Robust Economy Revives Cities New York Mayor Wants to Use $856 Million Surplus to Cut Taxes, Pay Debt, Aid Education

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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.

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. *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. …