Stronger-than-projected year-end budgetary results, fueled by extraordinary one-time federal relief, will mostly be used to fund new spending, with a smaller portion set aside to build up reserves, according to an analysis of New York City’s financial plan released today by State Comptroller Thomas P. DiNapoli.
“New York City faces economic uncertainty as it emerges from the pandemic,” DiNapoli said. “The city must balance the expansion of services now with the ability to fund these services in the future. Recurring spending should match recurring revenue so the city can close its gaps and build back reserves. Taking these actions should help mitigate future uncertainties so the city may have greater flexibility down the road.”
In June, the city adopted its $98.7 billion fiscal year (FY) 2022 budget. Excluding federal aid, the city will fund about $2 billion more in spending (excluding funds set aside for reserves) than was planned in the proposed executive budget in April. This is significantly higher than traditional spending increases at this point in the fiscal year.
Revenue Upside Boosts Spending in FY 2022
Since the release of the April financial plan, the city’s short-term financial condition has continued to improve due to better-than-projected revenues, reflecting continued strength in personal income and business tax collections in FY 2021 of $2.1 billion. These revenues come after $15.2 billion in one-time federal relief was incorporated into the city’s April financial plan.
The city used the unanticipated revenue, since April, to increase agency expenditures for FY 2022 by nearly $1.5 billion, more than half of which is spending for new needs ($466 million) and the temporary restoration of planned savings initiatives ($315 million). By FY 2025, the city will still incur more than $1 billion in recurring costs for proposed new services that are supported with nonrecurring federal resources.
City-funded spending growth will reach 7.9 percent in FY 2022 (excluding reserves) to reach $72.6 billion. The growth rate is projected to slow to 2.5 percent in the out-years (excluding labor savings and reserves), but city-funded spending will still grow to $78.3 billion by FY 2025 and does not include out-year funding for new recovery programs and restorations that may be popular and continue past the current budget year.
The choice of continuing these programs will fall to the next administration and the city council, as they consider their own initiatives to manage shifting service demands. DiNapoli has encouraged the city to use its federal relief for one-time recovery initiatives and to avoid new recurring spending without identifying resources to pay for it.
Reserves Grew But Remain Below Pandemic Levels
The city also made a first-of-its-kind $500 million deposit into its Revenue Stabilization Fund (i.e., a rainy-day fund), bringing the fund to $1 billion. It also maintained a general reserve of $300 million in FY 2022. In total, the city’s reserves stand at $5.1 billion when including the balance of $3.8 billion held in the Retiree Health Benefits Trust, higher than at the beginning of FY 2021 but still lower than prior to the pandemic ($6.1 billion).
The June financial plan assumes the city ended FY 2021 with an estimated surplus transfer of $6.1 billion, which will be used to prepay debt service in FY 2022, nearly $2.5 billion more than was anticipated in the April plan. The surplus transfer, which can act as a fiscal buffer, was the highest on record, and will need to be restored to provide future fiscal relief.
Budget Gaps Remain Stubborn Amid Uncertainty
While revenues have outperformed expectations over the past six months, projected budgetary gaps remain at approximately $4 billion per year beginning in FY 2023. Budget gaps may also be subject to more volatility than seen during the decade prior to the pandemic.
DiNapoli’s report notes that better-than-projected personal income tax revenues and lower pension expenses, which have been fueled by strong market returns in FY 2021 and are expected to offset future budget risks, are also not guaranteed going forward and could be a source of budgetary volatility.
Further spending volatility is also possible. The negotiation of the city’s expired labor contracts remains a question in the near future. Coupled with a target of $1 billion in labor savings beginning in FY 2023, the city faces significant risks to its budget that require the agreement of organized labor at a time when workers have had to adapt to a changing environment during the pandemic, including a recent increase in prices that could linger. Additionally, despite receiving $8 billion in federal aid for education, education-related spending risks still exceed $600 million in FY 2023, and near $1 billion in FY 2025.
In order to achieve long-term structural balance, the city should add to reserves, identify and closely track cost efficiencies and improve revenue collections. Setting aside resources to address unexpected fiscal challenges, and plan for new spending, will help keep the city attractive for residents and create economic opportunity for all.
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