Review of the Fiscal Year 1999 Executive
for the City of New York
May 19, 1998
H. Carl McCall
Office of the State Deputy Comptroller for
New York City
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I. Executive Summary
II. Fiscal Year 1998
A. Tax Revenues
B. Board of Education
C. State Budget
D. Agency Spending
III. Fiscal Year 1999
A. Revenue Estimates
B. Expenditure Estimates
C. Tax Reduction Program
IV. Projected Budget Gaps
V. Other Concerns
A. Sports Facility Corporation
B. Transitional Finance Authority
1. Four-year Financial Plan Revenues and Expenditures
2. OSDC Evaluation of the Fiscal Year 1999 Financial
3. Major Sources of the Fiscal Year 1998 Budget Surplus
4. Changes in Agency Spending Since the Budget Was
5. Major Factors Contributing to the Growth in Fiscal
Year 1999 Spending
6. Proposed and Enacted Tax Reduction Program
1. Annual City Surpluses
2. Wall Street Bonuses and Profits
3. Board of Education Expenditures.
4. Annual Change in City-fund Revenues
5. N.Y.C. Tax Revenue Growth
6. Annual Change in City-funded Expenditures
7. Projected FY 1999 City-funded Expenditures
8. City-funded Personnel Levels
9. City Pension Contributions
10. Public Assistance Expenditures
11. Growth in Medical Assistance Expenditures
The City is likely to end FY 1998 with a surplus in excess of $2
billion, the largest surplus, both in absolute terms and as a percent
of City revenues, since the budget was first balanced in FY 1981
in accordance with Generally Accepted Accounting Principles (GAAP).
The FY 1998 surplus comes on the heels of last year's then-unprecedented
$1.4 billion surplus. In both years, the surplus has been driven
by strong Wall Street performance which exceeded expectations.
The budget surplus, combined with an improving real estate market
and higher tax revenue forecasts, made it easier for the City to
balance the budget in fiscal years 1998 and 1999, and to narrow
the out-year budget gaps. Despite these favorable conditions, the
City still projects sizeable out-year budget gaps which we will
examine more closely in our report on the FY 1999 Adopted Budget.
The City has used the current fiscal improvement to reduce taxes;
expand its work force, reversing a trend of the last four years;
and to increase spending. The Plan shows City-funded spending declining
by 3 percent in FY 1999, but our analysis indicates that spending
would rise by about 6 percent for the second consecutive year. Spending
patterns become distorted because of the way the surplus must be
reflected in the budget.
Our estimate also includes debt service costs associated with the
Transitional Finance Authority (TFA), costs that have been removed
from the Plan. We believe that including both the revenues and debt
costs associated with the TFA in our review of the City's Financial
Plan provides a more complete picture of its finances.
Our review finds that tax revenues could exceed the City's revised
estimates for fiscal years 1998 and 1999 by $450 million. However,
some of these resources may be needed to restore cuts in funding
($104 million) to the covered organizations, most notably the
Health and Hospitals Corporation, for wage increases negotiated
by the City. In addition, the Mayor has imposed a unilateral freeze
in health insurance premiums ($58 million) which is subject
to ongoing discussions with the Health Insurance Plan of Greater
The City should consider investing any additional surplus in ways
that produce recurring benefits and ease the debt burden.
For example, it could:
- fund capital projects on a "pay-as-you-go" basis;
- retire outstanding debt; or
- eliminate the one-time proceeds from the expected sale of the
New York Coliseum from the Plan, and use the proceeds directly
to fund transit capital projects.
Under an agreement with the Metropolitan Transportation Authority,
the City would receive $200 million from the sale of the Coliseum
for use in its operating budget in exchange for issuing long-term
bonds for transit purposes. In our view, the City would be effectively
capitalizing an operating expense, an inappropriate use of its limited
The City also should consider using a portion of any future surplus
to create a reserve that would be drawn down only in times
of fiscal stress, such as an economic downturn. The City Council
has proposed creating such a "rainy day" fund. The Mayor
has proposed depositing $416 million of the FY 1998 surplus
in a Budget Stabilization Account. These resources will be used
to narrow the FY 2000 budget gap, unless needed to maintain
FY 1999 budget balance. While a step in the right direction, the
Account is not a true "rainy day" fund because the surplus
is being spent during a period of economic prosperity.
The City Council and the Mayor are also negotiating a package of
tax reductions. The City Council Speaker has proposed eliminating
the 12.5 percent personal income tax surcharge that is scheduled
to expire on December 31, 1998 and changing the personal income
tax rates to make the tax more progressive. The Plan currently assumes
that the surcharge will be extended in its current form, generating
revenues of $201 million in FY 1999. The Plan does reflect the Mayor's
proposed tax reduction program which would reduce revenues by $237 million
in FY 1999, primarily by accelerating the Governor's School
Tax Reduction program. Both the Mayor's and the Speaker's proposals
require State approval.
The Mayor has proposed using revenues from the commercial rent
tax to help fund construction of new stadia for the Yankees and
Mets on a "pay-as-you-go" basis, rather than issuing long-term
bonds. While we applaud the Mayor for identifying resources for
"pay-as-you-go" capital funding, the City should consider
whether new stadia are the best use for those resources.
Four-year Financial Plan Revenues and Expenditures
|| FY 2000
|| FY 2001
|| FY 2002
|General Property Tax
|Tax Audit Revenue
|Tax Reduction Program
|Unrestricted Government Aid
|Other Categorical Grants
|Less: Intra-City Revenues
|Sub-Total City Funds
|Total City & Inter Fund Revenues
|Federal Categorical Grants
|State Categorical Grants
|Other Than Personal Service
|Budget Stabilization Account
||- - -
||- - -
||- - -
|MAC Debt Service
|Less: Intra-City Expenses
|GAP TO BE CLOSED
||$ - - -
Data Source: N.Y.C. Office of Management and Budget.
OSDC Evaluation of the Fiscal Year 1999
|City Projected Budget Gap
||$ - - -
|FY 1998 Resources
|Risks and Offsets
|Extension of 12.5 Percent Personal
|Income Tax Surcharge
|Health Insurance Premiums
|Proposed Tax Reduction Program
The City projects a surplus of $2 billion for FY 1998.
