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February 12, 2004



New York City will end FY 2004 with a surplus and should have little difficulty balancing its FY 2005 budget, according to a report on the January Financial Plan issued today by New York State Comptroller Alan G. Hevesi. A series of City, State and federal actions, combined with an improved local economy, helped the City close a $6.4 billion budget gap for FY 2004.

“New York City has overcome its most serious fiscal challenge since the 1970s, a challenge that was precipitated by the recession, stock market decline, and the terrorist attack on the World Trade Center. There is no question that New York City, with the assistance of the federal and State governments, has done a remarkable job in improving its finances,” Hevesi said.

More than half of the FY 2004 surplus comes from unanticipated tax revenues from increased Wall Street activity and real estate-related transactions. Although the securities industry is not a large employer, it accounts for a disproportionate share of wages paid in New York City, according to the report. In 2002, Wall Street employment accounted for less than 5 percent of the jobs in the City, but about 18.5 percent of total wages. The City’s budget proposal assumes Wall Street profits will total $15 billion in calendar year 2003. Though less than the $18.8 billion forecast in November, that figure is still more than twice the estimate last June. Additionally, Wall Street bonuses increased after two consecutive years of decline, and have given a boost to local income and tax revenues. Business tax collections rose by 28 percent compared to the same period last year, and real estate–related tax revenue rose by nearly 10 percent during the first half of FY 2004.

“Despite the progress made by the City during FY 2004, the out-year budget gaps remain substantial, even though they have been reduced to manageable levels,” Hevesi said. The City projects out-year budget gaps that range from $2 billion to $2.9 billion because the personal income tax surcharge and the increase in the sales tax that were approved by the State last year are scheduled to be phased out, and nondiscretionary spending, which includes pension contributions and Medicaid, is growing far faster than revenues.

The report points out that the gaps could be much larger than projected by the City because the January Plan assumes that future wage increases will be funded entirely with productivity improvements. Wage increases at the projected inflation rate without offsetting productivity improvements would increase costs by $1.4 billion in FY 2005 and by as much $2.8 billion by FY 2008.

The Comptroller’s report identifies $482 million in budget risks for FY 2004, $1.5 billion in FY 2005, and about $1.4 billion in FY 2006 through FY 2008, most of which is beyond the Mayor’s direct control. Even if these risks materialize, FY 2004 would still end with a surplus and the City would have little difficulty balancing the FY 2005 budget because the City could draw upon reserves and other resources. The out-year gaps, however, could range from $3.4 billion to $4.2 billion.

The largest budget risks include:

  • Refinancing of Municipal Assistance Corp. (MAC) debt. The Governor has proposed legislation that would allow MAC to refinance its own debt as an alternative to the refinancing initiative currently in litigation. The Governor’s proposal would reduce the cost to the State by $2 billion and would fund the debt service costs on the new bonds with State sales tax and other resources, rather than with proceeds from the Local Government Assistance Corporation, which is at the center of the litigation between the State and City. The Mayor has not stated publicly whether the City will accept the Governor’s proposal, which also requires the approval of the State Legislature. “While the Governor’s proposal is an improvement over the current refinancing initiative, both initiatives are fiscally imprudent because they are costly, entail borrowing for operating budget purposes, and stretch out fiscal crisis debt that is due in less than five years,” Hevesi said.
  • Receipt of additional federal and State gap-closing aid. The January Financial Plan anticipates the receipt of $700 million in additional budget-balancing assistance for FY 2005. The report estimates that the Governor’s proposed budget would provide the City with $362 million in gap-closing aid in FY 2005. This estimate includes the Governor’s recommendation to permanently remove the sales tax exemption on clothing and footwear except for four one-week “holidays” each year, a plan the Mayor opposes but would generate $152 million for the City in FY 2005. While the City is likely to receive an increase in State assistance for FY 2005, the amount and form is not yet known. Similarly, it is too soon to determine whether the City will receive the requested increase in federal aid.

“The City made impressive progress during FY 2004 toward recurring budget balance,” Hevesi said. “However, continued progress will depend on sustained economic improvement, an affordable labor agreement, and a reduction in the projected growth in nondiscretionary spending.”

Click here for a copy of the Comptroller's report.


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