Recent unemployment claims suggest that most of New York City’s job gains over the past decade have been lost due to the economic impacts of the coronavirus. The city now forecasts its economy will shrink by 12.9 percent in 2020, according to a report released today by New York State Comptroller Thomas P. DiNapoli. Tax collections are projected to fall next fiscal year for the first time since the Great Recession.
“New York City has been the epicenter of the novel coronavirus pandemic in the United States. The economic, social and budgetary impacts are unprecedented, and the loss of life has been unimaginable,” DiNapoli said. “The city faces a number of significant budget risks, including additional revenue losses, and without additional federal assistance, another round of state budget cuts. With so many uncertainties, and a recovery that may be slower than anticipated in the city’s latest plan, the city must be prepared to revise forecasts as new information becomes available. Difficult budget choices loom.”
On March 1, 2020, New York City reported its first confirmed case of COVID-19 and the caseload grew rapidly in the five boroughs and the surrounding areas. In response, Governor Cuomo joined other governors in ordering residents to adopt social distancing measures, called on residents to shelter in their homes and restricted the activities of most businesses. These steps slowed the spread of the disease but greatly restricted economic activity, bringing the longest and largest job expansion in the nation’s history to a halt.
New York City residents filed a total of 831,100 initial claims for unemployment benefits during the eight-week period ending May 2, according to the New York State Department of Labor. The large number of claims suggests that most of the 920,500 jobs added in the city over the past 10 years have been lost for the foreseeable future and many may not return even when the economy fully reopens.
In April, Mayor de Blasio released his executive budget for FY 2021 and a revised financial plan. The plan assumes that the gross city product will contract by 12.9 percent in 2020 (the largest decline since 1980), before rebounding by 12 percent in 2021.
The plan assumes employment will decline by a net of 563,000 jobs during the first three quarters of 2020 before growth resumes in the fourth quarter. While the city expects a rebound in 2021, job losses may be greater and the recovery slower than anticipated.
The city expects the securities industry, one of its main economic drivers, to lose $6.4 billion in 2020, its first loss since 2008. Tourism revenue has already plummeted as hotel occupancy (which averaged 87 percent during the prior decade) was just 15 percent during the last week of March 2020.
In response, the city lowered its city fund revenue forecast by $2.5 billion in FY 2020 and $5.4 billion in FY 2021 (a two-year revenue loss of nearly $7.9 billion). Tax collections are now projected to fall by 3.1 percent in FY 2021, the first decline since the Great Recession. In addition, city officials estimate that the enacted state budget will increase the city’s costs by $797 million over a two-year period.
Consequently, the city needed to close an $8.7 billion budget gap over the two-year period. To do so, it will draw down its reserves ($4 billion) and expand its citywide savings program ($2.7 billion), and it is counting on $2 billion in federal budget relief from recently approved federal initiatives.
Since the city is relying heavily on nonrecurring actions to balance the FY 2020 and FY 2021 budgets, the FY 2022 budget gap has more than doubled to $5 billion. The gaps for fiscal years 2023 and 2024 have also grown, reaching $4.5 billion and $4.9 billion, respectively.
The city continues to face significant budget risks. Its financial plan does not fully reflect the impact of the state budget beyond FY 2021. Although the city funded a $360 million shortfall in anticipated state education aid in FY 2021, it made no provision in subsequent years.
The Governor also has indicated that further actions will be needed to balance the state budget if federal aid doesn’t materialize. These actions include an $8.2 billion cut in aid to localities. Although not yet specified, a cut of this size would likely have a large adverse impact on New York City. The cuts could reduce funding for education and services for lower-income people.
In addition, the resumption of economic activity and the growth of tax revenue will depend on factors largely beyond the city’s control. These include the loosening of social distancing restrictions, changes in social and business behaviors, and the return of tourism. While the number of new COVID-19 cases is currently declining, many epidemiologists warn of a second wave of cases in the fall or during the annual flu season.
One year ago, the city had reserves of $7.3 billion for fiscal years 2020 and 2021, including $4.7 billion in the Retiree Health Benefits Trust. In January the city drew down its reserves by $1.1 billion, and it now plans to draw down an additional $4 billion. The city will reduce the Retiree Health Benefits Trust (by $2.6 billion over two fiscal years); eliminate the FY 2021 capital stabilization reserve ($250 million); and reduce next year’s general reserve from $1 billion to $100 million, the statutory minimum at the start of a fiscal year.
The city is entering a period of unprecedented uncertainty. Given the reduction in reserves and large budget risks, officials will need to prepare additional actions to ensure budget balance and to reduce the $5 billion budget gap in FY 2022.
Review of the Financial Plan of the City of New York
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