This would be the largest surplus both in absolute terms and as
a percent of City-fund revenues since FY 1981 (see Graph
1), when the budget was first balanced in accordance with Generally
Accepted Accounting Principles (GAAP). As shown in Table 3, the
major source of the FY 1998 surplus, just like last year's,
is much-greater-than- anticipated tax revenue collections, due to
continued strength on Wall Street.
Major Sources of the Fiscal Year 1998 Budget
|Overestimation of Prior Years' Expenses
|Board of Education
|Impact of State Budget
|FY 1998 Budget Stabilization Account
Data Source: N.Y.C. Office of Management and Budget.
In addition to higher tax revenues, other sources are expected
to contribute to this year's surplus. They include $250 million
from overestimating prior years' expenses; $196 million from a surplus
projected by the Board of Education; $160 million from reducing
the general reserve to the current level of $40 million; $122 million
from lower debt service costs because interest rates and short-term
borrowing were both less than anticipated; and $150 million from
additional sales tax revenues because the State did not enact the
City's proposal to eliminate the tax on clothing purchases that
are less than $500. These resources were partly offset by higher-than-anticipated
agency spending, mostly in the uniformed agencies, and the adverse
impact of the State's FY 1997-98 budget. When aggregated, these
factors produced $1.7 billion in unplanned resources. In addition,
the City has $300 million in unneeded funds it had deposited
in the 1998 Budget Stabilization Reserve at the beginning of the
fiscal year, bringing the FY 1998 surplus to more than $2 billion.
Our review finds that tax revenues could exceed even the City's
revised estimates by $215 million in FY 1998. While the receipt
of $200 million in proceeds from the sale of the New York Coliseum
may be delayed beyond FY 1998, this resource will not be needed
in that year given the potential for a larger surplus.
Should the additional tax revenues materialize, we again urge the
City to eliminate the one-time proceeds from the sale of the Coliseum
from its operating budget and to use the proceeds directly for capital
purposes. Under an agreement with the Metropolitan Transportation
Authority, the City would receive the sale proceeds for use in its
budget in exchange for issuing long-term bonds to fund transit capital
projects. In our view, this amounts to capitalizing an operating
expense and is an inappropriate use of the City's limited bonding
Below is a more detailed discussion of tax revenues, the Board
of Education, the State budget and agency spending.
Tax revenues are expected to exceed the City's initial estimates
by $1,161 million.(2) Most of
the additional revenue is centered in the business and personal
income taxes, and can be largely attributed to Wall Street, which
significantly outperformed the City's expectations, posting its
second consecutive year of record profits in calendar year 1997.
In the FY 1998 Adopted Budget, the City had forecast a reduction
in securities industry profits from $11.3 billion in calendar year
1996 to $8 billion in 1997. Given the expected slowing in corporate
profits growth and uncertainty about the interest rate climate in
the wake of a Federal Reserve tightening in March 1997, the forecast
appeared reasonable at the time of adoption. However, quiescent
inflation reduced the chances that the Federal Reserve would increase
interest rates, and corporate profits were stronger than anticipated,
giving the market strength through the second half of the year.
The Dow Jones Industrial Average surpassed the 8,000 mark in July,
and recovered from a 7 percent drop in October in the wake
of the Asian financial crisis. Securities profits jumped in the
third quarter, and in the fourth quarter consumer confidence reached
its highest level in nearly 30 years. For the entire year, the average
annual increase in the Standard & Poor's 500 stock market index
was 29 percent, the largest gain since 1983.
a result, industry profits hit an all-time high of $12.2 billion
in 1997 (see Graph 2), with approximately
$11 billion earned by the largest firms headquartered in New
York City. Once again, profits were driven largely by fees from
record merger and acquisition activity. We anticipate that this
exceptional performance boosted securities bonuses by as much as
25 percent, resulting in payments of about $12 billion. Combined
with over $11 billion in estimated resident capital gains realizations,
collections of income-sensitive taxes recorded a substantial boost.
Thus, the forecast for the personal income tax has been raised
by $553 million since last June, while those of the three business
taxes (general corporation, banking corporation, and unincorporated
business tax) have increased $528 million. Among the other
major taxes, the forecasts for the real-estate related taxes (commercial
rent, real property transfer, and mortgage recording) were raised
by $78 million, while the property tax was increased $65 million.
Tax revenues (after adjusting for the sales tax cut not enacted)
were originally forecast to decline 1.2 percent in FY 1998. Growth
in total tax revenues is now forecast to be 4.7 percent. Moreover,
collections continue to surge, especially for the personal income
tax. Driven by strong Wall Street bonuses, solid underlying wage
gains, increased capital gains realizations, and large April 15
year-end payments, the personal income tax has grown by 17.1 percent
through May. Overall, total tax revenues have grown by 5.6 percent
in the first three quarters of the year. Based on this performance,
we estimate that tax revenue collections will exceed even the City's
current estimates by $215 million. This additional revenue
will come from the business and personal income taxes.
The Board of Education projects a surplus of $196 million,
the third consecutive year of budget surpluses. Annually since FY
1996, the City has agreed to return surpluses to the Board for use
in the following fiscal year. This has diminished incentives for
the community school districts to spend excess funding, sometimes
unwisely, rather than returning the resources to the City. Last
year, the Board realized a surplus of $226 million and in FY 1996,
a surplus of $159 million.
The FY 1998 surplus also results from lower-than-projected enrollment
growth. Enrollment grew by 7,360 students, less than half the level
anticipated. Board officials attribute the lower growth to changing
migration patterns, an increase in the number of students enrolled
in private schools, and an improved auditing process that has eliminated
nonattending students from the enrollment registers.
total, the Board will have spent about $9.7 billion (including pension
and debt service costs) in FY 1998 (see Graph
3). This exceeds last year's level by $910 million, or
10.3 percent, and is the result of additional City ($565 million),
State ($285 million), and Federal funding ($60 million). The
additional assistance represents the Board's largest one-year growth
in funding, in percentage terms, since FY 1984.
