By Hilary Russ
(Reuters) - If Bill de Blasio becomes New York City's first Democratic mayor in 20 years, the liberal politician would soon find himself immersed in labor talks that could saddle the city with a $7 billion bill for retroactive wage increases for municipal workers.
De Blasio, who now serves as public advocate, became the frontrunner in Tuesday's Democratic primary elections on a platform that included a plan to raise taxes on wealthier residents to fund pre-kindergarten and rein in corporate subsidies.
With ballots still being counted, de Blasio needs to hold on to 40 percent of the vote or face a runoff. If he does, he would face Republican Joe Lhota in November's mayoral election.
Lhota has ruled out the idea of paying retroactive wage increases, which financial analysts say could eat up 10 percent of the city's $70 billion annual budget. But de Blasio has not.
Retroactive wage increases are "something that should be on the table," de Blasio told Reuters in an interview last week. "It's a fair concern, but we need the cost savings to support it - that's the bottom line."
The biggest city in the United States is already facing a budget deficit of at least $2 billion in the fiscal year starting in July 2014. It has made about $80 billion worth of promises for retiree healthcare benefits that it might not be able to fund.
The magnitude of those fiscal challenges - which require the city to cut services or benefits - could sit uncomfortably with de Blasio's liberal beliefs, or force Lhota to make concessions with labor unions that would make other Republicans shudder.
"Whoever assumes that position is going to be looking at the numbers. And the numbers speak for themselves," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management, which has recently purchased New York City debt.
It is still too early to determine a favorite, but New York's fiscal woes and looming union battles are likely to become hot campaign topics.
By the time the last of Mayor Michael Bloomberg's three terms ends in December, every one of the more than 100 contracts that cover city workers will have expired at least a year earlier. The scenario leaves nearly 300,000 teachers, firefighters, police and other public employees without contracts. Many had gone without a pay raise for years.
Bloomberg "really kicked the can down the road. He did not deal with these contracts over a period, in some cases, of multiple years," said Douglas Muzzio, a political science professor at New York City's Baruch College. "His budgets have been balanced because he stuck the next mayor with this burden."
De Blasio and Lhota also differ on how to boost revenue.
Lhota has said he would try to find savings in the city's budget before raising taxes. That's the approach he took when he ran the Metropolitan Transportation Authority, where he recommended fare increases after first cutting costs within the agency.
To expand preschool programs for children, de Blasio has advocated raising the city's tax on incomes of more than $500,000 to 4.4 percent from 3.9 percent. He also proposed curtailing the economic development subsidies the city gives to some big companies like online grocer Fresh Direct to build or expand operations.
No mayor, however, can make most major financial decisions unilaterally. The mayor needs the approval of either the city council, the state legislature, and in some cases, voters. De Blasio would have to lobby state lawmakers for an income tax increase, for example. Other items, like property taxes and debt levels, are subject to caps.
Police and firefighters can also take their contract disputes to binding arbitration.
"The risk is that the next mayor could do a fairly decent job navigating...but if one of the uniformed unions thinks they could do better in arbitration, which historically they have, they could say forget it, we're going to Albany and figure it out there," said Maria Doulis, director of city studies at the Citizens Budget Commission.
The CBC estimates that if unions reached settlements soon for the same retroactive wage increases that have been awarded historically - between about 2 percent and 4 percent - the city could owe at least $7 billion this fiscal year through June 2014.
New York mayors have long struggled to win significant public labor concessions in a city that is heavily unionized.
Former Republican Mayor Rudolph Giuliani - for whom Lhota served as finance commissioner, budget director and deputy mayor for operations - was a favorite with police, who preferred him to his predecessor David Dinkins, the last Democrat to hold serve as mayor.
Giuliani lost that edge after he signed a 5-year contract with police in 1995 that included no pay raises for the first two years. But the so-called "zeroes for heroes" contract also included a pledge for no layoffs and skipped any other major concessions, according to Edmund J. McMahon, senior fellow at the conservative Manhattan Institute.
"I don't think any mayor's gotten a productivity concession out of any public union in New York in recent memory," McMahon said.
Taking a strong anti-union stance carries risks. In 1966, bus and subway workers walked off the job on Republican mayor John Lindsay's first day in office, shutting down the city. Over the rest of his first term, teachers, garbagemen and municipal workers all went on strike, leading Lindsay to lobby the state for an income tax increase to help pay for settlements. Some say Lindsay paved the way for the city's brush with bankruptcy in the 1975.
A councilman for three terms before becoming public advocate, de Blasio was part of a city government that wanted to spend more than Bloomberg. Analysts say that's the way the New York City budget politics works: mayors are conservative with revenue projections, and the city council knows it and seeks to spend more.
"When it saw money, council wanted to spend money," McMahon said. "As mayor, you're the one who has to make the budget."
(Reporting by Hilary Russ; Additional reporting by Edith Honan; Editing by Tiziana Barghini and Leslie Gevirtz)