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Review of the New York City Financial Plan

for Fiscal Years 1999 Through 2002

July 22, 1998

NYS Seal

H. Carl McCall

State Comptroller

Office of the State Deputy Comptroller for the City of New York

Report 3-99

Submitted to the Financial Control Board and the Municipal Assistance Corporation

Additional copies of this report

may be obtained from:

Office of the State Comptroller

Office of the State Deputy Comptroller

270 Broadway, 23rd Floor

New York, NY 10007

Telephone: (212) 417-5442

FAX: (212) 417-2144

e-mail: js@osc.state.ny.us

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Contents


I. Executive Summary

II. Wall Street Dependency

A. Wall Street’s Role in the City’s Recovery and Expansion

B. Wall Street-related Growth in Taxes in the 1990s

C. The Changing Wall Street Environment

D. The City’s Economic Outlook

E. The City’s Out-year Tax Revenue Forecast

III. Fiscal Year 1998 Surplus

IV. Fiscal Year 1999

A. Revenue Estimates

B. Expenditure Estimates

V. Fiscal Years 2000 Through 2002

A. The Projected Budget Gaps Have Grown Since April

B. Factors Behind the Projected Budget Gaps

C. Revenue Trends

D. Expenditure Trends

VI. Capital Plan and Financing Program

A. Debt Affordability and the Debt Limit

B. Capital Cash Flow

C. Wicks Law

D. Transportation Equity Act for the 21st Century

E. Maintenance

Tables

1. Four-year Financial Plan Revenues and Expenditures

2. OSDC Evaluation of the Four-year Financial Plan

3. N.Y.C. Economic Indicators Over the Business Cycle, 1989 - 2002

4. Major Sources of the Fiscal Year 1998 Budget Surplus

5. Changes in the Four-year Financial Plan Since April

6. Major Factors Contributing to the Growth in Fiscal Year 1999 Spending

7. Factors that Increased the Projected Budget Gaps for Fiscal Years 2000 Through 2002

Graphs

1. Annual City Surpluses

2. Annual Change in City-fund Revenues

3. N.Y.C. Tax Revenue Growth

4. Annual Change in City-funded Expenditures

5. Projected FY 1999 City-funded Expenditures

6. City-funded Personnel Levels

7. City Pension Contributions

8. Public Assistance Expenditures

9. Annual Growth in Medical Assistance Expenditures

10. Percent Changes in Assessed Values, FY 1993 Through FY 1999

11. Forecasts of Debt Service Burden

12. Medicaid Expenditures as a Percent of City-fund Revenues

13. New York City’s Capital Plan and Its Funding Sources

I. Executive Summary

The City is poised to end fiscal year 1998 with an unprecedented budget surplus of $2.1 billion, the second consecutive record surplus. Fiscal year 1999 is also likely to end with a substantial surplus.

There is currently a debate over how to make best use of surplus resources. This is in sharp contrast to the situation that existed only a few years ago, when budget cuts were hotly debated.

In each of fiscal years 1998 and 1999, most of the surplus has been used to support a level of spending that the City could otherwise not afford. In fiscal year 1999, City-funded spending is forecast to grow by over 6 percent, more than twice the projected inflation rate, but revenues are forecast to decline by 3.3 percent. The City plans to use three-quarters of last year’s surplus — nearly $1.6 billion — to balance this year’s budget.

While the local economy and tax revenues are likely to exceed the City’s expectations for fiscal year 1999, we are concerned that the City is not well- positioned to weather a downturn. For this reason, we urge the City to put a substantial portion of the surplus in reserve for when the “good times” turn bad.

Retiring high-interest debt would be another prudent use of the surplus. In fiscal year 1998, the City retired $73 million of high-interest debt and the City Council has proposed retiring another $165 million during fiscal year 1999. Retiring high-interest debt creates recurring savings and helps narrow the structural imbalance between revenues and spending.

Finally, the City could use a portion of the surplus to fund one-time expenditures that enhance the City’s competitiveness, such as new technology or capital investments. However, the surplus should not be used to create new recurring obligations without first having identified a replacement revenue source.

In conclusion, the City is currently enjoying unprecedented good times but they will not last forever. We urge the City to take steps now that will help it prepare for the future.

Fiscal Year 1999

Despite the tumultuous budget adoption process, fiscal year 1999 is likely to end with a surplus approaching $900 million, including $665 million in reserve funds which will not be needed in the current fiscal year. Our estimate of the surplus would grow to the extent additional cost-reduction initiatives, which are under consideration by the Mayor, are implemented.

Fiscal Years 2000 Through 2002

Despite large budget surpluses and stronger economic growth, the City has not made much progress in reducing the imbalance between recurring revenues and spending. The City’s four-year Financial Plan shows budget gaps of $2.3 billion in FY 2000, $3.1 billion in FY 2001, and $2.7 billion in FY 2002 (see Table 1). These gaps are significantly larger than those forecast in April. The FY 2001 gap equals 13.5 percent of City-fund revenues, a high level by historical standards.

Our review finds that the out-year budget gaps could be even larger than those projected by the City, totaling $3 billion in FY 2000, $3.5 billion in FY 2001, and $3.1 billion in FY 2002 (see Table 2). These estimates would be affected by policies adopted by the City’s decision makers, such as the use of operating budget resources to fund new stadia; additional tax cuts; and wage increases after the expiration of current agreements.

An economic downturn or unanticipated Wall Street weakening during these years could have a significant impact on the out-year budget gaps. Wall Street has accounted for over half of the City’s economic growth over the past five years and has been the primary source of the recent surpluses. Not only could revenues fall short of target, but so could pension fund investment earnings. If actual earnings fall below the actuarial assumed rate of return, the City could be required to increase its contributions to the pension funds. In addition, an economic downturn could reduce employment and increase the City's public assistance caseload.

We are also concerned about the City’s growing debt burden, which will reach nearly 19 percent of tax revenues by FY 2002. For this reason, we believe the City should use the proceeds from the sale of the New York Coliseum directly for transit capital projects, rather than to support the operating budget as contemplated.

Table 1

Four-year Financial Plan Revenues and Expenditures

(millions)

FY 1999

FY 2000

FY 2001

FY 2002

REVENUES

Taxes

General Property Tax

$ 7,386

$ 7,812

$ 8,135

$ 8,518

Other Taxes

11,985

12,295

12,569

12,928

Tax Audit Revenue

558

549

541

531

Tax Reduction Program

- - -

(975)

(1,172)

(1,259)

Miscellaneous Revenues

3,226

3,552

3,279

3,366

Unrestricted Government Aid

565

565

564

564

Other Categorical Grants

298

292

282

281

Less: Intra-City Revenues

(723)

(723)

(726)

(728)

Grant Disallowances

(15)

(15)

(15)

(15)

Sub-Total City Funds

$23,280

$23,352

$23,457

$24,186

Inter-Fund Revenues

271

271

271

271

Total City & Inter-Fund Revenues

$23,551

$23,623

$23,728

$24,457

Federal Categorical Grants

3,982

3,795

3,772

3,734

State Categorical Grants

6,653

6,654

6,662

6,729

Total Revenues

$34,186

$34,072

$34,162

$34,920

EXPENDITURES

Personal Service

$18,843

$19,491

$19,578

$19,498

Other Than Personal Service

14,100

14,450

14,715

15,014

Debt Service

City General Obligatiom

1,301

2,461

3,026

3,130

Budget Stabilization Account

465

- - -

- - -

- - -

MAC Debt Service

- - -

466

476

488

General Reserve

200

200

200

200

$34,909

$37,068

$37,995

$38,330

Less: Intra-City Expenses

(723)

(723)

(726)

(728)

Total Expenditures

$34,186

$36,345

$37,269

$37,602

Surplus/(Gap)

$ - - -

$(2,273)

$(3,107)

$(2,682)

Data Source: N.Y.C. Office of Management and Budget.


Table 2

OSDC Evaluation of the Four-year Financial Plan

(millions)

Better/(Worse)

FY 1999

FY 2000

FY 2001

FY 2002

City Projected Budget Gap

$ - - -

$(2,273)

$(3,107)

$(2,682)

OSDC Risks and Offsets

Unspecified Cost-reduction Program

(402)

- - -

- - -

- - -

Health Insurance Premiums

(58)

(97)

(142)

(192)

Overtime Costs

(25)

(25)

(25)

(50)

Revenues

375

- - -

60

120

Savings from Prior Years’ Expenses

200

- - -

- - -

- - -

Pension Savings

60

150

260

360

Debt Service Savings

30

7

- - -

- - -

Additional FY 1998 Surplus

25

- - -

- - -

- - -

Workers’ Compensation Costs

15

20

25

30

Port Authority Airport Lease Payments

- - -

(350)

(140)

(170)

Collective Bargaining Costs

- - -

(225)

(231)

(231)

Board of Education

- - -

(188)

(188)

(188)

Asset Sales

- - -

(50)

- - -

(100)

Subtotal

220

(758)

(381)

(421)

Projected Budget Surplus/(Gap)(1)

$220

$(3,031)

$(3,488)

$(3,103)

Additional Issues

Stadia Funding

- - -

$ 86

$ 200

$ 308

Proposed Tax Reduction Program(2)

- - -

128

194

242

Wage Increases at Projected Inflation

- - -

- - -

(380)

(830)


II. Wall Street Dependency

To an unprecedented extent, the City has been dependent on Wall Street for economic and fiscal stimulus in the 1990s. Wisely, the City does not forecast a continuation of Wall Street boom conditions beyond this year. Rather, the City forecasts a moderate slowing on Wall Street and in the economy. However, the City does not anticipate a national recession or sustained weakness in the financial sector over the four-year Financial Plan period. While the City's forecast provides a somewhat conservative basis for projecting tax revenues for FY 1999 — nearly half of the liability year has already passed — given the changing environment affecting the Wall Street outlook, there is a considerable downside risk to the City's forecast for economically sensitive taxes for the out years of the Plan period.

