New York City is projecting a $3.4 billion surplus for city fiscal year (FY) 2021 because of better-than-projected revenues from income and corporate taxes, debt service savings from lower interest rates and a deferral of labor costs to FY 2022, but the city will have to overcome major fiscal challenges in the years ahead as it recovers from the COVID-19 pandemic, according to a report released today by State Comptroller Thomas P. DiNapoli.
“New York City’s finances have certainly been strained by the pandemic, but strength in the securities industry and other sectors have boosted personal income and business tax revenues to soften the blow,” DiNapoli said. “However, the city has seen a steep decline in property values and that may take years to recover from. Unanticipated spending also presents risks that are likely to balloon the city’s budget gaps if left unchecked. Much-needed federal aid promised by the Biden administration and Congress should help the city find its economic footing and support a return to fiscal balance.”
In June 2020, the city adopted its FY 2021 budget running from July 1, 2020, to June 30, 2021. Budgetary balance in FY 2021 was enabled by one-shot actions, such as the use of retiree health reserves, and spending cuts. The city also included a then-unidentified $1 billion in labor savings. Significant federal relief played an important role in shoring up short-term finances, with the expectation that a sharp recovery would take hold by the fourth quarter of 2020.
The COVID-19 recession, however, has led to less severe impacts among higher-income workers employed in industries that let workers telecommute. While the gross city product is expected to decline by only 0.6 percent in 2020 as a result, the employment recovery tells a more troubled story.
The city’s unemployment rate in December was 11.4 percent, down from a peak of 20.3 percent in June. However, the rate remains at the highest pre-pandemic level since December 1992 and is well behind the national unemployment rate of 6.3 percent. At the same time, demand for social safety net services has shot up, with significant increases in unemployment compensation, Medicaid, and cash assistance rolls. Returning to the record employment levels reached just prior to the pandemic is likely to take years.
The $92.3 billion FY 2022 preliminary budget reflects these underlying shifts, with property tax collections, the city’s most significant revenue source at 46 percent of city-funded revenue, adjusted down by $2.5 billion. They are not expected to return to pre-pandemic levels until FY 2025.
The citywide savings program is expected to generate nearly $1.7 billion in FY 2021, including a one-time reimbursement of $212 million from NYC Health + Hospitals. The city was also able to lower pension contributions in FY 2021, and anticipates $421 million from overestimating its prior year’s expenses.
These budget actions are partially offset by more than $1.4 billion in agency needs in FY 2021, most of which is for costs associated with COVID-19 and for unplanned special education and transportation costs at the city’s Department of Education.
The city is relying on its anticipated FY 2021 surplus, its reserve funds, and the successful achievement of agency savings to balance the FY 2022 budget. The financial plan currently does not include significant revenue-raisers to close the FY 2022 gap.
In order to attain balance, the FY 2022 budget includes another $1 billion in labor savings that will have to be negotiated with the municipal unions, a budget risk. The city has also drawn down $1.15 billion in contingent reserves to attain balance in FY 2022.
The three-year city funds revenue shortfall for FY 2022 to FY 2024 is now $15.6 billion, an increase of $6.9 billion from the initial April 2020 projections. The city anticipates budget gaps will increase to more than $4 billion per year for the remainder of the financial plan, or just about $3 billion each year when budgetary reserves are taken into account, averaging 4.2 percent of city fund revenues.
DiNapoli’s report also notes recurring risks to out-year revenue and expense projections. There may be revenue risks ranging from $400 million to $820 million through FY 2024, mostly driven by slower-than-expected recovery of property and sales taxes.
Additionally, state education aid proposals could increase city expenses by $1 billion to $2 billion per year. In total, DiNapoli’s office has identified budget risks of $2.1 billion in FY 2022, $4.3 billion in FY 2022 and smaller amounts in subsequent years, which could increase the out-year budget gaps to average $7.8 billion annually, or 10.9 percent of city funds revenue. The city will need to close these gaps, but raising taxes significantly and cutting services could seriously impact the city’s recovery.
The city now anticipates $7 billion in relief funds from previously approved COVID-19 relief bills, about $5.1 billion of which will go towards costs associated with the pandemic, leaving about $1.9 billion for budget relief, about 13 percent of the three-year revenue shortfall.
DiNapoli’s report notes that legislation in Congress could net the city an estimated $5.6 billion. In February 2021, the President issued an executive order to waive Federal Emergency Management Agency‘s local share requirement, which could provide the city another $1 billion. This would help manage risks through FY 2022 and help reduce gaps in the out-years. It would also provide the city with time and resources to create a plan for long-term fiscal balance that targets its most critical needs, while benefiting from continued economic growth.
The state is also reviewing revenue-generating actions that would fall disproportionately on New York City’s tax base, including taxes on high incomes, financial transactions, and high-end real estate. The impact of any proposed tax increases remains uncertain, but care is needed to avoid slowing down the recovery.
Review of the Financial Plan of the City of New York
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