New York City Economy Remains Strong for Now
City to Benefit from $7 Billion in Unanticipated Revenues
A resilient real estate market and extraordinary Wall Street profits and bonuses in 2006 continue to push tax collections far beyond New York City’s expectations. Over the course of this year and next, the City expects to realize $7 billion in unanticipated resources, according to a report issued today by State Comptroller Thomas P. DiNapoli.
“Wall Street and the continued strength of local real estate have combined to fuel record budget surpluses for the City,” DiNapoli said. “Recent developments in the financial markets, however, are a reminder of the potential volatility of the stock market and the City’s dependence on Wall Street.”
The City’s current four-year financial plan projects a surplus of $3.9 billion for FY 2007 — higher than last year’s record of $3.8 billion — and, compared with the estimates in the July 2006 financial plan, another $3.1 billion in unanticipated resources for FY 2008.
Last year the Mayor and the City Council prudently used the surplus and other unanticipated resources to improve the City’s fiscal position and to provide financial assistance to City-related public authorities that were experiencing financial difficulties. The Mayor has proposed using this year’s surplus and next year’s unanticipated resources in similarly prudent ways.
Specifically, the Mayor would use $3.8 billion to balance the FY 2008 budget; $1.4 billion to narrow the FY 2009 budget gap; $1 billion to reduce the City’s tax burden; $500 million to help pay down the unfunded cost of post-employment benefits (in addition to the $2 billion allocated for this purpose in fiscal years 2006 and 2007); and nearly $300 million to help leverage additional federal assistance to help balance the budget of the Health and Hospitals Corporation.
“The City is wisely using a portion of the tax revenue windfall to improve its financial position,” DiNapoli said. “In the past six months alone, the City has closed a $3.8 billion budget gap that had been projected for FY 2008 and has narrowed the FY 2009 budget gap from $4.6 billion to $2.6 billion, while at the same time proposing significant tax cuts.”
The report cautioned that closing future budget gaps may be more difficult than in recent years, particularly in the event of an economic slowdown, because nondiscretionary spending is projected to consume an increasing share of City fund revenues, growing from 37 percent in FY 2003 to nearly 49 percent by FY 2009. Debt service alone is projected to increase by 60 percent, to $6.1 billion, between fiscal years 2006 and 2011.
The report notes that, while it is too early to predict the implications of recent events in world financial markets on the City’s economy and budget, the City’s financial plan is premised on conservative economic and revenue assumptions, which would mitigate any adverse budgetary impact. In the short term, tax collections are still likely to be higher than forecasted by the City because the economy remains strong. These additional revenues could ease the impact of the Governor’s proposed budget and other budget risks identified by the State Comptroller in his review of the City’s four-year financial plan.
The strength of the City’s economy is demonstrated by the following factors:
- Wall Street profits reached $16.8 billion in 2006 — the second-best year on record — and bonuses totaled $23.9 billion — the highest ever.
- In 2006, preliminary data show the City added 54,200 jobs, and wages grew by an estimated 8.4 percent — the largest gains since 2000. The City’s unemployment rate declined to 5 percent in 2006 — the lowest level on record.
- Citywide real property market values have more than doubled since FY 2000. Consequently, real property tax collections are projected to grow from $12.5 billon in FY 2006 to $17.5 billion by FY 2011, reflecting the rapid growth in assessed property values.
- Vacancy rates on prime Midtown properties are nearing 6.5 percent, compared with 10 percent in 2004.
- The number of visitors traveling to the City set a new record in 2006, totaling 44 million, including 7 million visitors from overseas.
The City’s four-year financial plan also reflects the Mayor’s proposal to increase education funding by $2.2 billion over the next four years. The Governor is proposing to increase State education aid to New York City by $3.2 billion during the same period. The combined increase of $5.4 billion would be more than twice the minimum amount recently ordered by the New York State Court of Appeals, which concluded the longstanding Campaign for Fiscal Equity lawsuit.
“The commitments by the Mayor and the Governor to increase education funding to the City’s public schools by $5.4 billion over the next four years represents an historic opportunity,” DiNapoli said. “The next challenge is to ensure that these resources make a difference in the classroom and result in improved student achievement.”
For next year, the Governor has proposed increasing education aid to New York City by $637 million. His proposed budget, however, includes proposals that would adversely affect other parts of the City’s budget by $691 million over the course of this year and next. Most of the negative impact would come from the elimination of revenue-sharing payments to New York City, valued at $328 million annually beginning in FY 2007. To help the State balance its own budget and to mitigate the impact on the City’s budget, the Governor has proposed closing certain corporate tax loopholes, which are expected to generate $374 million for the City beginning next year.
If all of the Governor’s proposals are approved by the State Legislature, the City will realize a large increase in education aid next year, but other parts of the City’s budget will experience a net loss of $317 million over the course of this year and next.
Click here for a copy of the report or visit http://www.osc.state.ny.us/osdc/rpt12-2007.pdf.