With the additional aid, the Board closed a $121 million budget
gap; funded enrollment growth-related needs; relieved some teachers
from administrative responsibilities pursuant to the teachers' contract;
hired additional teachers to relieve classroom overcrowding; began
to restore art courses to the curriculum; and implemented instructional
enhancements, such as Project Read. In addition, for the second
consecutive year, the Board's central budget office is utilizing
a differentiated approach for overseeing the community school districts
based upon criteria that includes financial and student performance.
The result is additional central office staff time for districts
in need of extra help in managing their resources.
The FY 1998 Adopted Budget assumed $422 million in State gap-closing
assistance, including $294 million in direct assistance and $128
million in social service entitlement program savings. A major portion
of the increased State aid -- $283 million -- was not forthcoming
primarily because the State did not enact the City's proposals to
accelerate revenue sharing funds ($148 million); increase the
State reimbursement rate for preschool students with special needs
($43 million); or increase the payment for the stock transfer tax
($25 million). In addition, the value of various Medicaid cost containment
actions enacted by the State was less than assumed in the Plan ($39 million).
The City did receive $139 million in gap-closing assistance from
the State, half of which came from the surplus in the Federal welfare
block grant. The other half largely reflected an increase in revenue-sharing
funds and resources from a Medicaid rate appeal. In addition, the
Board of Education received a $175 million increase in unrestricted
Agency spending rose during the year and exceeded the City's initial
estimates by $116 million. As shown in Table 4 and discussed below,
several factors contributed to the net increase in City spending.
During the fiscal year, the City identified new spending needs
of $292 million. These needs included $138 million for unplanned
spending in the uniformed agencies, that mainly resulted from higher-than-planned
overtime costs, lower-than-planned attrition, and an increase in
the City's share for funding emergency medical services. The City
also was required to add $72 million to its operating budget
to help fund the cost of closing the Fresh Kills landfill by January
1, 2002. The $72 million cost had previously been recognized in
the capital budget, but the City Comptroller ruled that the City
could not capitalize costs related to this liability. In addition,
the City added $68 million to expand its drug elimination program,
which included the accelerated hiring of 1,100 police officers.
Changes in Agency Spending Since the Budget
|Fresh Kills Closure
|Drug Elimination Program
Data Source: O.S.D.C. analysis.
The budgetary impact of these unplanned agency costs was partly
offset by the implementation of several management initiatives identified
by City agencies. These initiatives are expected to generate $176
million in resources and include revenue enhancements, overtime
cost-reduction initiatives, funding shifts, and reductions in the
public assistance caseload. In total, the public assistance caseload
will have declined by a total of 103,000 persons during FY 1998,
bringing the caseload to its lowest level in 30 years.
We also note that FY 1998 spending is projected to exceed the target
contained in an agreement between the City and the Municipal Assistance
Corporation (MAC) by $60 million, excluding the general reserve.
The City had agreed to keep discretionary spending below a certain
level in exchange for $125 million in surplus MAC resources
that were used to help balance the FY 1996 budget. Discussions
are continuing between the City and MAC officials on ways to resolve
The Executive Budget for FY 1999 is balanced based on the following
- $1.5 billion from the FY 1998 surplus.
- Resources of $595 million from successfully implementing the
FY 1999 gap-closing program. The program includes savings from
imposing a freeze on health insurance premiums and a further decline
in the public assistance caseload.
- Implementation of the Mayor's proposed tax-reduction program
that would reduce revenues by $237 million in FY 1999 and about
$660 million by FY 2001.
- Extension of the 12.5 percent personal income tax surcharge
that is scheduled to expire on December 31, 1998. Revenues would
decline by $201 million in FY 1999 and more than $550 million
annually thereafter if the surcharge is not extended in its current
- Tax revenue growth of $80 million, or 0.4 percent, over the
FY 1998 level.
- Expenditure growth of $1.4 billion, or 6.2 percent, largely
reflecting higher labor costs and new education initiatives. The
size of the municipal work force would remain stable, but the
City would continue to reallocate personnel resources to criminal
Our review finds that there is likely to be a very substantial
surplus in FY 1999. Revenues could exceed the Plan estimate
by $235 million and, as previously discussed, there could be $215
million in additional FY 1998 resources for use in FY 1999. In addition,
the Plan includes reserves of $616 million: a $200 million
general reserve and $416 million set aside in the FY 1999 Budget
Stabilization Account. Our review also disclosed several issues
that pose a net risk of $201 million, including a cut in funding
to cover wage increases for employees of certain covered organizations
($104 million), the receipt of additional Federal assistance ($75
million), and a freeze in health insurance rates ($58 million).
Total revenues, assuming implementation of the Mayor's proposed
tax reduction program, would decline to $34.1 billion in FY 1999,
3.9 percent less than the level projected for FY 1998. Lower
Federal and State categorical aid contributes to this revenue decline.
revenues, that portion of revenues that is either locally generated
or consists of unrestricted Federal and State aid, is forecast to
decline by 2.7 percent to $23.1 billion (see Graph 4).
The decline is due to stagnant tax revenues and lower miscellaneous
revenues. Even if the tax reduction program is not enacted as proposed,
City-fund revenues would still decline, but only by 1.7 percent.
The tax revenue forecast reflects the City's cautious outlook for
the local economy in FY 1999.
The City forecasts that economic growth will moderate in calendar
year 1998, due to a softening in the national economy and a less
robust Wall Street, after the City posted its strongest performance
in more than a decade in 1997. Real Gross Domestic Product (GDP)
is projected to grow 2.8 percent in 1998, down from 3.8 percent
in 1997. New York City employment growth is forecast to ease slightly,
while growth in personal income is expected to subside from 6.3 percent
in 1997 to 5.7 percent in 1998, due to slowing wage growth. The
Plan projects that Wall Street profits would drop from $12.2 billion
in 1997 to $8 billion in 1998, as growth in U.S. corporate profits
slows. However, the City expects continued strengthening in the
real estate market.
The City's scenario of slower growth in 1998 and subsequent years
appears reasonable at this time, especially in the context of weak
first quarter corporate profits growth and a rising trade deficit
with Asia(3). In addition, the Federal
Reserve Open Market Committee is concerned that if national growth
does not slow, inflation may rise. As a result, it has reportedly
shifted its bias toward raising short-term interest rates. Because
the City's fiscal health remains tied to Wall Street's fortunes,
an interest rate increase or further reverberations from the East
Asian economic crisis represent a risk to the outlook.
