DiNapoli: Economic Downturn Could Increase City's Out-Year Budget Gaps
Despite the City’s quick response to an economic slowdown, the potential now exists for a more prolonged economic downturn than assumed in the City’s four-year financial plan, according to a report State Comptroller Thomas P. DiNapoli released today. DiNapoli cited the national economy, inflation and the securities industry as areas of concern.
“Mayor Bloomberg has responded quickly to the economic downturn by lowering the City’s revenue and economic forecasts and instructing municipal agencies to curtail planned spending,” DiNapoli said. “But additional downside economic risks have developed since the Mayor released the January Plan that could make closing out-year budget gaps even more challenging.”
According to the DiNapoli report, out-year budget gaps have widened since the start of the City’s fiscal year: by $1.2 billion in FY 2009 to reach $2.8 billion; by $1.9 billion in FY 2010 to reach nearly $5.3 billion; and by $2.3 billion in FY 2011 to reach $6.6 billion. The larger gaps reflect the impact of revised economic assumptions that lowered projected revenues, and higher costs associated with actual and anticipated labor contracts.
Although DiNapoli’s report indicates the FY 2008 surplus will exceed $4.1 billion, nearly $2.5 billion of those resources were generated in prior years and most of the current year gains came from one-time actions such as drawing down reserves and not economic activity as in recent years.
To balance the FY 2009 budget and to narrow the out-year gaps, the Mayor has proposed a program to eliminate the gap. The gap-closing program relies on surplus resources from FY 2008; agency actions (about $750 million annually); health insurance savings from negotiations with the municipal unions ($200 million annually); and assistance from the State and federal governments ($100 million annually).
Even assuming successful implementation of the gap-closing program, remaining budget gaps still exceed $4.2 billion in FY 2010 and will reach almost $5.6 billion by FY 2011. According to DiNapoli’s report, there is the potential for slippage in the proposed gap-closing program and for future further revenue shortfalls, which could exacerbate budget gaps even more. Gaps could total $834 million in FY 2009, $5 billion in FY 2010, and $6.6 billion in FY 2011 if these risks materialize.
The report notes that closing budget gaps of this magnitude would be challenging during an economic slowdown because the City is unlikely to generate large budget surpluses as it did in recent years. In addition, nondiscretionary spending, particularly debt service, is rising rapidly and will consume nearly half of City fund revenues by FY 2011. While the City has considerable margin in the current fiscal year and the FY 2009 budget situation remains manageable at this time, closing out-year gaps will require difficult choices.
DiNapoli’s report also notes:
- Compared with the City’s forecasts at the beginning of the fiscal year, combined collections from business and real estate transaction taxes are now projected to be $2.6 billion lower in FY 2009 than in FY 2007; personal income taxes are forecast to be lower by $690 million.
- The City’s financial plan assumes that the local inflation rate will slow from 2.9 percent in 2008 to 2 percent annually in later years, but increased worldwide demand for energy could lead to higher costs, fueling inflationary pressures. The local inflation rate, for example, grew at an annual rate of 3.7 percent in January 2008.
- Agency actions in the Mayor’s proposed gap-closing program would generate $543 million in FY 2008 and $885 million in FY 2009—the most since FY 2002. The Department of Education has enacted a mid-year cut of $180 million and will cut $324 million next year.
- The seven largest financial firms based in New York City lost $28.6 billion during the second half of 2007. Despite these losses, DiNapoli estimates that Wall Street bonuses fell by only 2 percent in 2007, to $33.2 billion, as firms sought to retain high-performing employees.
- Financial firms and banks wrote off more than $145 billion in bad debt during the second half of 2007. Further write-offs are anticipated in 2008, and losses have spread to bond insurers and other financial institutions. The January Plan assumes that the securities industry will lose 8,000 jobs.
- The City assumes that Wall Street profits will decline by 87 percent from $20.9 billion in 2006 to $2.8 billion in 2007—the lowest level since 1994. The City also assumes profits will rebound in 2008 to $9.1 billion, an assumption that may also be optimistic given the potential for additional write-offs during the first half of 2008.
- Prices for single-family homes are forecast to decline by 6.6 percent between 2007 and 2009, and co-op/condo prices are expected to decline by 8.3 percent. Despite the expected decline in home prices, property tax collections will grow by about $900 million annually as past increases in market values are phased in as required under State law.
- Thanks to the weakened dollar, real estate is attractive to foreign investors and the tourism and hotel industries have benefited. The number of visitors set a record of 46 million in 2007, driven by a 17 percent jump in the number of foreign tourists.
Click here for a copy of the report.