Last week, Mayor Eric Adams added $1 billion to his original budget proposal, bringing his proposed spending for the next year to $99.7 billion. The City Council seems sure to push the mayor past the $100 billion mark, with its demands to add another $1 billion or so.

But while the mayor and the Council hammer out a budget, which must be agreed to by June 30, the rapidly rising rate of inflation threatens to upend their assumptions about everything from their cost of borrowing money to how much they’ll have to plow into pension funds.

Nationally, consumer prices rose 8.5% for 12 months ended in March, the highest annual rate of inflation since 1981. Prices are increasing at a somewhat slower pace in the New York area, with the 12-month jump at 6.1%.

Above all, inflation looms over the many expiring or expired union contracts the mayor must renegotiate with the city’s many labor unions.

The mayor’s executive budget sets aside $1.7 billion to fund new contracts with the city’s municipal worker unions — less than half that needed if he agrees to 3% increases, which would not even keep up with inflation.

“When they start settling the contracts, that will make the outyear budgets very uncertain,” said Comptroller Brad Lander.

Some factors make inflation slightly less serious in New York City than nationally — for now.

For example, New Yorkers rely more heavily than other Americans on mass transit, reducing the local impact of the surge in gasoline prices, according to an analysis of local inflation released Monday by Lander’s office.

And despite headlines highlighting sharp increases for rents, the data shows a slower increase in rental costs in the New York City area than nationally —  likely because more than 1 million city apartments that are rent regulated or government subsidized have seen minimal increases.

But the lower inflation rate in New York City and its suburbs offers little comfort for workers in both the public and private sectors who are worried about seeing cost increases outstrip their pay hikes. In NYC, food costs are up 7% in the last 12 months, recreation activities are up 8% and transportation by 14%, even if that is less than the rest of the country.

Missing Money

Already, more than two-thirds of the city’s contracts with its unions have expired. All the biggest pacts expire by the end of the year, with the teachers’ deal ending in September and sanitation workers in December.

The Adams administration did not respond to requests for comment on when it plans to begin talks, its timeline for reaching agreement or the scope of its initial wage and benefit offers. Traditionally, the city first reaches a deal with one of its largest unions, which then establishes the pattern for all other settlements.

Experts say they expect that union to be District Council 37, the city’s largest bargaining unit, which represents 150,000 workers in a large number of government agencies. Settling with the large unit will make it easier for other unions to fall in line and a deal may be easier to reach because Executive Director Henry Garrido has been a longtime ally of Adams, and the union was an early supporter of his mayoral campaign.

DC 37 will likely be demanding more than it won in 2018, when it set the pattern with then- mayor Bill de Blasio and agreed to a 44-month contract with rates of 2% in the first year of the contract, 2.25% the next year and 3% the year after that. In the private sector, residential building workers recently agreed to a four-year contract averaging 3.17% annually, plus a $3,000 bonus.

DC37 president Henry Garrido declined to comment.

Adams set aside $1.7 billion to pay for raises over the next three budgets. But a 3% annual raise in line with the residential building workers would cost the city more than $4 billion by June 30, 2026, according to an analysis by the Citizens Budget Commission — or more than twice what is in the budget.

Each additional percentage point increase in a raise adds another $1.4 billion over three years, the CBC says.

Economists remain sharply divided on whether the surge in inflation is temporary as a result of pandemic disruptions and the war in the Ukraine, oil companies price gouging or a more enduring trend — uncertainty that could leave Adams in a jam if he makes the wrong move.

“Locking yourself into a long term contract with fixed wage increases could be risky,” said Joshua Freeman, a labor historian at the City University of New York.

One option, he suggests, could be a clause allowing the contract to be reopened if inflation continues at the high level. A base wage increase with a cost-of-living increase tied to inflation is another option. A short-term contract is also a possibility as well.

Another unknown is Adams himself.

“The mayor is an unknown entity, and no one knows where he wants to go on labor issues,” added Ed Ott, a longtime leader of the New York City Central Labor Council and now a lecturer at CUNY.

An Uncertain Future

Inflation is not a total negative for New York City’s finances.

It will help the city out — at the expense of New Yorkers — because higher prices and wages increase city revenues. As the cost of goods rises, sales tax revenues go up. Since the city does not index tax brackets to inflation like the federal government, higher wages push taxpayers into higher tax brackets.

But those gains are likely to be offset by other factors. The city’s cost for the goods it buys will increase. Rising interest rates will deny New York City future chances to save money by issuing lower-cost bonds to replace ones with higher interest rates. A so-called refunding in June 2021 generated more than $400 million in savings, according to city financial documents.

In addition, soaring markets produced a gain to 25% in the city pension fund for the fiscal year that ended last June. The increase allowed de Blasio to reduce its projected contributions to its pension funds by billions of dollars. Now a stock-market selloff means city taxpayers will likely have to step up and invest more.

The key remains the union contracts. Ott says he is looking for “innovative creativity” given the uncertainty.

Fiscal experts are calling for much the same approach.

“Inflationary pressures strongly reinforce the importance of the city and municipal unions working together to change work rules and other contractual constraints to improve productivity and offset costs of salary increases,” said Andrew Rein, president of the CBC. “Absent efficiency measures, higher raises may come at the expense of service cuts, workforce reductions or harmful tax increases — all bad choices.”

This article was originally posted on Inflation Threatens Foundation of Eric Adams’ First Budget