Given the City's current economic forecast, tax revenues are projected
to reach $20.3 billion, an increase of 0.4 percent from expected
FY 1998 levels.(4) This small increase
reflects growth in property taxes, offset by a small decline in
nonproperty tax collections. This would be the first decline in
nonproperty tax revenues since 1995, and follows annual average
growth of approximately 8 percent for the last three years. Should
the tax program be enacted as proposed, total taxes would instead
decline by almost 1 percent from FY 1998 levels.
Our review finds that tax revenue collections could exceed the
City's forecast by $235 million. However, the receipt of additional
Federal assistance ($75 million) may not materialize. In addition,
the Mayor and the City Council are negotiating competing tax reduction
proposals which are essentially equivalent in value (see "Tax
Reduction Program" later in this chapter).
1. Real Property Tax
Real property tax revenues are forecast to be $7.4 billion
in FY 1999, an increase of $93 million or 1.3 percent
from FY 1998. The increase largely reflects the expected increase
in the tax levy of $212 million based on higher billable assessed
values of 2.7 percent as contained in the tentative tax roll
released in January. The final tax roll will be released at the
end of May. Partially offsetting the increase in revenues from the
higher billable assessments are increases in both the City and State
tax reduction programs. The additional reduction in real property
taxes for condominium and cooperative apartments will reduce revenues
by $65 million in FY 1999. Additionally, the State's School
Tax Reform (STAR) program is expected to lower real property tax
revenues by some $43 million, a revenue loss that will be offset
by an increase in State education aid.
2. Nonproperty Taxes
The nonproperty taxes, those levied on consumption, incomes and
businesses, are projected to total $12.9 billion, a decline of 0.4
percent, in FY 1999. Moderating growth in personal income tax collections,
along with sharp declines in the business taxes, account for the
overall slowing in nonproperty tax revenues (see Graph
Personal income tax collections are forecast to increase by 1.4 percent
to $5 billion in FY 1999, following double-digit average
growth over the last three years. The personal income tax forecast
assumes the extension of the 12.5 percent surcharge scheduled
to expire on December 31, 1998. The Mayor and the City
Council are negotiating its extension and the Mayor's proposed tax
The business taxes -- general corporation, banking corporation,
and unincorporated business -- are together forecast to total $2.8
billion in FY 1999 (including audits), a decline of 9 percent from
FY 1998 levels, with the largest decline attributable to the banking
corporation tax. Besides the City's assumptions for lower Wall Street
and corporate profits, factors contributing to the forecast decline
include reductions in audit collections and the City's anticipation
of increased credits to corporations that overpaid taxes in prior
Sales tax collections are projected to total $3.2 billion in FY
1999, an increase of 4.6 percent over the prior year. Expected growth
in tourism may help offset some downward pressures on spending resulting
from moderating wage growth. The real property transfer and mortgage
recording taxes are expected to yield $555 million, an increase
of 9 percent from FY 1998 levels. These taxes will benefit
from increased residential and commercial activity in the local
real estate market.
3. Miscellaneous Revenues
Miscellaneous revenues, net of water and sewer revenues which are
offset by expenditures, are forecast by the City to be $2.6 billion,
or $365 million less than the FY 1998 forecast. The decline
reflects the absence of one-shot resources expected in FY 1998
from the sale of the New York Coliseum ($200 million) and other
assets including the United Nations Plaza Hotel ($132 million),
lower interest earnings from investments on overnight cash balances
($45 million) and lower rental income from the Port Authority
of New York and New Jersey (PA) for the two City airports ($20 million).
Partially offsetting these reductions are additional revenues from
settlements of litigation ($50 million) and FICA overpayments
($16 million). The FY 1999 forecast is also $282 million
less than forecast in January. This reduction is due primarily to
the City deferring until future years $350 million expected
from the settlement of its dispute with the PA related to airport
4. Intergovernmental Aid
The Plan anticipates the receipt of $100 million of unrestricted
intergovernmental aid. The Plan assumption of $25 million in additional
State aid appears reasonable, but the receipt of $75 million in
Federal aid may not materialize. The City has suggested that the
Federal aid could be provided by diverting a portion of the President's
proposed Economic Development Initiative for use as unrestricted
urban aid and by increasing the Federal Medicaid reimbursement rate
from 50 percent to 51 percent. However, these proposals
require approval by both the President and Congress, which may not
5. Review Adjustments
Based upon our review, we expect tax revenue collections to exceed
the City's expectations by $235 million, primarily in the business
and personal income taxes. Although we agree with the City that
a slowdown on Wall Street and in the rest of the local economy is
possible this year, we believe that the strength generated in FY 1998
will carry over into the start of FY 1999, helping to boost business
tax collections by $115 million. In addition, the City's personal
income tax estimates do not appear to accurately reflect the wage
growth they have forecast, and it appears that estimated and final
payments have yet to catch up with the recent growth in capital
gains realizations. Thus we forecast that personal income tax revenues
are likely to be $145 million greater than the City expects.
Finally, commercial rent tax collections are likely to be lower
by $25 million, because we continue to believe that the City's recent
tax reductions in this area are having a greater impact than originally
projected. Even with the additional revenue we anticipate, we are
forecasting tax revenue growth of only 0.5 percent in FY 1999.
Expenditures, including those reimbursed by the Federal and State
governments, are projected to total $34.1 billion in FY 1999.
The Plan shows that the portion of the budget funded with locally
generated resources and unrestricted Federal and State aid (i.e.,
City funds) is projected to total $23.3 billion. This would
suggest a 3 percent reduction in City-funded spending compared
with the prior year's level.
projected spending would grow by $1.4 billion, or 6.2 percent,
after adjusting for surplus transfers (see Graph 6).
Under applicable accounting rules, the City cannot count the surplus
as a revenue source. While it can receive the same benefit by prepaying
certain expenses, this distorts expenditure patterns.
As shown in Table 5, City-funded spending would rise by more than
$1 billion, or 4.4 percent, even excluding the general
reserve and taking into account the potential for savings from overestimating
prior years' expenses. Such a rate of growth would be nearly double
the projected local inflation rate. The growth is driven by costs
associated with new labor agreements and higher spending for mayoral
agencies, education, and medical insurance for City employees and
the indigent. These costs are partly offset by lower pension costs
and savings expected from initiatives that comprise the FY 1999
gap-closing program, such as a freeze in health insurance premiums.