A. Wall Street's Role in the City's Recovery and Expansion

The City is currently experiencing the strongest pace of employment growth in the past decade. New York City's expansion has been dominated largely by Wall Street investment banking and securities trading activities. Wall Street, with its lucrative compensation structure and extensive linkages to other local sectors, led the City out of recession in the early 1990s, and has accounted for a growing share of economic activity throughout the 1990s.

Wall Street certainly has not been alone in accounting for direct job creation in this decade. A number of other "export" sectors that serve the crucial role of bringing spending into the City and regional economies have boosted the job base. The culture and media sector, and business and professional services have together added 129,000 jobs since the November 1992 employment low point while Wall Street employment has risen by 32,000 in that period.

Nonetheless, a review of various empirical measures of economic activity underscores the overwhelming centrality of Wall Street in the City's economic resurgence in this decade. Wall Street's 156,000 jobs represented 4.6 percent of City employment in 1997 and directly accounted for an estimated 17.2 percent of annual earnings. However, an analysis of the latest data on earnings — wages plus proprietors' income — indicates that, in inflation-adjusted or real terms, Wall Street has accounted for over half, or 56 percent, of the increase in aggregate earnings in New York City between 1992 and 1997. Other sectors, such as business services, culture and media, or retail trade, that have accounted for more job growth than securities, have contributed far less to the real earnings growth in the 1990s. For example, business services has accounted for 34 percent of job growth but 16 percent of the growth in real earnings.

Employing a well-established economic model,(3) OSDC has estimated the extent to which Wall Street has acted as a driver of other sectors of the local economy. Between 1995 and 1997, Wall Street firms themselves added about 9,800 jobs while Citywide employment expanded by about 80,000. The model estimates that, through the indirect economic impacts of additional purchases of goods and services by Wall Street firms from other New York City companies during this period, Wall Street activity resulted in roughly $1 billion in additional sales for suppliers and led to the creation of some 7,800 new jobs in industries such as legal services, accounting, computer processing, temporary help agencies, and real estate.

On top of these business-to-business transactions, the model estimates that the induced consumption spending by City residents stemming from these new jobs and from rising employment and employee compensation on Wall Street added almost $3.7 billion to sales across a range of industries, and led to the creation of about 38,000 jobs. These jobs were created largely in the local market sector, including restaurants, retail stores, and personal services. Thus, Wall Street’s full economic impact — its direct, indirect and induced effects — may have accounted for well over half of all job growth in New York City over this two-year period.

B. Wall Street-related Growth in Taxes in the 1990s

Wall Street has been the major contributor during the 1990s to the growth in the City's income tax collections. The personal and business income taxes have grown by 60 percent in the FYS 1992-1998 period, while FY 1998 property tax revenues, which have been dampened by weakness in the commercial real estate market, were still 8 percent below their FY 1992 level. The income taxes have accounted for $3 billion, or 90 percent, of the $3.3 billion increase in New York City tax collections over this period.

Taking into account only direct impacts, Wall Street accounted for an estimated 36 percent of the growth in the personal income tax and the two business income taxes typical securities firms pay, the general corporation tax and the unincorporated business tax.(4) In addition to the direct impact, the tax implications (excluding property taxes) of Wall Street's incremental indirect and induced effects that were estimated for the 1995-1997 period amount to about $100 million.

In attempting to gauge the effect of Wall Street on City tax collections, we can examine what happened in FY 1995 when, as a result of a string of interest rate hikes by the Federal Reserve, the bond market lost 10 percent of its value in calendar 1994 and the stock market finished the year only slightly ahead. Securities profits plunged from $8.6 billion in 1993 to $1.2 billion in 1994, and bonus pay-outs fell by 15 percent. City income tax collections from financial services fell by an estimated $220 million in FY 1995 compared with the year before. Moreover, since the City had not foreseen a market setback, total tax collections ended the year about $500 million below what had been anticipated at the time the FY 1995 budget was adopted in June of 1994.

C. The Changing Wall Street Environment

With the exception of 1994, the Standard & Poor's 500 stock market index has risen an average of 18 percent annually between 1991 and 1997. Several factors help account for the fortuitous environment shaping Wall Street's performance in the 1990s. Among these, three stand out: subdued inflation, strong corporate profits, and heightened merger-and-acquisition (M&A) activity. Record-breaking M&A activity has been the driving force behind the growth in securities profits. Moreover, since many such transactions have been carried out in a manner that reduces the supply of outstanding equities, M&As have helped drive equity prices higher generally.

For three of the past four quarters the major stock market indices have not gained appreciably. This reflects growing concern about limits to the further rise in the market. The major vulnerability in financial markets at this point is continued weakness in corporate profitability. Corporate profits, after growing by 12 percent on average for the last five years, declined by 2 percent in both the fourth quarter of last year and the first quarter of this year. The Asian economic crisis has contributed to weaker corporate profits and fears of further international

economic instability.(5) And, given the heightened importance of M&A activity to the profitability of New York's securities firms, New York City's fortunes are also vulnerable to developments, such as growing concern regarding the merits of large mergers, that could diminish merger volume.

D. The City's Economic Outlook

In the City's budget forecast, economic growth will slow in 1999 and 2000, then pick up slightly in the next two years. On average for the four years, 1999-2002, the key economic variables are lower than the average levels prevailing in the previous four-year period, 1995-1998. Table 3 also shows these variables for the 1989-1991 recession and the early recovery period of 1992-1994. Growth in real total wages, for example, averages 1.8 percent over the next four years compared with 4.7 percent annually during the 1995-1998 period. Securities profits are forecast to average about half the average for the previous four-year period.

This is a forecast for moderate slowing on Wall Street and in the local and national economies. It does not reflect a national or local recession or sustained Wall Street weakness over the course of the Financial Plan period. The City's out- year forecast is plausible and possible, but it is not the only such scenario given the risks facing the national and local economies. While one cannot rule out a continuation of the Wall Street boom conditions of the past three years, there could also be a Wall Street "correction” — more severe than the 10 percent declines that occurred in the spring and the fall of 1997 — from which there is not an immediate rebound. It is also conceivable that a national recession coupled with a significant Wall Street downturn could flatten the City's economy for several quarters.

Retrenchment on Wall Street in the wake of the 1987 stock market crash had a lot to do with the depth and duration of the ensuing recession that was far more severe locally than what was experienced nationally. As we have noted before, the City is significantly more dependent on Wall Street today than it was in 1987. Even without a downturn of the magnitude of the last recession, there is considerable risk for the City.


Table 3

N.Y.C. Economic Indicators Over the Business Cycle

1989 - 2002

Average Annual Growth Rates

Employment

Total Real Wages

Real Personal Income

Real Securities Profits (Billions, 1997$)

Real Growth in Non- Property Taxes**

Recession

1989-1991

-2.2%

-2.8%

0.2%

3.0

-6.7%

Early Recovery

1992-1994

-0.6

0.8

1.1

5.6

1.5

Expansion*

1995-1998

1.1

4.7

3.3

9.9

5.3

Out Years*

1999-2002

0.9

1.8

1.4

4.8

1.3

* N.Y.C. Office of Management and Budget forecasts for 1998-2002 for all indicators and for 1997 wages and personal income growth.

** Tax data on fiscal year basis that most closely corresponds to calendar year, e.g., tax collections for FY 1999 most closely track economic activity occurring in calendar year 1998. Growth rates for major nonproperty taxes have been adjusted for rate and base changes.

Data Sources: N.Y.S. Department of Labor, U.S. Department of Commerce, U.S. Department of Labor, New York Stock Exchange, N.Y.C. Office of Management and Budget, O.S.D.C. analysis.

Many major national forecasters consider the likelihood of a national recession to be rising. In the latest Blue Chip consensus survey of 50 macroeconomic forecasters, 65 percent expect a national recession to begin in either 1999 or 2000, while at least 92 percent anticipate that a recession will begin before the end of the four-year Financial Plan period. However, such expectations should be kept in perspective. Four years ago, a similar Blue Chip survey found that 78 percent of the forecasters expected a recession to begin before now.

E. The City's Out-year Tax Revenue Forecast

For fiscal years 2000 through 2002, the City expects total tax collections to rise, before proposed tax cuts, by an annual average of 3.5 percent. Reflecting its forecast for a moderation in economic activity, growth in the economically sensitive nonproperty taxes is expected to average only 2.7 percent, barely above the projected inflation rate of 2.5 percent. On the other hand, after declining for five of the past six years, property tax revenues are forecast to rise by 4.9 percent annually between FY 2000 and FY 2002. The property tax's resurgence stems largely from the recovery in the Manhattan office market, a recovery that only starts to show up in a significant way in FY 2000 because of the delay caused by the State requirement to phase in over five years higher assessments for income-producing property.

While property tax revenues would eventually be affected if the City's economy does slow significantly in the out years, during the Plan period itself the phasing-in of assessment increases for office properties would help offset, up to a point, weakness in the more economically sensitive nonproperty taxes.

After factoring out base and rate changes, as the last column in Table 3 indicates, the City is forecasting that the real growth in nonproperty taxes will average only 1.3 percent for the out years. This is well below the 5.3 percent average for the previous four years. However, during the last recession nonproperty taxes declined by nearly 7 percent a year on a real common rate and base. More recently, in FY 1995, when Wall Street faltered, the decline exceeded 4 percent.

