New York City, facing significant uncertainty in its economic and financial outlook, should develop a comprehensive plan to lay out its options before resorting to long-term borrowing to fund operations, according to a report released today by State Comptroller Thomas P. DiNapoli. DiNapoli urged the federal government to provide relief, as it has after each of the last two recessions.
“The scope and devastation of the COVID-19 pandemic has created a significant revenue loss for the city while driving up costs to deal with its effects,” DiNapoli said. “The challenges are certainly daunting, but are mitigated by reserves the city built up before the current recession. Past experience indicates the city would be well-served by developing and considering all options, in order to identify if and when deficit financing is truly needed. Washington, for its part, can, and must, help the city weather this colossal economic storm.”
The report found that the city’s initial budget gaps, inclusive of risks identified by DiNapoli, prior to the COVID-19 pandemic were much smaller than those prior to the Great Recession or 9/11. On average, the pre-pandemic gaps were under 5 percent, compared to 10 percent in the previous two recessions. DiNapoli’s report also found that reserve and surplus levels going into the pandemic were among the highest on record, as a result of robust economic and revenue growth and a commitment from the administration and city council to boost reserve levels after the Great Recession.
The city’s current projected budget gaps remain lower than the prior two recessions and officials anticipate a rebound in growth and revenues in fiscal years 2022 and 2023 with a return to normal economic activity. As a result of this anticipated rebound, DiNapoli projects the gaps to average 12 percent through FY 2023 before any actions are taken by the city to address the shortfalls, smaller than during the Great Recession and after 9/11. The report notes the recovery may be slower than anticipated and its pace will depend on numerous factors that may be out of the city’s control.
City employment has experienced its most severe decline on record, with a loss of 944,000 jobs in March and April. However, a return to prior pandemic employment levels is generally expected to be quicker than in past recessions. The city currently projects a return to pre-recession employment 33 months from the first quarter of 2020. An updated projection of the economic recovery, with a conservative approach to managing the uncertain outlook, is needed to understand the magnitude and duration of potential revenue shortfalls and should be a prerequisite for considering deficit financing as a revenue source, according to DiNapoli’s report.
New York City also needs clarity from the federal government. Past recessions highlight the role of federal assistance, not just in the worst years but in a managed ramping down of relief over multiple years, to bridge a return to pre-COVID economic activity. The level of federal support to New York state will also have considerable influence on what state aid will be available for the city. Federal funding bills in Congress, if passed, would enable further gap reductions through direct funds and reduce uncertainty associated with economic projections through additional funding to businesses and individuals.
DiNapoli’s report noted that in ordinary times, deficit financing should be treated as a true last resort after all others have been exhausted. However, during these extraordinary times the city’s overall economic competitiveness may be at stake. DiNapoli said in considering new revenues and cost savings, the city must not disturb its delicate economic recovery or allow quality of life to deteriorate. The challenge faced in this scenario calls for a cautious approach to leveraging nonrecurring resources and for careful evaluation of the decisions to bring the city to structural balance in a new environment.
Report
Lessons from Past Recessions: Borrowing for Operations
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