Major Factors Contributing to the Growth
in Fiscal Year 1999 Spending
|Board of Education
Data Source: N.Y.C. Office of Management and Budget.
The FY 1999 gap-closing program has a total value of $595 million,
of which $461 million would come from cost-reduction initiatives.
Most of the savings would result from shifting funding responsibility
to other levels of government, reducing overtime costs, freezing
health insurance rates, and requiring agencies to self-fund managerial
pay raises. There are also some modest program reductions, such
as a cutback in funding for cultural institutions and libraries
($28 million), and the elimination of the City's subsidy to the
Staten Island Rapid Transit Operating Authority ($11 million).
Excluding the proposed freeze in health insurance rates, the recurring
value of the gap-closing program would decline to $350 million
by FY 2001. This is due largely to the City's reliance on actions
that would produce one-time savings of $174 million in FY 1999,
or 30 percent of the program's total value in that year.
shown in Graph 7, nearly 60 percent of the
City-fund budget is allocated to health and social services, education,
and criminal justice. Debt service accounts for another 14 percent,
while the remaining 28 percent is devoted to basic municipal
services, such as fire fighting, environmental protection, refuse
collection, and to fund administrative agencies and the offices
of the City's elected officials.
Our review has identified two issues that together pose a risk
of $162 million. The City has eliminated funding for the cost
of labor agreements that it negotiated on behalf of its covered
organizations. This initiative was first proposed in FY 1997,
but was rescinded for fiscal years 1997 and 1998. In addition, the
City has unilaterally decided not to fund increases in health insurance
premiums for municipal employees.
1. Personnel Costs
City-funded personal service costs are projected to grow by 5.4
percent, or $641 million, to $12.5 billion. The increase stems
largely from the cost of new labor agreements. The costs of new
education initiatives and expanding the City's drug elimination
program were offset by anticipated savings from certain cost reduction
initiatives and lower pension costs.
New labor agreements have now been reached with most of the municipal
unions, but the agreements begin to expire in FY 2000. The Plan
assumes that those employees who have not yet reached agreement
with the City will accept wage increases patterned after those contained
in agreements reached with District Council 37 and the United Federation
of Teachers; those agreements include a two-year wage freeze at
the start of the contract, then wage and fringe benefit increases
totaling 13 percent over the next three years. It also assumes that
wages for most employees will rise by between 4 percent and 7.75 percent
during FY 1999 at a cost of about $600 million. In addition, the
City has negotiated agreements with fire fighters and sanitation
workers that would reward them for taking on additional responsibilities
or increasing productivity, and the Mayor has announced that certain
police officers will be awarded performance-based payments.
The City no longer intends to fund the cost of labor agreements
it negotiates on behalf of certain covered organizations, such as
the Health and Hospitals Corporation (HHC). This initiative is expected
to save $104 million in FY 1999 and about $225 million annually
thereafter. About 85 percent of the savings is attributable
to HHC, which is experiencing financial difficulties. When this
initiative was first proposed in November 1996, the City had planned
to stop funding beginning in FY 1997. The City rescinded this initiative
for fiscal years 1997 and 1998 in response to union opposition,
but plans to implement it in FY 1999. We believe these savings
are at risk because the unions continue to oppose this initiative
and HHC's challenging financial situation could require an infusion
of City resources.
increasing by about 6,750 employees during FY 1998, City-funded
staffing levels are projected to remain stable during FY 1999 at
about 207,000 employees (see Graph 8). However,
the City will continue its efforts to reallocate personnel resources
among agencies. Since FY 1990, the police force and the number
of teachers have grown by 13,500 employees, while 33,000 positions
were eliminated in other agencies. As a result, teachers and police
officers are expected to comprise 54 percent of the work force
by June 1999, compared with 43 percent in June 1990.
In addition, about 38,000 public assistance recipients are working
an average of about 25 hours per week in City agencies and in not-for-profit
organizations as a condition of receiving welfare benefits under
the Work Experience Program (WEP). More than 40 percent of the WEP
participants are assigned to the Parks and Sanitation Departments,
agencies that experienced large reductions in staffing levels since
FY 1990. However, in response to threatened layoffs at HHC, the
union representing municipal hospital workers recently sued claiming
that WEP participants were displacing union employees in violation
of State law, and raised other issues concerning this program. In
response, the City has removed about 900 WEP participants assigned
to HHC and has agreed to support early retirement legislation and
help reassign laid-off hospital workers.
City-funded fringe benefit expenses are projected to grow by $80 million
in FY 1999 to nearly $2.9 billion. Costs associated with new
wage agreements account for over half the increase, and most of
the balance reflects a small increase in the number of retirees
and a 10 percent increase in Medicare supplemental insurance premiums
that the City traditionally pays on behalf of retirees.
Under agreements between the City and its unions, premiums paid
to the Health Insurance Plan of Greater New York (HIP) determine
the City's cost for all municipal health insurance providers. Insurance
premiums have been frozen for the last three years under an agreement
between the City, municipal unions and HIP, but between fiscal years
1989 and 1995 premiums grew at an average annual rate of 12 percent.
The New York State Insurance Department is no longer required to
review and approve health insurance rate increases up to 10 percent.
In compliance with the new law, HIP notified the Department in November
1997 that it intended to increase premiums by 5 percent effective
July 1, 1998.
Although the City has not provided any legal basis to withhold
payment, it has notified HIP that it is challenging the rate increase
and has eliminated funding for the increase from the Plan. The City
contends that HIP has not justified the rate increase, but has met
with HIP officials to examine the rate increase more closely. Should
the City be required to restore funding to the Plan, health insurance
costs would rise by another $58 million in FY 1999.
City-funded pension contributions are expected to decline by $70 million
to $1.3 billion in FY 1999, reflecting the impact of extraordinary
investment earnings during fiscal years 1996 and 1997. During those
years, pension fund investment earnings averaged nearly 20 percent
annually, more than twice the assumed rate of return of 8.75 percent.