In conclusion, while the City is prudently reducing its out-year forecasts for the more economically sensitive taxes in anticipation of a softening on Wall Street, the City does not have a cushion in the event economic conditions deteriorate beyond that envisioned in its economic outlook. While this is not to suggest that the City plan for the worst case scenario, we feel it would be imprudent to budget for higher nonproperty tax revenues than the City’s estimates for the out years.

Even though the City's recovery has broadened beyond Wall Street, the substantial income-generating capacity of Wall Street means that it will continue to largely determine the City's economic and fiscal fortunes for the foreseeable future. The changing environment affecting Wall Street and the growing likelihood of a national recession over the Plan period pose considerable risks to the City's forecast for economically sensitive taxes.

III. Fiscal Year 1998 Surplus

The City projects a surplus of nearly $2.1 billion for fiscal year 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). These resources will be used to balance the FY 1999 budget ($1.6 billion); establish a reserve fund ($300 million) which would be used to narrow the FY 2000 budget gap if these resources are not needed to maintain FY 1999 budget balance and to retire high-interest debt ($215 million).(6)

Annual City Surpluses

As shown in Table 4, the major source of the FY 1998 surplus, like last year’s, is much-greater-than-anticipated tax revenue collections. 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. The securities industry posted its second consecutive year of record profits and hit an all-time high of $12.2 billion in 1997, with approximately $11 billion earned by the largest firms headquartered in New York City. This exceptional performance boosted securities bonuses by as much as 25 percent, resulting in bonus payments of about $12 billion. Combined with more than $11 billion in estimated resident capital gains realizations, collections of income- sensitive taxes recorded a substantial boost.

Besides higher tax revenues, other sources contributed to the FY 1998 surplus. They include $259 million from a surplus projected by the Board of Education; $250 million from overestimating prior years’ expenses; $156 million from reducing the general reserve to $44 million; $150 million from 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; and $115 million from lower debt service costs because interest rates and short-term borrowing were both less than anticipated.

Table 4

Major Sources of the Fiscal Year 1998 Budget Surplus

(millions)

Tax Revenues

$1,326

Overestimation of Prior Years’ Expenses

250

Board of Education

259

General Reserve

156

Unenacted Sales Tax Reduction

150

Debt Service

115

Other

106

Impact of State Budget

(283)

Sale of New York Coliseum

(200)

Agency Spending

(105)

Subtotal

1,774

FY 1998 Budget Stabilization Account

300

Total

$2,074

Data Source: N.Y.C. Office of Management and Budget.


These resources were partly offset by the adverse impact of last year’s State budget (SFY 1997-98); a delay in the sale of the New York Coliseum; and higher- than-anticipated agency spending, mostly in the uniformed agencies. Overall, City- funded spending is projected to rise by 6 percent in FY 1998 and staffing levels by 6,750 employees. While most of the growth in the work force comes from hiring additional teachers and child care workers, the increase represents a reversal of the trend for the last four years.

When aggregated, these factors produced almost $1.8 billion in unplanned resources. The City also drew down $300 million in unneeded funds it had deposited in the 1998 Budget Stabilization Reserve at the beginning of the year, bringing the FY 1998 surplus to nearly $2.1 billion. Our review indicates that the surplus could be higher by a net of about $25 million, due to even higher tax collections, partly offset by higher debt service costs.

IV. Fiscal Year 1999

The FY 1999 Plan has undergone significant change since the Mayor released his Executive Budget last April, largely as a result of this year’s tumultuous budget adoption process (see Table 5). In preparing the revised Plan, the City’s Office of Management and Budget has reflected the budget adopted by the City Council, actions proposed by the Mayor in response to the Council’s budget, and other unrelated developments.

For the first time under the 1989 Charter, the City Council adopted its own budget, even overriding the Mayor’s vetoes. The Council’s budget would restore some of the Mayor’s budget cuts, increase funding to targeted programs, retire additional high-interest debt, and reduce taxes even further than proposed by the Mayor. The Council rejected most of the tax cuts proposed by the Mayor, but it intends to implement a $221 million tax reduction program of its own. Most of the benefits to taxpayers would come from letting lapse the 12.5 percent temporary personal income tax surcharge that is scheduled to expire on December 31, 1998.

The City Council funded these actions by suggesting agency cost-reduction initiatives and by drawing down the FY 1999 Stabilization Reserve. At the last minute, however, the Mayor informed the City Council that he believed non-tax revenues, mostly unrestricted Federal and State assistance, would be $251 million less than forecast in his Executive Budget. To offset this shortfall, the Council drew down certain property tax reserves.

The Mayor intends to prevent implementation of the City Council’s initiative to retire high-interest debt and instead has proposed using those resources to increase the FY 1999 Stabilization Reserve to $465 million. The Plan assumes that these resources will not be needed in FY 1999 and have been used to reduce the FY 2000 budget gap.

The Mayor claims that the Council’s actions and those of the State now require $427 million in additional as yet unspecified cost-reduction actions. However, our review finds a potential budget surplus of $220 million, excluding $665 million in reserves. Tax revenues are likely to be significantly higher than projected by the City, there is the potential for savings from prior years’ expenses, and the Plan does not reflect savings from extraordinary FY 1998 investment earnings.

Table 5

Changes in the Four-year Financial Plan Since April

(millions)

City Council Actions

Increase Targeted Spending

$(204)

Retire High-interest Debt

(165)

Increase Tax Cuts

(45)

Increase Cost-reduction Initiatives

298

Draw Down Stabilization Reserve

116

Subtotal

- - -

Draw Down Property Tax Reserve

251

Total

251

Mayor’s Actions

Restore Property Tax Draw Down

(251)

Reestimate Federal Assistance

(75)

Cancel Council Debt Initiative

165

Enhance Stabilization Reserve

(165)

Rescind Council Cost-reduction Initiatives

(123)

Total

(449)

State Actions

Reestimate State Assistance

(176)

Increase Funding for Pension Fund Legislation

(125)

Other

72

Total

(229)

Net Change

$(427)

Data Source: N.Y.C. Office of Management and Budget.


A. Revenue Estimates

The City is projecting declines in most of its major revenue categories for FY 1999. Total revenues are forecast to decline to $34.2 billion in FY 1999, 3.8 percent less than the level projected for FY 1998. Lower Federal and State categorical aid contributes to this revenue decline.

City-fund Revenues

City-fund revenues, that portion of revenues that is either locally generated or consists of unrestricted Federal and State aid, is forecast to decline by 3.3 percent to $23 billion (see Graph 2). The decline reflects the City Council’s tax reduction program, and lower miscellaneous revenues and baseline tax collections. The City Council rejected the tax reduction program proposed by the Mayor and adopted one of its own. While the Council’s program was valued at $282 million, the State did not approve two initiatives, reducing the program’s value to $221 million in FY 1999. Most of the tax cuts come from allowing the 12.5 percent personal income tax surcharge to expire. In general, the forecast 1.5 percent decline in tax revenue reflects the City’s cautious outlook for the local economy in FY 1999.

Our review finds that revenues could exceed the City’s forecast by $375 million, due mostly to our higher estimate of tax revenues. Even with the additional revenue we anticipate, we are forecasting a slight decline of 0.1 percent in total tax revenue receipts in FY 1999, a still sizable slowdown from the 6 percent growth we expect for FY 1998.

1. Economic Assumptions

The City forecasts that economic growth will moderate in calendar year 1998, due to an easing in national economic growth and a less robust Wall Street. This follows a year in which the City posted its strongest performance in more than a decade. Real U.S. 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 City 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 will 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 appeared reasonable at the time the Executive Budget was released in April, especially in the context of weak first quarter corporate profits growth and a rising trade deficit with Asia.(7) However, more than half of liability year 1998 has now passed, and the City’s economy continues to expand. The City has gained 86,000 private jobs over the last twelve months, primarily in business services and retail trade. This represents a 3 percent gain, the fastest rate of increase in four decades. Wall Street’s performance remains strong, with the Standard & Poor’s 500 stock index up by 22 percent through July 20th. Securities profits for the first quarter were $3.3 billion, while profits for the first eight firms to report for the second quarter already total $3.8 billion. Unless the Federal Reserve Open Market Committee increases interest rates considerably to slow national growth and contain inflationary pressures, or there are further reverberations from the East Asian economic crisis, the City may be understating its economic outlook and its revenue forecast.

Given the City’s current economic forecast, tax revenues are projected to reach $20 billion, a decline of 1.5 percent from expected FY 1998 levels. Although the property tax is expected to increase slightly, it is more than offset by a forecasted decline in nonproperty taxes, resulting from lower Wall Street-derived profits and income growth and the expiration of the 12.5 percent personal income tax surcharge. This would be the first decline in nonproperty tax revenues since 1995, and follows annual average growth of 8.7 percent for the last three years.

2. Real Property Tax

Real property taxes in the Plan are forecast to be $7.4 billion in FY 1999, an increase of $170 million, or 2.4 percent, from FY 1998. This forecast is $11 million more than forecast in the Executive Budget, largely reflecting a lower estimate of property tax exemptions for the State’s “School TAx Relief” (STAR) program. As part of the STAR program, the additional real property tax revenues will be offset by less State aid for education.

