New York City ended its 2016 fiscal year on June 30 with an estimated surplus of $4 billion, but needs to be cautious with budgeting going forward amid slowing economic growth and tax collections, according to a report on the city’s financial plan released today by State Comptroller Thomas P. DiNapoli.
“New York City’s finances have been boosted by strong economic growth and conservative tax revenue forecasts in recent years,”DiNapoli said. “While the city’s economy is doing well, there are reasons to be concerned about the future, including a slowing economy here and abroad. Mayor de Blasio’s cautious approach to FY 2017 is warranted given the economic risks ahead. I commend the Mayor and the City Council for increasing the city’s reserves in recent years.”
Nationwide job growth during the first half of 2016 was the slowest of any year since 2010. The U.S. economy grew by 2.6 percent in 2015, but most economists expect growth to slow to less than 2 percent in 2016.
In addition, the growth in city tax collections slowed to 3.6 percent in FY 2016 after growing at an average rate of 6.9 percent during the five prior fiscal years. The city’s financial plan, updated in June, assumes that collections will grow 1.8 percent in FY 2017. While property tax collections continue to increase, non-property tax collections are expected to drop 0.8 percent in FY 2017.
Although job growth may exceed the city’s expectations in 2016, it is slowing after record gains over the past two years. The tourism and retail sectors have been affected by the stronger dollar and weakened global economies, and after two years of job growth, the securities industry has resumed downsizing. The city also expects securities industry profitability to decline for the fourth consecutive year.
The city’s FY 2017 budget is balanced, in large part thanks to the $4 billion surplus, the largest since FY 2008. Still, budget risks could increase the projected budget gaps by a net of more than $1 billion by FY 2020.
Those risks include:
- The city assumes employee overtime costs will decline by $180 million in FY 2017, but that estimate seems optimistic. Based on current trends, overtime could exceed the city’s estimates by $150 million annually during fiscal years 2017 through 2020.
- Pension fund investment earnings fell short of target in FY 2016, and as a result the city could be required to increase its planned pension contributions beginning in FY 2018 to make up for the shortfall.
- The city anticipates $731 million from the sale of taxi medallions during fiscal years 2018 through 2020, but the sale has been repeatedly delayed and market conditions remain unsettled.
- Sales tax receipts could be lower by a total of $400 million during fiscal years 2017 through 2019 as the state recoups savings that the city realized from refinancing bonds issued by the Sales Tax Asset Receivable Corp.
The report also found that the Health and Hospitals Corporation continues to face serious financial problems. While the city has increased its support to $2 billion (more than one-quarter of total receipts), the corporation still projects budget gaps that reach $1.8 billion by FY 2020. The corporation has proposed an ambitious gap-closing program, but it relies heavily on actions that have fallen short of targets in the past. If unsuccessful, the city could be called upon to further increase its support.
The city projects budget gaps of $2.8 billion in FY 2018, $2.9 billion in FY 2019 and $2.3 billion in FY 2020. DiNapoli’s report notes that the out-year budget gaps are relatively small as a share of city fund revenues (averaging 4.2 percent), and are manageable under current conditions. The budgets for those years also include a general reserve of $1 billion that could be used to narrow the gaps.
Additionally, the city continues to add to its reserves. In FY 2015 it raised the general reserve to a record level of $1 billion, and last year it created a $500 million Capital Stabilization Reserve.
The city has also replenished the Retiree Health Benefits Trust, which was drawn down by the prior administration to help the city navigate through the Great Recession. In FY 2016, the city deposited an additional $500 million, raising the balance to a record $3.9 billion.
DiNapoli’s report also notes that:
- City-funded spending is projected to grow by 4.2 percent annually during the financial plan period, more than twice the inflation rate;
- Debt service is projected to increase by 38 percent by FY 2020, reflecting a large increase in the capital program and the city’s conservative interest rate assumptions; and
- Despite the city’s efforts to slow the growth of health insurance costs, these costs are projected to rise by 34 percent.
Read the Review of the Financial Plan of the City of New York, or go to: http://www.osc.state.ny.us/osdc/rpt3-2017.pdf