The savings that resulted from the unexpected earnings were large
enough to fund the pension costs associated with wage increases
granted to municipal employees under new labor agreements.
rising during the 1980s and peaking in FY 1988, total-fund pension
costs (including Federal and State funding) have declined and remained
stable at about $1.4 billion (see Graph 9).
There also has been a dramatic reduction when measured as a percentage
of salary and wage costs, declining from 33 percent in FY 1982
to 11 percent in FY 1999. The reasons for the decline
include extraordinary investment earnings that have averaged more
than 12 percent over the past decade; less generous pension
benefits for new employees hired after June 30, 1973; and a 5 percent
reduction in staffing levels since FY 1990.
Pension costs could be less than shown in the Plan because investment
earnings have exceeded 18 percent during the last nine months, more
than twice the assumed rate of return. Even without further gains
during the final three months of the fiscal year, pension costs
would be lower than those shown in the Plan by about $50 million
in FY 1999, rising to about $250 million in FY 2002 as
the gains are phased in.
While the potential for significant savings exists, there may also
be offsetting liabilities. An actuarial consulting firm has been
hired to conduct a biennial review of the assumptions and methodologies
used to compute City pension contributions as required under the
City Charter. A report expected by the end of the calender year
could recommend changes in the investment earnings assumption or
other assumptions that would affect pension costs.(6)
In addition, current labor agreements begin to expire in FY 2000
and the Plan does not provide for new wage increases or the associated
pension costs. Also, the State is likely to enact legislation that
will supplement the benefits of State retirees to help offset the
impact of inflation. In the past, such legislation has been extended
to include City employees. Three years ago, the State enacted a
one-time adjustment in pension benefits that increased City pension
costs by about $100 million annually. The State Comptroller
has proposed a comprehensive package of pension improvements for
State employees, including automatic annual cost of living adjustments
for retirees that would be funded by extraordinary pension fund
2. Board of Education
The Plan allocates $10.2 billion to the Board of Education
(including resources for pension and debt service costs), which
is $491 million more than projected for FY 1998. The Board's
allocation will increase once FY 1999 State aid increases are
fully recognized. State and Federal education aid has increased
faster than the City's budget as a whole, and, as a result, the
Board's share of the City's budget will grow to more than 30 percent.
This could restrict the City's flexibility to balance future budgets
because State law requires the City to allocate to the Board a share
of the City's total budget that is no less than the average of the
prior three years.
Under the Adopted State Budget, the Board will realize an additional
$158 million in unrestricted aid, which is more than adequate
to close the $132 million budget gap being projected by the
Board. The remaining resources may be allocated to fund proposed
instructional initiatives or to help offset the impact of a gubernatorial
veto of a $63 million State program that had supplemented teachers'
salaries. Alternatively, the Board could reduce teachers' salaries
or the City could provide additional funding.
The Governor also vetoed a legislative initiative to allocate $500
million over the next four years for capital needs, of which the
Board was to receive $200 million. This initiative was considered
critical because last November voters rejected a $2.4 billion school
facilities bond act, and the State Legislature has not approved
funding for year-round schools. Board officials believe that year-round
schooling would go a long way toward relieving school overcrowding
and enhancing instructional services. Increased school utilization
also would enable the Board to allocate more of its capital resources
for restoring the public schools to a state of good repair. However,
these issues remain unresolved. Meanwhile, the Board is expected
to release in March 1999 its 2000-2004 capital plan, which is expected
to identify its capital needs and funding requirements.
3. Public Assistance
Plan assumes that the Public Assistance caseload will decline by
58,000 persons between May 1998 and June 1999. Such a reduction
would bring the caseload down to 718,000, 443,000 fewer than the
peak in March 1995. Similarly, City-funded spending for this program
is projected to decline by 14 percent to $431 million.
This would be less than half the amount spent in FY 1994 (see
Graph 10) and the lowest level in 16 years.
We are concerned that the Plan may not reflect the full programmatic
and financial impact of implementing Federal welfare reform and
other changes in the State public assistance program. For example,
we estimate that an additional 52,000 adults, mostly women with
children, will be required to work or be engaged in work-related
activities by the end of FY 1999 to comply with Federal work requirements.
The new Commissioner for Social Services intends to intensify efforts
to find employment for welfare recipients in the private sector
by converting existing income maintenance centers to employment
centers. However, it is unlikely that the private sector can meet
the demand. As a result, the City may have to expand WEP to avoid
Federal sanctions. In addition, the Plan makes no assumption concerning
welfare recipients who will have met the five-year life-time cap
on Federal welfare benefits.
4. Services to Children
The Administration for Children's Services expects to spend nearly
$2 billion in FY 1999 on child care, early childhood education,
and the care of abused and neglected children, virtually the same
amount as projected for FY 1998. The City estimates that these resources,
combined with $100 million in the Human Resources Administration,
would enable it to provide child care services to 80,000 children
during FY 1999. While the State budget will provide the City with
$70 million in surplus Federal welfare block grant resources,
which is intended to help fund the costs of implementing Federal
welfare reform, most of these resources will be needed to offset
reductions in Federal and State funding.
As discussed in a separate report(7),
the demand for child care slots could nearly double as parents are
required to make the transition from welfare to work. We currently
estimate that as many of 60,000 additional children will require
services by December 1998. Providing services to these children
could cost between $90 million and $140 million in FY 1999
as slots are phased in during the year. Another $208 million
would be needed to provide services to all 31,000 children already
waiting for services. We note that the Governor vetoed a State Legislative
initiative that would have provided the City with $30 million in
additional child care resources.
Medicaid expenditures are projected to total $2.8 billion,
only $55 million, or 2 percent, more than the prior year's
level (see Graph 11). The low rate of growth reflects
declining Public Assistance caseloads, a relatively low inflation
rate for medical services, and an emphasis on outpatient services
rather than costly inpatient and emergency room services. Unlike
previous years, neither the State nor the City has proposed any
new Medicaid cost containment actions. The Plan does anticipate
$9 million in savings from enrolling Medicaid recipients in
mandated managed care programs.