Our analysis shows that real property tax revenues could be $55 million higher than the forecast in the Plan. The Plan does not reflect the anticipated sale of $45 million of real property tax liens that were originally scheduled for FY 1998. It is within the City’s discretion to proceed with the sale. However, given the apparent effectiveness of prior lien sales as an enforcement tool, it seems likely that the postponed sale could take place in FY 1999. An additional $10 million could be realized from a decline in property tax exemptions related to the City’s Commercial Revitalization Program, which was designed to encourage the conversion of obsolete commercial buildings to residential use, primarily in lower Manhattan. Activity in this program has been less than expected as result of a pickup in demand for commercial office space.

The State Constitution allows the City to levy real property taxes to pay debt service on its general obligation bonds, plus a limited amount for operating expenses. Initially, the City had planned to transfer the entire FY 1998 surplus ($2.1 billion) by prepaying FY 1999 general obligation debt service. However, this would have brought the FY 1999 real property tax levy that is dedicated for operating expenses to 97 percent, or within $200 million, of the Constitutional limit, potentially limiting the City’s flexibility to respond to adverse budget conditions. To avoid this situation, the City has prepaid other FY 1999 expenses, including all of the Municipal Assistance Corporation funding requirement ($469 million). Thus, when the FY 1999 tax fixing resolution is amended, the operating budget margin will stand at 88 percent of the Constitutional limit, leaving a margin of about $850 million.

The City is supporting a bill that would amend the State Real Property Tax Law to exclude it from a provision enacted in 1997 that permits property owners throughout the State to use actual sales of real property as evidence of whether an assessment is unequal. From 1986 to the passage of the 1997 amendment, State law had precluded the use of sales data in proving assessment inequity as actual sales were not deemed to be representative of all properties on the tax roll. In addition to other methods permitted by State law to prove inequality, under this bill evidence of inequality in New York City could be determined by the percentage of full value at which property in the same class and on the same roll was assessed, as established and published by the City’s Finance Commissioner. This bill was passed by the Senate in the last legislative session, but failed to win approval in the Assembly. If not enacted, City officials feel that the City’s liability in tax certiorari cases could increase substantially over current estimates. {short description of image}

3. Nonproperty Taxes

The nonproperty taxes, those levied on consumption, incomes and businesses, are projected to total $12.7 billion, a decline of 3.6 percent, in FY 1999. A decline in personal income tax collections, along with sharp declines in the business taxes, accounts for the overall slowing in nonproperty tax revenues (see Graph 3).

Personal income tax collections are forecast to decline by $363 million, or 7.1 percent, to $4.7 billion in FY 1999, following double-digit average growth over the last three years.(8) The expiration of the 12.5 percent personal income tax surcharge will reduce collections by $201 million. However, the City’s expectation of slower income growth, primarily due to lower year-end bonuses from Wall Street firms, also has an impact on collections.

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 11 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, the City anticipates increased credits to corporations that overpaid taxes in prior years.

Sales tax collections are projected to total $3.2 billion in FY 1999, an increase of 4 percent compared with the expected FY 1998 level. The real property transfer and mortgage recording taxes are expected to yield $555 million, an increase of 4.9 percent from FY 1998 levels. These taxes will benefit from increased residential and commercial activity in the local real estate market.

In addition to the potential for property tax revenues to be higher by $55 million, other tax revenues could exceed the City’s expectations by $300 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 $125 million. In addition, the City’s personal income tax collections could be $200 million greater than expected. The City’s revenue estimate does not appear to accurately reflect the wage growth it has forecast, and it appears that estimated and final payments have yet to catch up with the recent growth in capital gains realizations. 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.

4. Miscellaneous Revenues

Miscellaneous revenues, net of water and sewer fees which are offset by expenditures, are forecast at $2.5 billion, a reduction of $52 million from the April Plan. The lower estimate stems primarily from eliminating the revenues expected from the State over a law suit involving Federal payments for foster care services ($47 million). Miscellaneous revenues are projected to be $262 million less than in FY 1998. This forecast is due to a lower projection of revenues in FY 1999 from one- time resources such as asset sales ($94 million), lower interest earnings on investments ($63 million), and reduced airport rents ($20 million) and resources from the sale of taxi medallions ($35 million). Our analysis shows however, that interest income could be $20 million higher than projected in the Plan because of greater interest earnings on invested cash balances.

B. Expenditure Estimates

Expenditures, including those reimbursed by the Federal and State governments, are projected to total $34.2 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 $23.1 billion. This would suggest a 2.8 percent reduction in City-funded spending compared with the prior year’s level.

Projected spending would grow by $1.6 billion, or 6.8 percent, after adjusting for surplus transfers (see Graph 4). Under Generally Accepted Accounting Principles (GAAP), 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.

City-Funded Expenditures

As shown in Table 6, City- funded spending would rise by $1.4 billion, or 6.1 percent, even excluding the general reserve and assuming unspecified savings of $402 million. Such a rate of growth would be more than double the projected local inflation rate. The growth is driven largely by costs associated with new labor agreements and higher spending for mayoral agencies, education, and debt service. Most of the agency spending is in the areas of social services, reflecting losses in anticipated unrestricted Federal and State aid, and criminal justice. In the aggregate, these costs would be partly offset by anticipated savings from initiatives that comprise the FY 1999 gap-closing program and as yet unspecified actions.

Table 6

Major Factors Contributing to the Growth

in Fiscal Year 1999 Spending

(millions)

Agency Spending

$ (704)

Labor Costs

(610)

Board of Education

(426)

Debt Service

(174)

Medical Insurance

(143)

Cost-reduction Initiatives

563

Unspecified Savings

402

All other

(315)

Total

$(1,407)

Data Source: N.Y.C. Office of Management and Budget.


The FY 1999 gap-closing program has a total value of $645 million, of which $563 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, requiring agencies to self-fund managerial pay raises, and by eliminating funding for the City Council’s Emerging Industries Fund and the City’s subsidy to the Staten Island Rapid Transit Operating Authority. The Mayor had proposed reducing subsidies to libraries and cultural institutions, but the City Council rejected this proposal, as well as some others. Excluding the proposed freeze in health insurance rates that the City has recently rescinded, the recurring value of the gap-closing program would decline to $300 million annually. This is due largely to the City’s reliance on actions that would produce one-time savings of $177 million in FY 1999, or 27 percent of the program’s total value in that year.

As shown in Graph 5, nearly 60 percent of the City-fund budFY 1999 Expendituresget is allocated to health and social services, education, and criminal justice. Debt service accounts for another 14 percent, while the remaining 27 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 finds that FY 1999 expenditures could be higher by $180 million, largely because the Mayor has not yet specified how he plans to meet a cost- reduction target of $402 million. In addition, the Plan assumes a freeze in health insurance premiums, but the City has recently agreed to fund a 5 percent increase at a cost of $58 million. These costs could be partly offset by potential savings of $280 million from lower prior years’ expenses ($200 million), and lower pension ($60 million) and debt service costs ($30 million).

1. Personnel Costs

City-funded personal service costs are projected to grow by 7 percent, or $833 million, to $12.7 billion. The increase stems largely from the cost of current labor agreements, which grows by over $600 million in FY 1999 or more than double the FY 1998 cost. The balance is due to the cost of new education initiatives, State pension initiatives, and expanding the City's drug elimination program, partly offset by anticipated savings from certain cost reduction initiatives and extraordinary pension fund investment earnings.

Uniformed Agency Overtime Costs

Overtime costs in the uniformed agencies are projected to total $303 million in FY 1999, or about $40 million less than the FY 1998 forecast. We believe such costs could be higher by $25 million annually because of unspecified cost-reduction initiatives and the unlikelihood that the City will be able to further reduce arrest processing times as assumed in the Plan. Overtime costs could exceed the Plan estimate for FY 2002 by an additional $25 million because of unspecified cost- reduction initiatives.

Labor 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 employees who have not yet reached agreement with the City will accept wage increases patterned after 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 offered certain police officers performance-based payments.

Staffing Levels

After increasing by about 6,750 employees during FY 1998, City-funded staffing levels are projected to grow by another 900 employees during FY 1999 to about 208,300 employees (see Graph 6). However, the City will continue its efforts to reallocate personnel resources among agencies. The City intends to add about 2,220 criminal justice employees, but it plans to eliminate about 1,100 social service positions. Since FY 1990, the police force and the number of teachers have grown by 13,500 employees, while 32,000 positions were eliminated in other agencies.Personnel Levels 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 the Health and Hospitals Corporation (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. Nevertheless, the court has agreed to hear the union’s arguments, but HHC is still seeking to have the case dismissed.

Fringe Benefits

City-funded fringe benefit expenses are projected to grow by $100 million in FY 1999 to nearly $2.9 billion. Costs associated with new wage agreements account for nearly 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. Between fiscal years 1989 and 1995 insurance premiums grew at an average annual rate of 12 percent, but premiums have been frozen for the last three years under an agreement between the City, municipal unions and HIP. The Plan assumes that the City would be successful in imposing a unilateral freeze for FY 1999, but the City has subsequently agreed to fund a 5 percent increase at a cost of $58 million.

Furthermore, Workers’ Compensation costs could be $15 million less than assumed in the Plan for FY 1999. The Plan assumes that these costs will grow by 30 percent in FY 1999, to about $90 million, but we believe that they will rise by only 7 percent based on historical trends. We also believe that these costs will grow more slowly than assumed in the Plan in subsequent years.

Pension Contributions

After rising during the 1980s and peaking in FY 1988, total-fund pension costs (incluPension Contributionsding Federal and State funding) have declined and remained stable at about $1.4 billion (see Graph 7). There also has been a dramatic reduction when measured as a percent of salary and wage costs, declining from 33 percent in FY 1982 to 12 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 over the past decade.

