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June 3, 2003 


The State Legislature was instrumental in helping the City reduce an unprecedented budget gap for FY 2004 to a manageable level, but the Governor's threats to challenge the Legislature's actions add uncertainty to the City's FY 2004 budget, according to a report on the Mayor's Executive Budget issued today by State Comptroller Alan G. Hevesi.

"The State Legislature came through in a big way for the City, but the City is not yet out of the woods," Hevesi said. "The City still faces large budget gaps beginning in FY 2005, and the Mayor and the City Council, with assistance from the State and federal governments and the municipal unions, must find a responsible way to address the problem."

The City's fiscal condition deteriorated during FY 2003 as a result of continued weakness in the economy, which necessitated additional actions to maintain budget balance and to narrow an $8 billion budget gap for FY 2004-the largest budget gap since the fiscal crisis of the 1970s. Following City and State actions to raise taxes and reduce planned spending, and assistance from the federal government, New York City's financial plan now shows a $1 billion surplus for FY 2003. While there are about $500 million in risks in the FY 2004 budget, they are manageable and the City will likely end the year with a balanced budget.

The State Legislature restored most of the cuts in education and healthcare that were proposed by the Governor in January 2003, and funded them through an increase in State personal income and sales taxes. The State Legislature also approved additional City increases in personal income and sales taxes on City residents. According to the Comptroller's report, the recently enacted federal tax reduction program would more than offset increased State and City personal income taxes that target higher-income City residents. For example, a married couple with two dependents and an adjusted gross income of $200,000 will pay higher State and City personal income taxes of $2,375, but will save $4,318 thanks to the federal tax cuts and additional federal deductions from the additional State and City taxes they pay. Thus, the couple would have a net savings of $1,942. A married couple with two children and an adjusted gross income of $1 million would pay an additional $15,245 in State and City tax. However, they would save $40,638 from the federal government, and thus have a net savings of $25,393.

The Legislature's actions allowed the City to avoid draconian cuts to core municipal services-although the current plan does entail painful service reductions and layoffs. The April Plan assumes that the City-funded workforce, including both part-time and full-time employees, will be reduced by 13,854 employees between June 2002 and June 2004, including 5,100 layoffs. The Mayor has indicated that some of the layoffs and budget cuts could be rescinded if the municipal unions agree to provide $600 million in assistance. The City has rejected the unions' proposals, although the parties continue to negotiate.

While the Comptroller's Office identified $500 million in budget risks for FY 2004, it concluded that the City should be able to manage its FY 2004 budget given available reserves. A preliminary analysis of the actions taken thus far by the State indicates that the City fell about $200 million short of its goal of $2.7 billion from the State. However, the City is still negotiating an agreement with the Metropolitan Transportation Authority that could generate additional resources. Additional risks include retroactive airport lease payments from the Port Authority of New York and New Jersey ($200 million), higher police overtime costs ($100 million), a delay in the transfer of tax benefits to a private entity ($100 million), and higher Medicaid costs ($50 million). These risks would be partially offset in FY 2004 by the receipt of about $350 million in federal gap-closing assistance, $150 million more than anticipated in the City's budget.

Even after balancing the FY 2004 budget, the City will continue to face budgetary constraints for the foreseeable future. While City funded spending is projected to grow at an average annual rate of 5.8 percent during the Plan period, most of the growth is focused in areas largely outside the City's direct control.

  • Pension costs are projected to rise from $1.5 billion in FY 2003 to $4.8 billion by FY 2007, an annual rate of 33 percent, which reflects pension fund investment losses.
  • City debt service costs, despite deep cuts to the capital program, are projected to grow at an annual rate of 9.9 percent.
  • Health insurance costs for both municipal employees and the indigent continue to grow faster than revenues.

The Comptroller's report also found that although the out-year budget gaps have been greatly reduced they are still substantial, in part because the benefit from some of the actions authorized by the State Legislature, such as raising taxes, will be phased out over the next few years. The report estimates that the out-year gaps could total $3 billion in FY 2005 and about $4 billion in each of fiscal years 2006 and 2007. The size of the out-year budget gaps will also depend on the pace of the economic recovery and whether future wage increases for municipal employees will be funded entirely with productivity savings as assumed in the April Plan, a strategy the City has been unable to implement since the 1970s fiscal crisis.

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Click here for a copy of Comptroller Hevesi's Report


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