6. Debt Service
Debt service costs, after adjusting for the transfer of surplus
funds, would total $3.4 billion, only 1 percent greater
than the FY 1998 level. Such costs, which include those of
the Transitional Finance Authority, would grow only slightly because
of actual and planned City bond refundings, and lower MAC funding
needs. Since the Adopted Budget, debt service costs have declined
by $433 million due mainly to savings from City bond refundings
($233 million), reduced MAC funding requirements ($82 million),
a reduction in seasonal financing needs from $2.4 billion to
$850 million ($53 million), and lower than forecast bond issuances
to finance the capital program ($46 million).
The Plan reflects the Mayor's proposals to reduce taxes by $237
million in FY 1999. While the Plan assumes the extension of
the 12.5 percent personal income tax surcharge ($201 million) that
is scheduled to expire on December 31, 1998, the City Council Speaker
has proposed permitting it to expire.
The value of the Mayor's proposals would rise to $666 million by
FY 2002. Added to the cuts enacted since FY 1995, the proposed reductions
would push the FY 2002 value of the total tax program to almost
$1.5 billion from $1.1 billion in FY 1999 (see Table 6). While
the size of the tax program has been reduced somewhat since January,
it remains a significant contributor to the out-year budget gaps.
STAR Personal Income Tax Credit Acceleration
The largest of the new tax reductions affecting FY 1999 revenues
proposed by the Mayor would accelerate the personal income tax (PIT)
credit established as part of the Governor's STAR program. For New
York City residents, the STAR program provides both property and
personal income tax relief.(8) Under
current law, the personal income tax credit is scheduled to be phased
in and fully implemented by FY 2002. The Mayor's proposal would
have the City make up the difference between the phased-in and the
ultimate value of the refundable tax credit until the full credit
($125 for married couples and $62.50 for others) is in effect. If
approved by the City Council and the State, City revenues would
decline by $153 million in FY 1999, an amount that would be phased
out by FY 2002.
PIT Credit for Resident Sub-chapter S Shareholders
Unlike the Federal government, the City levies corporate income
tax on the net earnings of Sub-chapter S corporations, which are
generally small, closely held companies. Shareholders are then subject
to tax on their proportionate share of corporate earnings when they
file their City personal income tax. The Executive Budget proposal
would address the problem of double taxation by allowing resident
shareholders to apply a credit to personal income tax of between
15 and 65 percent of their Sub-chapter S tax liability. This proposal,
which is similar to tax relief for the City's unincorporated businesses
enacted last year, is valued at $34 million in FY 1999, and $39
million by FY 2002.
Proposed and Enacted Tax Reduction Program
|| FY 2000
|| FY 2001
|| FY 2002
|Proposed Tax Program
|Items to Begin in FY 1999
|STAR PIT Credit Acceleration
||$ - - -
|PIT Credit for Resident Sub-chapter S Shareholders
|PIT Dependent Care Credit
|State Authorized Clothing/Footwear Sales Tax Exemption
|Sales Tax Exemption for School Uniforms
|| - - -
|| - - -
|Items to Begin in FY 2000
|Cooperative/Condo Property Tax Relief
||- - -
|Clothing/Footwear Sales Tax Exemption for Items Costing
More Than $110
||- - -
|Commercial Rent Tax Threshold Increase
|| - - -
||$ - - -
|| $ (231)
|| $ (300)
|| $ (352)
|Total Proposed Tax Program
|| $ (537)
|| $ (657)
|| $ (666)
|Tax Program Already Enacted
|| $ (738)
|| $ (789)
|| $ (817)
| Total Proposed and Enacted
Data Source: N.Y.C. Office of Management and Budget.
PIT Dependent Care Credit
The Mayor has also proposed a refundable personal income tax credit
for dependent and child care expenses. This credit is pegged to
50 percent of the State credit, which is in turn based on a sliding
percentage of the Federal credit. The City estimates that 194,000
households will benefit from the credit, at a cost to the City of
$27 million in FY 1999, growing to $31 million in FY 2002.
As discussed in our last Financial Plan report (Report 5-98, issued
February 26, 1998), the proposed credit would improve the progressivity
of the tax code, providing benefits up to $720 on top of the State
and Federal credit for a low-income family with two children. However,
many low-income families are unable to afford child-care arrangements
that are eligible for the credit, which include formal day-care,
preschool, and "on-the-books" babysitting. Instead, many
families opt for "informal" care, paying relatives, neighbors,
or babysitters off the books to care for their children.
A recent report by the New York City Independent Budget Office
points out that the erosion of the City's household credit by inflation,
combined with the Earned Income Tax Credits at the State and Federal
level, has contributed to a situation in which nearly 100,000 low-income
New York City taxpayers owe over $10 million in City tax, but
no State or Federal tax.(9) Because
proportionately few low-income households could take advantage of
the dependent care credit, this proposal contributes only partially
to addressing this disparity. A City Earned Income Tax Credit (EITC)
would help to bring the City tax code into conformity with State
and Federal policy. The City Council has proposed an EITC that would
benefit low-income working families.
State Authorized Clothing/Footwear Sales Tax Exemption
The State has authorized two one-week exemptions from sales tax
for clothing and footwear purchases costing under $500, which will
cost the City $20 million in FY 1999. The State has also authorized
a permanent exemption from the sales tax on clothing items costing
less than $110, valued at $135 million in FY 2000. Localities
have the option of matching these State reductions, and City Council
approval is expected. In addition, the Mayor has proposed a sales
tax exemption for school uniforms, which would be in effect until
the permanent clothing sales tax exemption is fully effective in
the middle of FY 2000.
Tax Reduction Proposals Beginning in FY 2000
The Mayor has also proposed reductions in three taxes that would
not affect revenues until FY 2000: a three-year extension of the
cooperative and condominium property tax relief program; extension
of the sales tax exemption to items of clothing and footwear costing
more than $110; and an increase in the commercial rent tax base
rent exemption. Together, the three proposals would reduce City
tax collections by $231 million in FY 2000, rising to $352 million
in FY 2002. These elements, along with the Mayor's proposal to accelerate
the STAR personal income tax credit, may change in the budget adoption
process as the City Council and the Mayor also consider the Council's
personal income tax proposals, including one to let lapse the 12.5
percent personal income tax surcharge.