The Plan reflects the cost of pension supplementation and other pension-related initiatives recently enacted into law by the State. It assumes that the City Council will choose to begin supplementing retiree benefits in September 1998, rather than July 1999 as permitted under the legislation. These changes will cost $125 million in FY 1999 and about $150 million annually in subsequent years. However, the Plan does not reflect the impact of extraordinary FY 1998 pension fund investment earnings that could reduce City pension contributions by $60 million in FY 1999, rising to about $360 million by FY 2002 as the gains are phased in.

Some of these resources may be needed to fund potential future 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.(9) 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.

2. Board of Education

The Plan allocates $10.6 billion to the Board of Education (including resources for pension and debt service costs) which is about $1 billion more than projected for FY 1998. Education funding 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. However, the Governor vetoed funding for a State program that had supplemented teachers’ salaries. Unless alternative resources are identified, the Board has indicated that it would reallocate resources that are currently dedicated for instructional services to offset the impact of the Governor’s veto.

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 should identify its capital needs and funding requirements.

3. Public Assistance

The Plan assumes that the Public Assistance caseload will decline by 45,000 persons during FY 1999. Such a reduction would bring the caseload down to 718,000, 443,000 fewer than the all-time peak level in March 1995. Similarly, City-funded spending for this program is projected to decline by Public Assistance Expenditures14 percent to $431 million. This would be less than half the amount spent in FY 1994 (see Graph 8) 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 49,000 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 Social Services Commissioner 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 does not reflect the impact of welfare recipients who will have met the five-year lifetime cap on Federal welfare benefits. Under State welfare reform, all public assistance recipients who become ineligible for Federal benefits will receive benefits through the State Safety Net Assistance program (SNA), for which the State and City each pay half. Based on the most recent data available, 30 percent of the public assistance caseload, or 127,000 recipients, could lose Federal benefits by FY 2002. The City’s share of providing SNA benefits could total $45 million in FY 2002 and up to $120 million annually thereafter.

4. Services to Children

The City expects to spend nearly $650 million in City funds ($2 billion in total funds) in FY 1999 on child care, early childhood education, and the care of abused and neglected children. This represents an increase of about $100 million in City funding over the level forecast for FY 1998. These additional resources are needed to offset a loss in Federal and State funding, and to provide about 3,000 additional child care slots.

As discussed in a separate report,(10) 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 as 60,000 additional children will require services by December 1998. Providing services to these children could cost between $83 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.

5. Medicaid

Medicaid Expenditures City-funded Medicaid expenditures are projected to total $2.8 billion, only $55 million, or 2 percent, more than last year's level (see Graph 9). 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, after adjusting for the transfer of actual and projected surplus funds and including debt service costs of Transitional Finance Authority (TFA) bonds, is forecast to total $3.3 billion in FY 1999, or 4 percent more than FY 1998. This limited growth is due primarily to actions that reduced FY 1999 debt service costs including savings from City bond refundings and a decrease in seasonal borrowing costs. Our review finds that debt service costs could be $30 million less than shown in the Plan due to savings from recent bond refundings.

V. Fiscal Years 2000 Through 2002

The June Plan shows budget gaps of $2.3 billion for FY 2000, $3.1 billion for FY 2001, and $2.7 billion for FY 2002. Both in absolute terms and when measured as a percent of City-fund revenues, these are among the largest gaps projected by the City at this point in the financial planning process. The gaps represent 10 percent of City-fund revenues in FY 2000, 13.5 percent in FY 2001, and 11.3 percent in FY 2002. As discussed below, these estimates represent a significant step backwards since the April Plan in addressing the need for the City to bring recurring revenues in line with projected spending.

Our review also finds that the out-year budget gaps could be larger than those projected by the City by $758 million in FY 2000, $381 million in FY 2001, and $421 million in FY 2002. This would bring the gaps to $3 billion in FY 2000, $3.5 billion in FY 2001, and $3.1 billion in FY 2002.

In addition, the Plan does not make any provision for an economic downturn, which could reduce revenues and increase City pension contributions and the public assistance caseload. It also does not provide for wage increases after the expiration of current contracts.

New labor agreements that provide wage increases at the projected local inflation rate, without offsetting productivity gains, would widen the gaps to nearly $4.0 billion in fiscal years 2001 and 2002. The projected budget gaps could be reduced by about $400 million in FY 2001 and $550 million in FY 2002 if the certain elements of the Mayor’s proposed tax reduction program and his proposal to use operating budget resources to help fund new stadia fail to receive necessary approvals. In addition, the Mayor has asked agencies to get a head start in identifying potential cost reduction and productivity initiatives that would help narrow the out-year budget gaps.

A. The Projected Budget Gaps Have Grown Since April

Since April, the City’s estimates of the projected budget gaps have grown by $817 million in FY 2000 and about $1 billion in each of fiscal years 2001 and 2002, an increase of about 50 percent. As shown in Table 7, the higher gaps are due largely to tax cuts enacted by the City Council, including its decision to permit the temporary surcharge on personal income to expire on December 31, 1998; the Mayor’s reestimate of intergovernmental assistance; and the cost of pension-related initiatives approved by the State Legislature.

Table 7

Factors that Increased the Projected Budget Gaps

for Fiscal Years 2000 Through 2002

(millions)

FY 2000

FY 2001

FY 2002

April Gap Estimates

$(1,456)

$(2,148)

$(1,637)

Additional Tax Reductions

(438)

(515)

(593)

Reestimate of Intergovernmental Aid

(192)

(206)

(207)

State Pension Initiatives

(146)

(147)

(147)

Net Change in Agency Spending

(56)

(58)

(64)

Other

15

(33)

(34)

Subtotal

(817)

(960)

(1,045)

June Gap Estimates

$(2,273)

$(3,107)

$(2,682)

Data Source: N.Y.C. Office of Management and Budget.


B. Factors Behind the Projected Budget Gaps

Despite a balanced budget forecast for FY 1999, the City projects a $2.3 billion budget gap for FY 2000 in large part because it balanced the FY 1999 budget with $1.6 billion in non-recurring resources (i.e., a large prior year budget surplus). The gap between recurring revenues and expenditures widens in FY 2000 because the projected growth in real property and other taxes will be offset by a 66 percent growth in labor costs associated with current collective bargaining agreements ($750 million), a 10 percent increase in debt service costs, and the cost of additional tax cuts proposed by the Mayor ($128 million).

The FY 2000 gap would have been even larger if not for $865 million in one- time resources planned for that year. These include the FY 1999 Stabilization Account ($465 million), which the Plan assumes will not be needed in FY 1999 and can instead be used 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, and proceeds from asset sales ($50 million).

Although property and other tax collections are expected to continue to rise in FY 2001, the Plan shows the gap for that year growing by nearly $800 million to $3.1 billion. The larger gap reflects the absence of the resources in the FY 1999 Stabilization Account that will be used to narrow the FY 2000 gap; continued growth in debt service costs, which will equal nearly 18 percent of tax and offsetting revenues(11) by FY 2001; the rising value of both enacted and proposed tax reductions; and the impact of the Mayor’s proposal to divert some commercial rent tax proceeds to fund new stadia.

The Plan shows the budget gap declining to $2.7 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. Consequently, the City can reduce its contributions to the pension funds by a total of nearly $600 million between fiscal years 1998 and 2002. The Plan does not yet reflect the benefit of FY 1998 extraordinary investment earnings, but it also does not include funding to provide wage increases after the expiration of current labor agreements.

C. Revenue Trends

City-fund revenues are expected to exhibit little growth in FY 2000, when they are projected to rise by 0.3 percent to $23.1 billion. Growth is restrained by the implementation of the FY 2000 tax reduction program and the City’s expectations of subdued Wall Street profits. City-fund revenues would have declined in FY 2000 if not for an increase in miscellaneous revenues due to higher airport rents and sales of unidentified assets.

Growth in City-fund revenues is also subdued in FY 2001, with a forecast increase of 0.5 percent to $23.2 billion, reflecting the loss of one-time miscellaneous revenue resources and an increase in the value of the FY 2000 tax reductions. In FY 2002, City-fund revenues are projected to grow to $23.9 billion, an increase of 3.2 percent compared with the previous year.

Total taxes are forecast to decline by 0.1 percent to $20.1 billion in FY 2000. Growth resumes with a 3.4 percent increase in FY 2001, and by FY 2002 total taxes reach $21.6 billion, an increase of 4.1 percent. Collections of property taxes consistently outperform those of nonproperty taxes during these years. In the event the proposed tax reduction package is not enacted, total tax growth will average 3.5 percent annually between fiscal years 2000 and 2002.

Based upon our review, we find that revenues could be lower than the City expects by $400 million in FY 2000, $80 million in FY 2001, and $150 million in FY 2002. This reflects risks associated with anticipated airport lease payments, asset sales, offset by the potential for higher property tax receipts. (For a discussion of the risks associated with the City’s nonproperty tax revenue forecast, which are not included in the above assessment, see Chapter II, “Wall Street Dependency.”)

1. Real Property Tax

Real property tax revenues are forecast to total $7.6 billion in FY 2000, $8.0 billion in FY 2001 and $8.3 billion in FY 2002, an average annual increase of 4.1 percent.(12) Over this period, the real property tax levy, which is driven by growth in billable assessed values, is forecast to grow by an average annual rate of 4.4 percent. However, the revenues generated from this levy will grow at a slower pace due to annual increases in property tax abatements related to the State’s program (STAR) to shift some of the cost of education from localities to the State.

Assessed Values In FY 1999, billable assessed values increased by 2.6 percent, the second such year after four years of decline (see Graph 10). For the first time since FY 1993, billable assessments for commercial properties are higher than in the preceding year and assessed values for office properties grew for the first time since FY 1991. These increases reflect the fourth consecutive year of increases in actual assessed values with the growth rate in FY 1999 reaching nearly 5 percent.

