New York City’s economy and finances are recovering, largely due to unprecedented federal economic stimulus for businesses and individuals, and direct federal relief to New York state, New York City and the Metropolitan Transportation Authority, according to a report released today by State Comptroller Thomas P. DiNapoli.

”Hope is building in New York City as vaccination rates climb, capacity limitations are rolled back and federal relief and stimulus funds make their way through the region,” DiNapoli said. “The city needs to carefully manage the significant relief it received to aid its recovery while also maintaining flexibility as it moves toward budgetary structural balance.”

In April, New York City released its $98.6 billion executive budget for the fiscal year beginning July 1, 2021 (FY 2022), including a $6 billion increase in spending from the preliminary financial plan released in January, mostly funded by federal relief.

The city received $15.2 billion in new federal aid since its January plan, but its cumulative budget gaps for the out-years have barely declined, from $12.8 billion in January to $11.6 billion today. In all, federal aid will make up 16 percent of FY 2021 revenues, twice the level of aid in FY 2019. More than two-thirds of federal relief will be used for spending that will not recur after the financial plan period, including COVID-19-related expenses and short-term measures to boost recovery.

However, the proposed FY 2022 budget would also rely on nonrecurring federal aid to pay for planned increases in spending and an expanding workforce, creating new challenges when the federal relief expires. By FY 2025, the city would incur more than $1 billion in recurring costs for proposed new services, including funding for 4,365 positions, that are paid for with nonrecurring resources.

The city will need a strong economic recovery for revenues to catch up to spending. Unemployment was 11.4 percent in April, down from the peak of 20 percent in May 2020, but still well behind the state (8.2 percent) and nation (6.1 percent), with major sectors such as tourism slow to return. The city expects to add 151,300 jobs in 2021, a decline of almost 40,000 jobs from projections in January. However, the city increased its out-year projections, and now expects employment to reach pre-pandemic levels by the first quarter of 2023.

Tourism is not expected to return to pre-pandemic levels before 2025, and businesses are expected to have some form of remote work going forward, potentially reducing the impact of the return of commuters. Highlighting the unevenness in the recovery, gross city product is expected to grow 5.1 percent in 2021 due to better than projected income and corporate tax collections in FY 2021, driven by less severe impacts among higher-income workers who could telecommute.

City Needs Budget Options and Flexibility to Face Long-Term Challenges

Tax collections are expected to grow at an average annual rate of 2.7 percent during fiscal years 2022 to 2025, after declining for the first time in 25 years in 2021. In comparison, city-funded spending is expected to average 4.8 percent growth through 2023 before slowing to 2.7 percent in 2024.

As the city seeks revenue growth while also managing new spending and maintaining budgetary flexibility, DiNapoli’s office encouraged efforts to seek out options for recurring savings to bring the plan into long-term structural alignment.

DiNapoli said the April plan leaves few resources uncommitted and set aside to respond to unexpected developments that may emerge from an uneven economic recovery. Recent increases to state income and corporate tax rates may also hinder growth.

The Comptroller’s report notes the city plans to provide a general reserve of $300 million in FY 2022, about 0.4 percent of city-funded spending, the second lowest of any year since FY 1982.

Contingency (general and capital) reserves are set to return to $1.25 billion annually beginning in FY 2023, which, if they are not needed for any other purpose, could reduce gaps to less than 4 percent of city-fund revenues, absent the budget risks.

DiNapoli’s report notes other FY 2022 budget impacts, including:

• The citywide savings program is now expected to generate savings of $3.9 billion over fiscal years 2021 and 2022, and an average of more than $1 billion annually in each subsequent year.
• New York state’s enacted budget provides $11.9 billion in state-funded school aid to the city in FY 2022, which is $300 million less than the city had anticipated in the January plan but $46 million more than assumed in April estimates. The state has also allocated to the city its share of federal relief for schools received since December 2020, which totals $7 billion in FY 2022.
• The city plans to use federal resources to avoid the need to achieve $1.27 billion in labor savings through FY 2022. While it still anticipates $1 billion in recurring labor savings in subsequent years, it has yet to reach a collective bargaining agreement with the municipal unions to generate recurring labor savings.
• The city lowered its forecast for sales and hotel collections by $473 million in FY 2021, nearly $1.1 billion in FY 2022 and smaller amounts in subsequent years.

Report
Review of the Financial Plan of the City of New York

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