NYC's Financial Position Strengthens,
But Out-Year Gaps Remain a Challenge
New York City is on track to end FY 2006 with $5.5 billion in unplanned resources, according to a report released today on Mayor Bloomberg’s proposed executive budget for fiscal year 2007 by State Comptroller Alan G. Hevesi.
The Mayor has proposed using $2.1 billion to improve the City’s financial position and to provide supplemental financial assistance to the Health and Hospitals Corporation and the New York City Housing Authority. After taking these actions into account, the City forecasts a net surplus of $3.4 billion, which the Mayor proposes to use to balance the FY 2007 budget.
“The improvement in the City’s fiscal condition can be traced directly to the continued recovery of the local economy and sound management practices adopted by Mayor Bloomberg,” Hevesi said.
Most of the unplanned resources came from tax collections ($3.6 billion) and revised actuarial assumptions and methodologies ($924 million in FY 2006). The report notes that a significant portion of the resources came from sources that are unlikely to recur in the foreseeable future:
- Real estate transaction tax collections were $1.1 billion higher than projected by the City at the beginning of the fiscal year. (Real estate transaction tax collections exceeded the City’s forecasts by $1.3 billion last year, but the real estate boom is now showing signs of slowing.)
- Pension contributions are expected to be $1.5 billion less this year and next from the implementation of revised actuarial assumptions and methodologies, but these changes will increase future costs.
- Personal income tax collections were higher by $1.1 billion, driven by job gains and profits from stock market transactions.
- Business and all other tax revenue exceeded expectations by $1.4 billion.
The report finds that the pace of job growth accelerated during calendar year 2005 as the City added 49,100 jobs. (The City added 18,600 jobs in 2004.) These job gains helped push the unemployment rate down to 5.8 percent in calendar year 2005, the lowest level since before the recession in 2000. According to the report, the strength of the local economy is also evidenced by the real estate boom and record Wall Street bonuses. Market values for single family homes, for example, now average $524,400, an increase of 149 percent since 2000. Wall Street bonuses set a new record in 2005 of $21.5 billion, according to a report Comptroller Hevesi released in January 2006.
“Wall Street continues to be a very important factor in the City’s economic and fiscal resurgence. At the same time, the City should continue its efforts to diversify the economy and to stimulate economic development in the outer boroughs,” Hevesi said.
Among the steps proposed by the Mayor to strengthen the City’s financial position is the creation of a health benefits trust fund. New accounting rules require state and local governments to estimate the future liability of post-retirement benefits other than pensions, such as health insurance. Although the City is under no obligation to fund the liability, which could exceed $50 billion, the City intends to deposit $1 billion into the trust fund in each of fiscal years 2006 and 2007 to help pay down these liabilities. As an added benefit, the trust fund could also serve as a rainy day fund, although that is not its intended purpose.
“Using a portion of this year’s surplus to create a health benefits trust fund is a smart investment that will strengthen the City’s financial position,” said Hevesi.
The Mayor has also proposed prepaying $350 million in debt service that is not due until FY 2008 and deferring the receipt of $454 million in tobacco settlement revenue until FY 2008, when it will be needed. These actions are largely responsible for a 20 percent reduction in the FY 2008 budget gap from the level that had been projected one year ago. In addition, the City had previously allocated $200 million annually to fund the capital program on a pay-as-you-go basis, which reduces the need for borrowing. Despite these steps, the report found that debt service is the fastest-growing area of the budget, rising from $3.9 billion in FY 2006 to nearly $6 billion in FY 2010.
“Even though the City is borrowing for legitimate capital projects, debt service is projected to rise by 50 percent between 2006 and 2010, an astounding rate of growth,” Hevesi said.
The report also expressed concern about the size of the out-year budget gaps. The City’s four-year financial plan projects budget gaps of $3.9 billion in FY 2008 and $4.2 billion in FY 2009 because expenditures, especially debt service and fringe benefits, are projected to grow faster than recurring revenues. Although the Comptroller’s report found that revenue collections could be higher than the City’s forecasts, the additional revenue will not be sufficient to close the gaps.
One of the budget risks cited by the Comptroller is whether the current economic recovery will stall in response to higher interest rates, inflation, and energy costs. In addition, the federal government projects daunting budget deficits and efforts to close those gaps could adversely affect New York City. The report noted that the City could be called upon during the financial plan period to increase its funding for education as part of any resolution of the Campaign for Fiscal Equity lawsuit. The report also cited the potential for higher labor settlements than assumed in the City’s financial plan as another budget risk.
“The City’s fiscal condition has improved steadily over the past four years, but the out-year budget gaps remain substantial and the City still faces significant budget risks,” Hevesi concluded.
Click here for a copy of Comptroller Hevesi's report.