State law requires that increases in actual assessed value for income producing properties be phased in over five years. The inventory of actual assessment increases yet to be phased in, referred to as the “pipeline,” amounted to $4.4 billion in FY 1999, up from $2.7 billion in FY 1998. To achieve the Plan growth rate in billable assessed values of 3.7 percent in FY 2000, our analysis shows that actual assessed values will need to grow by about 6.6 percent. This growth rate, which is reasonable in light of recent trends, will cause the pipeline to increase to between $6 billion and $7 billion in FY 2000. We estimate that because of the recent strength shown in the real estate market, particularly in office properties, similar growth in actual assessed values should continue over the remainder of the Plan period. Combined with a growing pipeline, this could result in additional real property tax revenues of about $60 million in FY 2001 and $120 million in FY 2002.

2. Nonproperty Taxes

As in its forecast for calendar year 1998, the City expects more moderate levels of growth in national and local economic activity for the balance of the Plan period when compared with that experienced in 1997. During calendar years 1999 through 2002, local employment growth is expected to average about 32,000 jobs annually, while City personal income increases at an average annual rate of 4 percent, and Wall Street profits average $5.2 billion a year. For the national economy, growth in U.S. GDP averages 2.3 percent annually during these years.

Based upon this economic outlook, coupled with planned tax reductions in fiscal years 2000 through 2002, nonproperty tax revenues are projected to decline by 2.2 percent to $12.4 billion in FY 2000, but then rise by 2.9 percent to $12.8 billion in FY 2001, and by 3.7 percent to $13.2 billion in FY 2002. These rates of growth are considerably slower than occurred in fiscal years 1996 through 1998.

As discussed earlier, Wall Street has been the predominant factor driving the City's economy and its economically sensitive nonproperty tax collections in the 1990s. While the City's forecast for the out years of the Plan is appropriately cautious, it does not reflect either a national recession or a major Wall Street correction. The possibility of either of these developments occurring over the Plan period poses considerable risks to the City’s forecast for nonproperty taxes.

3. Miscellaneous Revenues

Miscellaneous revenues, net of water and sewer fees that are offset by expenditures, are forecast to be $2 billion in FY 2000, $1.7 billion in FY 2001, and $1.9 billion in FY 2002. These forecasts are largely unchanged from those in the FY 1999 Executive Budget. The year-to-year differences stem from fluctuations in airport rental income, revenues expected from the sale of as yet unidentified assets, and refunds of prior year expenses.

The Plan assumes receipt of $365 million in FY 2000, $155 million in FY 2001, and $185 million in FY 2002 from the Port Authority of New York and New Jersey (Port Authority) for airport lease payments stemming from a claim of underpayment of prior years’ rents and from a renegotiated lease. Reportedly, the City has estimated that the total amount due from prior years’ rents is $810 million. The City’s claim is currently the subject of an arbitration hearing. In November 1996, the Federal Aviation Administration ruled that part of the City’s claim, the $220 million associated with a passenger surcharge, represents a separate revenue stream distinct from other airport revenues and beyond the control of state and local government. The ruling, however, is not binding on the arbitrators. Additionally, the City has suspended negotiations on a new lease and instead has proposed the creation of a New York Airport Authority in order to wrest control of the airports from the Port Authority. Uncertainties about the outcome of the arbitration and a new lease place at risk all but $15 million annually of these revenues, the amount the City expects to realize in FY 1999 under the terms of the current lease.

The City is forecasting revenues of $50 million in FY 2000 from the sale of assets and $100 million in FY 2002 from refunds of prior year expenses. Since the City has not provided details on assets that might be sold nor has it identified what expenses will be refunded, the receipt of these revenues is at risk.

4. Tax Reduction Program

The Plan contains a number of tax reduction initiatives scheduled to begin in FY 2000: the elimination of the City's entire sales tax on clothing and footwear items; personal income tax credits for dependent care and Subchapter S corporations that pay the unincorporated business tax; further reductions in the commercial rent tax rate; and extension of cooperative and condominium property tax relief. Together, these items are valued at $429 million in FY 2000, $604 million in FY 2001, and $666 million in FY 2002. All of these items were contained in the April Executive Budget, and are discussed in detail in an earlier report.(13)

As in the past, the components of the tax reduction package will come under debate, both in the City Council and in the State Legislature, which has to approve most changes to the City's tax code. However, two components of the tax program, with a combined value of $301 million in FY 2000, $410 million in FY 2001, and $424 million in FY 2002, are likely to be enacted. First, tax relief for cooperative and condominium owners has received wide support in the past and is likely to be extended. In addition, the State Legislature has already approved elimination of the State's sales tax on clothing and footwear items costing less than $110 beginning December 1, 1999, and given counties authority to eliminate the local share of the tax below this threshold if they so desire. Thus, only City Council approval is necessary to enact this reduction. Although the Mayor would like to eliminate the entire clothing sales tax, he has expressed support for the current State proposal.

The likelihood that the remaining proposals, valued at $128 million in FY 2000 and growing to $242 million in FY 2002, will be implemented is less certain. Although support exists for the personal income tax credit proposals, there is more resistance to the elimination of the sales tax on clothing items costing more than $110. If the entire FY 2000 program is enacted as proposed, the City would have reduced its annual tax revenues, in combination with reductions enacted since FY 1995, by nearly $2.1 billion by FY 2002. If not enacted, the revenues associated with these initiatives would be available for gap-closing purposes.

5. Sports Authority Financing

The Plan includes a proposal to create a Sports Authority that would finance the construction of new sports facilities, primarily new baseball stadia for the Yankees and the Mets, on a pay-as-you-go basis. Resources would be provided by delaying a proposed commercial rent tax reduction and instead dedicating a stream of revenues from this tax for these projects. This revenue stream would be available for between four and six years, with the first three years valued at $86 million in FY 2000, $200 million in FY 2001, and $308 million in FY 2002. The public financing of new sports facilities is currently undergoing intense debate. If the Authority is not enacted, the City has indicated it would prefer to return to its earlier proposal to eliminate the commercial rent tax. Alternatively, the resources could be made available for gap-closing purposes.

D. Expenditure Trends

City-funded spending is projected to grow by $1.4 billion in FY 2000, or 5.7 percent, to $26.1 billion. The growth rate is more than double the projected inflation rate for that year, reflecting higher costs for wage increases, debt service, and medical insurance for the indigent and municipal employees, partially offset by lower pension fund contributions. Current labor agreements will increase personal service costs by a total of 13 percent during fiscal years 1997 through 2000, and will cost nearly $2 billion annually beginning in FY 2000.

City-funded spending is projected to grow by another $656 million in FY 2001, or 2.5 percent, and $404 million in FY 2002, or 1.5 percent. These estimates reflect a continuation of prior year trends, with one important exception: the Plan does not include funding to provide wage increases after the expiration of current labor contracts. Wage increases at the projected local inflation rate would increase costs by $380 million in FY 2001 and $830 million in FY 2002.

Our review finds that City-funded spending could be higher by a net of $358 million in FY 2000, $301 million in FY 2001, and $271 million in FY 2002, due largely to the potential need to provide resources to the Health and Hospitals Corporation to fund labor costs (about $225 million), unfunded needs at the Board of Education ($183 million annually), and higher health insurance costs. Extraordinary FY 1998 pension fund investment earnings could produce offsetting savings of $150 million in FY 2000, $260 million in FY 2001, and $360 million in FY 2002.

1. Personnel Costs

City-funded personal service costs are forecast to grow by $703 million, or 5.6 percent, to $13.4 billion by FY 2000 due almost entirely to the cost of current labor agreements. Personal service costs are projected to rise by only 0.9 percent in FY 2001 and remain virtually level in FY 2002, because the Plan makes no provision for wage increases after the expiration of current labor agreements. Fringe benefit costs continue to increase during this period, but the higher costs will be offset by lower pension fund contributions.

The Plan includes funding to cover the cost of current labor agreements with employees of City agencies, but 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. Although the City rescinded this initiative for fiscal years 1997 and 1998 in response to union opposition, it plans to implement it in FY 1999. About 85 percent of the anticipated savings (about $225 million beginning in FY 2000) is attributable to HHC. HHC will not need these resources in FY 1999 since it already is projecting a sizeable surplus for that year, but it does forecast significant out-year budget gaps. Thus, we believe these savings are at risk in those years because the unions continue to oppose this initiative and HHC's challenging financial situation could require an infusion of City resources.

The Plan assumes that the City-funded work force will remain stable over this period, increasing by only 550 employees. As in prior years, the composition of the work force will continue to change. The City plans to add nearly 1,600 police officers in FY 2002, and to reduce the number of social service workers due to the declining welfare caseload and the continued privatization of the operation of homeless shelters. Staffing levels at the Board of Education are likely to be greater than shown in the Plan by about 800 employees because neither the City nor the Board has identified a recurring funding source for Project Read, but there is no reason to believe the program will be discontinued.

Fringe Benefits

City-funded fringe benefits are projected to total $3.1 billion in FY 2000, nearly 8 percent more than the level projected for FY 1999. One-third of the increase results from City contributions to union-administered welfare funds that were deferred in fiscal years 1996 and 1997.

Excluding the deferred payments, fringe benefit costs are projected to rise by 5 percent in FY 2000 and by an average of 4 percent over the following two years. The major factor driving the growth in these costs is projected increases in health insurance costs, which are projected to increase by 5 percent annually, because Medicare supplemental insurance premiums paid by the City on behalf of retirees will increase by 10 percent and that the number of retirees will grow by 3 percent.