Despite a balanced budget for FY 1999, the Plan shows a $1.5 billion
budget gap for FY 2000. The gap largely reflects costs associated
with current labor agreements ($750 million) and the absence of
resources used to balance the FY 1999 budget that the City does
not expect to recur (i.e., a large budget surplus).
The FY 2000 gap would have been nearly $800 million larger if not
for one-time resources planned for use in that year. These one-time
resources include the portion of the FY 1998 surplus ($416
million) allocated to narrow the FY 2000 gap and the anticipated
receipt of retroactive airport lease payments ($350 million)
from the Port Authority of New York and New Jersey. FY 2000 also
benefits by a $437 million rise in real property tax collections,
reflecting the improvement in property values. Between fiscal years
1996 and 2000, property tax collections are expected to increase
by more than $700 million, or 10 percent.
Although property tax collections are expected to rise by about
5 percent in FY 2001, the Plan shows the gap for that year
growing by $600 million. The larger gap reflects growth in debt
service costs. We calculate that the debt burden would reach 18.4
percent of tax and offsetting revenues by FY 2001 compared with
16.6 percent in FY 1997.(10)
The Plan shows the budget gap declining to $1.6 billion in FY 2002,
reflecting continued growth in real property and other tax collections,
and the full benefit of extraordinary FY 1997 pension fund
investment earnings. The pension funds earned 21.8 percent in FY
1997, more than twice the assumed rate of return, and, as a result,
City pension costs could be reduced by $380 million by FY 2002 when
the benefits are fully phased in.
Our review has identified a number of issues that could affect
the City's gap estimates for fiscal years 2000 through 2002.
The Plan assumes that the 12.5 percent personal income tax surcharge
scheduled to expire on December 31, 1998 is extended. In its current
form, the surcharge is expected to generate about $550 million annually
during fiscal years 2000 through 2002. At the same time, the Plan
assumes implementation of the Mayor's proposed tax reduction program,
which would reduce revenues by $537 million in FY 2000 and
$666 million by FY 2002. The Mayor has also proposed using a portion
of commercial rent tax collections for "pay-as-you-go"
funding to construct sports facilities, such as a new stadium for
In addition, the Plan makes no provision to continue beyond FY
1999 $125 million in funding for Project Read, a remedial education
initiative, or to provide wage increases after the expiration of
current labor contracts. Wage increases at the projected inflation
rate would increase City costs by $380 million in FY 2001 and $830 million
in FY 2002.
The Executive Budget includes a proposal to establish a New York
City Sports Facilities Corporation, which would provide pay-as-you-go
capital to help finance the construction of new stadia for the Yankees
and the Mets, with the possibility of providing funds for other
sports facilities as well. The money to fund the Corporation would
come from the difference in the revenues the City would receive
from only scaling down but not eliminating the commercial rent tax,
as it proposed in January.
City officials believe that the construction of a new baseball
stadium on Manhattan's West Side could generate more than $1 billion
per year in economic activity and more than $40 million in additional
tax revenues compared with the current Yankee Stadium. However,
most of this economic benefit is linked to the City's view of the
potential for "ancillary development" of commercial space
in the area. This development is not dependent on the stadium, and
would require several hundred million dollars in non-stadium infrastructure
and transportation improvements. The City does not intend to finance
these improvements with proceeds from the change in the commercial
rent tax and has not identified another source of funding.
The City is currently unable to provide details regarding the structure
of the proposed Corporation. Given that the City has competing infrastructure
needs and faces constraints on expansion of its capital program,
it might consider using these resources to finance a more general
pay-as-you-go infrastructure program.
The City has removed the revenue stream and debt service attributable
to the New York City Transitional Finance Authority (TFA) from the
projection of City revenues and expenditures in its Financial Plan.
Instead, the City has provided that information in a separate submission
for the TFA as a covered organization. The City maintains that this
presentation properly reflects the legal structure of the TFA (i.e.,
it is separate from the City with respect to various legal considerations
and for bond rating purposes) and, since both TFA debt service and
related personal income tax revenues have been removed, the City's
budget is unaffected. In our opinion, this approach does not present
a full picture of the City's finances. Inclusion of the TFA in the
City's budget results in a better portrayal of trends in City revenues
For budgetary purposes, TFA debt is simply an extension of the
City's authority to issue general obligation (GO) bonds. Similar
to GO debt, TFA debt is backed by City tax revenues that flow to
the City as operating budget revenues only after providing for payment
of TFA debt service. As a result, factors affecting TFA debt service
costs (e.g., higher interest rates) directly influence the level
of resources available to the City to support its operating needs.
By contrast, for example, debt issued by the Municipal Water Authority
is secured by water and sewer charges levied by the Water Board
on the system's users. Those fees are adjusted as required to fund
the debt service costs (and other needs) of the system with no impact
on the City's budget.
H. Carl McCall
Office of the State Deputy Comptroller for
New York City
Assistant Deputy Comptroller
Bureau of Agency Analysis
Ken Bleiwas, Director
Bureau of Fiscal and Economic Analysis
James Parrott, Director
Marcia Van Wagner, Asst. Director
Yves Denize, Counsel
Lava Thimmayya, Director
Ann M. Shea
1. The Plan also includes a $200 million general reserve and $416
million that has been set aside in the FY 1999 Budget Stabilization
Account to narrow the FY 2000 budget gap.
2. This estimate reflects certain technical adjustments. For example,
it excludes sales and State School Tax Reform tax cuts that were
included in the Adopted Budget but were not enacted.
3. See our Report TM-1-99, "The East Asia Economic Crisis:
A Background Report on the Implications for New York City,"
issued April 27, 1998.
4. These estimates take into account the State School Tax Reform
program and exclude the proposed tax reduction program.
5. The Adopted State Budget also would increase education aid to
the City, but this aid will be needed by the Board of Education
to balance its FY 1999 budget.
6. The State law which sets the actuarial assumed rate of return
on pension fund investments is scheduled to expire on June 30, 2000.
7. See our Report 4-98, "Child Care Services in New York City,"
issued December 18, 1997.
8. STAR is budget neutral, because the loss in City tax revenues
is offset by increased State aid.
9. New York City Independent Budget Office, "New York City's
Tax on the Working Poor," March 1998.
10. Offsetting revenues includes water and sewer fees, payments
from the Health and Hospitals Corporation, and State education building