planning and Transparency

Last week I traveled to Chicago to an exciting two-day conference hosted by the Federal Reserve Bank of Chicago and the Institute of Government and Public Affairs at the University of Illinois. The topic of the conference was Charting Illinois’ Fiscal Future: Dealing with Structural Deficits and the Implications of High Levels of Future Debt. I was invited by both institutions to attend due to my government finance expertise gained while working in New York City and New York State from 1983-1994, where I was a key player in managing under the New York Financial Emergency Act and related responses to fiscal crisis.

The main players at the Charting Illinois’ Fiscal Future event wanted to know what lessons from New York City’s experiences could be applied to Illinois’ current crisis. New York City learned its lessons from its own fiscal crisis in 1975. After massive changes in taxes and spending from 1975 to 1980 in order to balance its budget, New York City has maintained a balanced budget every single year. That is especially notable because its economy had significant declines in 1981, 1987, 1991, 1998, 2001 and 2008.

So what can we learn from New York City? What does the City do that avoids the deficits that are looming now for so many?  You will see that these lessons apply to nonprofits, for-profits, and governments.

  1. Its budget counts the same way as its audited financial statements. This seems obvious but in general, public budgets are counted (the “budget basis”) one way and their financial statements are counted another way (“GAAP basis”). This makes it difficult to know if the budget was an accurate predictor of how the year would end up. The most basic question cannot be answered definitively: did you do (the end-of-year financial statements) what you said you would do (the budget)?  I frequently encounter the same problem in working with nonprofits.
  2. It authorizes spending only one quarter at a time. Thus, a department can’t blow its annual budget early in the year and confront New York with an unclosable hole.
  3. It has a financial system that permits real-time monitoring of its spending. This allows it to block spending immediately if necessary.

Those are the preliminary items. Here are the biggies.

  1. It is required to produce a four-year financial plan, with the current year as the first year of the plan. This plan must be updated every quarter. Thus, the implications of today’s decisions on future years are always visible and future budget problems are always known. This is extremely powerful. One person in the audience said, “but New York City is always in financial trouble.” The answer is that most governments always face financial challenges in the future, but, with its financial plan requirement, New Yorkers always know that trouble lies ahead, creating a perpetual pressure to deal with problems now rather than putting decisions off.  Once again, this is a tool that is relevant to decision-making in the nonprofit and for-profit sections, not just the government.
  2. New York has many governmental and private organizations that review, analyze, and publicly comment on the New York budget, and the newspapers, TV, and radio almost all dedicate one reporter to local fiscal affairs. This network looking over New York’s shoulders creates a powerful transparency. In my job as head of the New York Financial Control Board, I would usually spend at least one hour per day doing newspaper, TV, or radio interviews about New York’s budget condition. On more than one occasion, the fact that anything the City would contemplate would be exposed in the media was a sufficient deterrent to kill bad ideas in the bud.

These are lessons that governments and nonprofits would do well to study: knowing where you stand financially at all times; reporting your situation in ways anyone can follow; having objective evaluations of whether you did what you said you would do; laying out your challenges for all to see; and thinking ahead.

For more on government finances and fiscal transparency, check out my first book, Linking Mission to Money®, for sections on “building a mission-focused budget,” where you’ll learn how to effectively budget and review priorities. The book also has a helpful section on communication which highlights the benefits of transparency in donor and media relations, with suggestions on how to make fiscal transparency and accountability a reality for your organization.

And these themes underlie many chapters in my forthcoming book, More Than Just Money: Practical and Provocative Steps to Nonprofit Success. Douglas Kridler, President & CEO of The Columbus Foundation, said of this book:

“In this valuable book, Allen’s expertise is blended with his passion for a healthy nonprofit section – one of the clearest roadmaps for improvement you will find anywhere.”

Sign up at www.linkingmissiontomoney.com to be notified when the book becomes available next month.