The Plan assumes a freeze in basic health insurance premiums for FY 1999 and increases of only 2 percent in subsequent years. However, the City has recently agreed to fund a 5 percent increase in FY 1999 and the Health Insurance Plan of Greater New York, whose premium levels determine City contributions for all employees, projects future increases in basic premium rates of up to 8 percent annually. Annual rate increases of 5 percent, the level assumed in the January Plan, would increase costs by $97 million in FY 2000, $142 million in FY 2001, and $192 million in FY 2002.

Pension Costs

City-funded pension contributions are expected to decline by $355 million between fiscal years 1999 and 2002, even with the implementation of State- sponsored pension supplementation. In fact, the contribution planned for FY 2002 ($1.1 billion) would still be the lowest in more than twenty years. The continued reduction in these costs results from extraordinary pension fund investment gains during fiscal years 1996 and 1997 when earnings averaged nearly 20 percent annually, more than twice the assumed rate of return. Moreover, the Plan does not reflect extraordinary FY 1998 investment earnings that could produce significant savings of $150 million in FY 2000, $260 million in FY 2001, and $360 million in FY 2002. These savings could be reduced by the cost of recommendations that might be contained in an actuarial audit scheduled for release by the end of calendar year 1998 and pension costs associated with future labor agreements.

2. Board of Education

Spending at the Board of Education could exceed available resources by $188 million because there is likely to be pressure to continue funding for a remedial reading program called Project Read, and neither the City nor the Board has identified recurring resources to replace State funds used to supplement teachers’ salaries. Additional City funding may also be needed to comply with State-mandated school governance reform and to implement an optional State initiative to reduce class sizes in the early grades.

3. Debt Service

Debt service costs, after adjusting FY 1999 and FY 2000 for the transfer of projected surplus funds and including the debt service from TFA bonds, are forecast to total $3.7 billion in FY 2000, $4 billion in FY 2001, and $4.2 billion in FY 2002. This represents an average annual growth rate of 7.8 percent. The debt service burden (debt service as a percent of tax revenues and other revenues that offset debt service) in FY 2000 is nearly 18 percent and increases to 19 percent by FY 2002. The latter proportion represents the level of ongoing operating budget resources that will be needed to support the City’s long-term capital program. A lower Debt Service Burdenburden is forecast for subsequent years — 14.7 percent in FY 2000, increasing to 14.9 percent by FY 2002 (see Graph 11). The City’s burden is lower as it omits certain debt service and related revenue streams associated with City general obligation bonds issued for water and sewer, hospital and education purposes and, as noted above, the TFA. Since these revenues and expenditures directly affect the Financial Plan, we feel their inclusion presents a more complete picture of the City’s finances.

4. Public Assistance

Public Assistance costs are expected to continue to decline during the Plan period, reflecting the implementation of welfare reform. The Plan assumes that the caseload will decline to 678,000 persons by the end of FY 2000 and that the City’s share of funding this program will be $400 million, the lowest level in 18 years. The Plan assumes no further caseload reductions in subsequent years.

5. Medicaid

City-funded Medicaid expenditures are projected to total $2.9 billion in FY 2000, an increase of only $47 million or 1.7 percent, over the FY 1999 level. The Plan assumes a slightly higher average annual growth rate of 2.7 percent during fiscal years 2001 and 2002. Higher costs for hospitals, nursing homes and pharmaceuticals would be partially offset by a reduction in the number of persons eligible for Medicaid due to welfare reform and by annual savings of $35 million anticipated from mandatory managed care.

MA as % of City RevenuesBased on the City’s estimates, Medicaid spending as a percent of City-fund revenues will increase slightly in fiscal years 2000 and 2001 and then decrease in FY 2002 because the growth in City-fund revenues will outpace the projected growth in Medicaid costs in FY 2002 (see Graph 12).

6. Judgments and Claims

Settlements against the City are projected to cost $383 million in FY 1999, increasing to $470 million in FY 2002, nearly triple the amount spent in FY 1988. The City asserts that much of the actual and planned increases result from the widespread perception that, in tort litigation, the City is an easy target with deep pockets. Jury awards in excess of $1 million, many for medical malpractice claims against the Health and Hospitals Corporation, have grown significantly in recent years. In addition, judgments against the City for lead paint poisoning of children continue to increase. The City’s strategy continues to be the aggressive pursuit of early settlements in personal injury cases, a more active defense of tort cases, and improvements in its claims management process. The City continues to harbor the hope that the State Legislature will enact tort reforms that would impose monetary caps on personal injury awards, but City officials concede that there is little chance of success since several similar efforts failed in recent years.

7. Year 2000 Compliance

As discussed in an earlier report(14), New York City must meet the enormous challenge of repairing or replacing many of its computer systems to overcome the Year 2000 problem. If unsolved, this problem could result in the shutdown of vital systems, the disruption of governmental services, and the loss or corruption of date- sensitive data involving the year 2000 and beyond. The City has indicated that it is addressing the Year 2000 problem by reducing the number of data centers and mainframe computers through consolidation, and by replacing older systems that would be too costly and too time-consuming to fix.

The City plans to spend about $100 million in operating budget funds for consultant contracts and other costs, and has appropriated $185 million in capital funds to purchase hardware and software. City officials acknowledge that additional operating budget resources — perhaps as much as another $100 million — may be required for consultant contracts, but would not provide any details. City officials also acknowledge that the City cannot replace all of its systems before the Year 2000, but have repeatedly refused to identify the systems at risk or the potential disruption that might result. We are also concerned that the City has committed only $103 million of its $185 million capital appropriation for FY 1998 and has spent only $7 million. This suggests that the City may be falling behind schedule in the implementation of its plan.

The State Comptroller recently issued an audit report on the efforts of the Governor’s Task Force on Information Resource Management to coordinate the approach State entities are taking to resolve Year 2000 issues. In addition to a survey of all State agencies, the audit included an examination of actions underway at a selected group of State agencies. New York City Transit was found to be well- positioned to meet its target implementation dates. The State Comptroller is currently auditing the Health and Hospitals Corporation, the Board of Education, and City University to learn how these agencies are addressing the Year 2000 problem. The progress of City agencies towards compliance is being tracked by the City Comptroller who is currently auditing various City departments. Recent audits found that the Departments of Sanitation, Correction, Finance, and the Housing Authority were behind schedule and at risk of not meeting their Year 2000 deadlines.

VI. Capital Plan and Financing Program

The City continues to dedicate substantial resources to its capital program. Actual commitments over the FY 1990-through-FY 1997 period averaged nearly $4.2 billion annually. The current ten-year capital strategy, submitted in May 1997 and covering the FY 1998-through-FY 2007 period, totals $45 billion and is some $4.4 billion larger than the previous strategy prepared two years earlier.(15) The long- range plan is based on the need to maintain the existing infrastructure, adapt to economic change, enhance the quality of life, and improve productivity in the delivery of City services.

Capital PlanA revised capital plan was submitted by the City along with the FY 1999 Executive Budget, covering the period from FY 1998 through FY 2002. During this time, projected capital commitments total $26.8 billion with about half dedicated to meet the City’s infrastructure needs (see Graph 13).(16) These needs include $7.2 billion to expand and maintain the City’s water supply and waste water systems, $4.7 billion to improve bridges and highways, $900 million for the removal of solid waste, and $800 million for mass transit. Another $6.2 billion is targeted to expand educational seating capacity and to renovate and upgrade existing school buildings. The balance, $7.9 billion, is for other governmental operations such as housing, criminal justice facilities, and cultural institutions.

More than 60 percent of the capital program is expected to be funded with City general obligation bonds and revenue bonds issued by the New York City Transitional Finance Authority. The balance will be financed by revenue bonds

issued by the New York City Municipal Water Finance Authority ($6.9 billion), the State Dormitory Authority ($1.6 billion) for the court reconstruction program and certain hospital projects, and $2.2 billion from non-City sources, primarily Federal and State aid. The entire City-funded portion of the capital program will be funded with proceeds from debt issuances.

Some highlights of the five-year capital plan include:

  • Education: Half of the program ($3.1 billion) will be devoted to the replacement and rehabilitation of building components, while 30 percent ($1.8 billion) will be used to expand capacity.
  • Courts: The construction or major reconstruction of many courthouse facilities ($1.2 billion).
  • Environmental Protection: Continuing work on stages one and two of the third water tunnel ($828 million), and construction of a filtration plant at the Croton reservoir ($306 million).
  • Transportation: Reconstruction of the four East River bridges ($893 million).
  • Fire Department: The construction of a new training center ($50 million), and the purchase of emergency vehicles and equipment such as mobile radios and management information and control systems ($256 million).
  • Economic Development: The construction of various sport complexes in Brooklyn and Staten Island ($70 million), subsidies to assist in the construction of facilities to house certain commodity exchanges ($28 million), the conversion of the main Manhattan post office to a railroad station ($24 million), the construction of a new Whitehall Ferry terminal in Manhattan ($79 million), and improvements to the Brooklyn Army Terminal that is operated as an industrial park ($32 million).
  • Health and Hospitals Corporation: The reconstruction of Queens Hospital Center ($137 million) and Kings County Hospital Center ($90 million).
  • Cultural Institutions: Improvements to the New York Hall of Science in Queens ($30 million) and the Museum of the City of New York ($20 million).

Additionally, about $200 million to close the Fresh Kills landfill by December 31, 2001, has been transferred from the capital to the expense budget because of a ruling by the City Comptroller that prohibits the City from capitalizing certain costs related to closing this facility.

