New York City’s finances have remained resilient so far during the COVID-19 pandemic, largely as a result of tax revenue from the financial services sector, but the city will face some dire choices in 2021 if the federal government does not deliver direct aid to state and local governments soon, according to a budget analysis released today by State Comptroller Thomas P. DiNapoli.
“The city’s budget this year was aided by better-than-projected income and business taxes and low interest rates for refinanced debt. The city has so far staved off the need to issue debt to pay for operations by leaning on one-time measures, but a prolonged period of economic weakness would require recurring, and more difficult, solutions,” DiNapoli said. “Senator Schumer and the New York state congressional delegation deserve praise for passing a much-needed federal relief package. It provides an important down payment for the regional recovery, but the city, New York state and the Metropolitan Transportation Authority all need additional direct aid to make up revenue shortfalls caused by the COVID-19 pandemic.”
In November, the city released its modified financial plan, which projects that gross city product will grow 0.2 percent, an improvement from its previous projection of negative 12.9 percent. The city estimates a $632 million surplus for fiscal year (FY) 2021, which it expects to use to help balance the budget in FY 2022. However, payments deferred in FY 2021 will need to be paid in FY 2022, and are higher than the projected surplus. The city also projects sustained employment weakness and a drop in Wall Street profitability after what is likely to end as a record-breaking year.
The risks associated with a lack of federal aid are difficult to quantify, but would be significant. Additional federal relief for the city would minimize the need to raise taxes or cut services at a time of great economic fragility. A lack of federal aid to the state would also necessitate reductions in local assistance, which could have significant adverse impacts on the city’s budget.
DiNapoli’s report identifies budget risks of more than $2.1 billion annually from FY 2022 through FY 2024, mostly from the inclusion of recurring labor savings and optimistic projections for state aid for education funding. Risks associated with federal relief, state aid and the economic recovery could balloon recurring gaps to more than $5.5 billion annually.
The city intends to transfer its surplus and resources from its saving program to FY 2022 by prepaying expenses, such as debt service. Those funds would more than offset unplanned expenses in FY 2022 and would reduce the FY 2022 budget gap from $4.2 billion to $3.8 billion. Out-year gaps are virtually unchanged in the five months since the FY 2021 budget was adopted in June 2020.
Higher-than-anticipated business tax collections and personal income tax collections were the driving forces behind the increase in the revenue forecast for FY 2021. While the city revised its economic and employment forecast, it did not update its tax forecast for fiscal years 2022 through 2024.
The timeline for economic activity to resume at pre-pandemic levels also remains uncertain. After a record 10-year expansion that added 920,500 jobs, New York City lost 944,100 jobs in March and April 2020. While the city has added back 349,400 jobs through October, only 10,800 jobs were added in October, the weakest growth since May.
The city estimates job losses of 518,200 for 2020, which is in line with DiNapoli’s estimated losses of more than 500,000. The November budget update projects employment to return to 2019 levels by 2024.
The projected budget gaps in fiscal years 2022 through 2024, as a share of city fund revenues, average 4.6 percent, which are significantly smaller when compared to projected budget gaps in prior post-recession years. In addition, the budgets in these years include $1.25 billion in annual reserves (the budget in FY 2021 includes a general reserve of $100 million), which, if not needed, could be used to help narrow the gaps.
Since June, the city has maintained a balanced budget and has narrowed the FY 2022 budget gap, but is largely relying on nonrecurring resources to balance the FY 2021 budget, reducing its budgetary flexibility going forward. The FY 2022 gap is $801 million larger than projected a year ago and is the largest for an upcoming fiscal year at this point of the budget cycle since FY 2010.
The city has managed gaps of this magnitude in the past, but there are risks that could greatly increase their size. The city has not yet released a contingency plan to address these risks, deferring action until the release of the FY 2022 preliminary budget early next year.
DiNapoli’s office has identified budget risks of $642 million in FY 2021 and more than $2.1 billion in subsequent years, which could increase next years’ budget gap to $5.9 billion.
DiNapoli’s report also notes:
- The city’s unemployment rate in October was 13.2 percent, down from a peak of 20.3 percent in June. However, the rate remains at the highest level of any month prior to the pandemic, since tracking began in 1976.
- Securities industry profits grew by 82 percent in the first half of 2020 to $27.6 billion, the best first half since 2009. The city estimates securities profits for all of 2020 will be $33 billion, an increase of 18 percent, but the forecast declines in 2021 to $17 billion (a 49 percent drop).
- According to NYC & Company, the city’s tourism agency, tourism is projected to decline in 2020 by two-thirds from 2019 levels, and will not fully rebound until 2024.
- Residential vacancies are at historic highs, and office occupancy levels are significantly lagging behind the rest of the nation, with new construction permits down 28 percent through October.
- While vaccines have been developed, their full economic impact is unlikely to be realized until FY 2022, which begins July 1, 2021. In the meantime, the city still faces a resurgence of COVID-19, with winter weather and the holiday season likely to increase the spread.
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