A. Debt Affordability and the Debt Limit

As required by the act that created the Transitional Finance Authority, the City submitted its annual debt affordability statement with the FY 1999 Executive Budget. In addition, the City, to comply with the TFA statute, has suggested proposals to increase its Constitutional debt limit.

The City’s statistical measures of debt affordability continue to show a high and rising debt burden over the FY 1998 through FY 2002 period. The level of outstanding debt, which includes debt of the City, the TFA and the Municipal Assistance Corporation, is forecast to rise from $33.4 billion in FY 1998 to $37.6 billion in FY 2002. Should the City’s population remain essentially unchanged, the debt load of each City resident would grow from its current level of $4,581 to $5,147 in FY 2002, or by 12 percent. Debt service as a percent of taxes, a commonly cited benchmark, is projected to rise from 15.8 percent in FY 1998 to 19.6 percent in FY 2002. Over this period, debt service is expected to grow by an average rate of nearly 7 percent each year while the projected average growth in tax revenues over this period is 1.4 percent annually, assuming achievement of the Mayor’s tax reduction program.

On a more positive note, most of the indicators of debt affordability over the FY 1998-through-FY 2002 period have improved during the past year. Contributing to this situation are reduced debt service costs stemming in part from incorporating lower interest rates into debt service projections, and lower near-term borrowing needs due to a reassessment of the pace at which capital contracts are liquidated. In addition, personal income and tax revenue forecasts are higher because of the current economic climate.

The debt statement continues to assert that debt affordability is a judgment made in balancing capital needs against other competing priorities funded through the City’s operating budget. We agree that the City has large and pressing capital needs. Moreover, there is no hard and fast rule to determine the affordable level of debt, and the importance of sustaining a capital program that attends to infrastructure needs, improves the quality of life, and enhances long-term economic potential cannot be minimized.

A major factor causing the current and projected high levels of debt and debt service is that the City has and will continue to finance virtually the entire City- funded capital program with debt. In our opinion, the City should consider, particularly in today’s environment, using additional surplus funds in the operating budget to retire outstanding debt or, alternatively, to fund capital projects on a pay- as-you-go basis. Both actions would produce recurring benefits and ease the debt burden. The removal of the Coliseum sale proceeds from the Plan is a positive step in this direction as the sale proceeds rather than the City’s limited bonding authority will now be used to fund transit capital projects.

The City has drafted two proposals to amend its Constitutional debt limit. In both the City clearly is asking for a limit well in excess of what it will need to support the current capital program and provide a reasonable cushion for unexpected developments. Should the City choose to use the additional debt issuing capacity, the resulting debt service burden would seriously strain the City’s ability to provide other essential expense budget services.

In our opinion, an amendment to the debt limit must adhere to the following principles:

  • It should balance the need to provide adequate capacity to meet long- term capital requirements against the need to place prudent and meaningful limits on City long-term debt obligations.
  • It must ultimately be affordable and should not give the City the capacity to significantly increase its debt burden above currently projected levels.
  • It should adequately reflect a more accurate measure of the economic capacity of the City to incur debt. Additional revenue sources are available to support debt service and a revised limit may appropriately reflect this.
  • It should better withstand swings in the business cycle by avoiding large annual fluctuations to allow for proper planning of the capital program. This office has previously documented major problems in the current methodology used to determine market values in calculating the debt limit.(17)

The TFA, as its name implies, is a temporary measure to allow the City over the short term to continue its capital plan and ultimately to amend, in some manner, the Constitution. A debt limit should be rooted in and closely connected to the ability of the City to generate revenues to pay down debt and not determined statutorily.

B. Capital Cash Flow

The City recently completed a review of its capital budget spending patterns that determines the timing of bond issuances needed to finance capital contracts. The review showed that, on average, contracts are being funded at a slower rate than previously forecast, about 14 percent slower. As a result, general obligation and TFA borrowing needs over the FY 1998-through-FY 2002 period have been reduced by about $1 billion, and debt service costs have been deferred to later years. Lower spending patterns have also enabled the City to increase commitments by $400 million during this Plan period without increasing debt service costs.

C. Wicks Law

The Capital plan assumes that the State’s Wick’s Law, which requires separate contracts for electrical, plumbing, and heating, ventilating and air conditioning work on construction projects costing more than $50,000, will be repealed. According to City estimates, this action will produce savings of $1.2 billion over the FY 1999-through-FY 2008 period, including $151 million in FY 1999. The City has proposed reinvesting $600 million of these savings into Board of Education capital projects. However, it is unlikely that any savings will be forthcoming as the Legislature continues to show no willingness to amend or repeal the Wicks Law. Thus, the City will need to find alternative financing sources.

D. Transportation Equity Act for the 21st Century

The $217 billion Transportation Equity Act for the 21st Century (TEA-21) will provide 40 percent more funding for transportation projects such as bridges, roads, subways, buses and ferries over the next six years than did its predecessor, the Intermodal Surface Transportation Efficiency Act of 1991. New York State expects to receive $8.1 billion for highway purposes and $6.7 billion for mass transit projects. Besides providing resources to help move the City’s mass transit closer to a state of good repair, TEA-21 also would provide funding for specific projects within New York City. These include a Manhattan tunnel connecting the Long Island Rail Road to Grand Central Terminal, reconstruction of the Staten Island ferry terminals and purchase of a new ferry, and conversion of the main post office in Manhattan into a railroad station.

E. Maintenance

As required by the Charter, the City recently submitted the Asset Condition and Maintenance Schedules for Major Portions of the City’s Capital Plant. The report identifies expense budget maintenance needs of $127 million for FY 1999 but points out that agencies intend to fund only $60 million, or about 47 percent, of these needs, an estimate comparable to last year’s but varying widely by agency. For example, maintenance needs at the Board of Education are projected to total $39 million — the same amount as last year — but the Board plans to allocate only $8 million, or 19 percent of its maintenance needs. The Departments of Parks and Recreation and Business Services plan to fund only about 10 percent of their needs. On the other hand, both the Departments of Transportation and Correction plan to fund three-quarters of such needs. We would urge the City, particularly in these times of large budget surpluses, to fully fund maintenance needs to extend the life of its assets and reduce future capital costs.


Contributors

H. Carl McCall

State Comptroller

Office of the State Deputy Comptroller for New York City

Kathleen Grimm

Assistant Deputy Comptroller

Bureau of Agency Analysis

Ken Bleiwas, Director

Mark Chernoff

Linda Goodman

John Griffith

Lawrence Kirschner

Manfred Pastrano

Mark Waldman

Craig Weinstein

Office Support

Gail Bessoir

JoAnne Corsi

Francine Cox

Terry Reed

Merlene Richardson

Ann M. Shea

Jesse Simmons

Bureau of Fiscal and

Economic Analysis

James Parrott, Director

Marcia Van Wagner, Asst. Director

Michael Brisson

Diane Diamond

Michael Gibbons

Peter Hatch

Michelle Holder

Robert Horowitz

Bob Kepple

Maureen Ryan

Sandy Stevenson

Other Contributors

Yves Denize, Counsel

Lava Thimmayya, Director

(1)The Plan includes a $200 million annual general reserve and assumes that $465 million set aside in the FY 1999 Budget Stabilization Account will not be needed in that year and instead can be used to narrow the FY 2000 budget gap. If not needed in FY 1999, these reserves would be added to our estimate of the FY 1999 surplus. Return

(2)We assume the City will extend the co-op/condo tax relief program and will participate in the State program to eliminate sales tax on clothing purchases under $110. However, it is uncertain whether other elements of the FY 2000 program will be enacted. Return

(3)The IMPLAN model, developed for the Federal government, utilizes detailed data on national and local inter-industry economic transactions to model the effects of regional economic changes. Return

(4)Many of the largest commercial banks have significant securities operations. When commercial banks are added to the securities industry, the finance sector directly accounts for half of the growth in personal and business income taxes over the FY 1992-1998 period. Return

(5)See our Report TM-1-99, "The East Asian Economic Crisis: A Background Report on the Implications for New York City," issued April 27, 1998. Return

(6)The Mayor intends to block a City Council initiative to retire $165 million in high-interest debt and the Plan assumes that these resources will be added to the FY 1999 Stabilization Account. Return

(7)See our Report TM-1-99, “The East Asian Economic Crisis: A Background Report on the Implications for New York City,” issued April 27, 1998. Return

(8)Personal income tax includes the portion of the tax that is dedicated to debt service payments for the Transitional Finance Authority. Return

(9)The State law which sets the actuarial assumed rate of return on pension fund investments is scheduled to expire on June 30, 2000. Return

(10)See our Report 4-98, “Child Care Services in New York City,” issued December 18, 1997. Return

(11)Offsetting revenues include water and sewer fees, payments from the Health and Hospitals Corporation, and State education building aid. Return

(12)These estimates assume that the State Legislature will extend the City’s program to reduce taxes for cooperative and condominium units beyond December 31, 1998. Return

(13)See our Report 1-99, “Review of the Fiscal Year 1999 Executive Budget for the City of New York,” issued May 19, 1998. Return

(14)See our Report 5-98, “Review of the New York City Financial Plan: Fiscal Years 1998 Through 2002," issued February 26, 1998. Return

(15)The City’s Ten-Year Capital Strategy is revised biannually and will be next published with the FY 2000 Executive Budget. Return

(16)The total incorporates $900 million in savings assuming repeal of the Wicks Law. Return

(17)See our Report No. 5-95, “Determining Special Equalization Ratios for Calculating Constitutional Tax and Debt Limits,” issued February 27, 1995. Return



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