In a report released today, New York State Comptroller Thomas P. DiNapoli urged New York City officials to better prepare for financial downturns by evaluating the city’s rainy-day reserve fund, establishing targets for how much should go into the fund each year and setting the conditions for withdrawals. His report found the city’s reserve policies are not as robust as other large U.S. cities, and with recent changes in state and local law enabling the use of these funds, called on the city to define how these resources are accumulated and used.

“Setting aside funds for unexpected events and ensuring they are available when needed are sound fiscal policies,” DiNapoli said. “Economic damage from the pandemic and changes to state and local laws on the use of reserves necessitates the need for clear policies for how the funds are deposited and spent. The next administration and the city council not only have an opportunity to build these reserves in the near term, but also to shape the city’s reserve policy for years to come.”

In early 2021, New York City officials established a rainy-day fund (also called the Revenue Stabilization Fund), which was authorized by changes in state law and the city charter. This move made available $499 million in resources that could not be used to balance the city’s budget prior to fiscal year (FY) 2020. Officials subsequently approved a deposit of $500 million in FY 2022, which will bring the total reserve to $1 billion.

Until the change in state law, the city effectively maintained a substantial budgetary cushion through other means, including prepaying future-year expenses, a necessary practice that nevertheless clouded actual spending in the presentation of the city’s budget.

The city’s plan to build up the fund so soon after its creation is prudent. However, the city’s planned deposit also revives past questions about the rationale for depositing funds, their purpose, and their eventual use and plans for replenishment, which the city still has not laid out in a written policy.

DiNapoli’s report contrasts New York City’s policies with the nine other largest U.S. cities, all of which have established the purpose of reserve policies and target achievement ranges, pushing them to build more significant unrestricted reserves over time. Cities including San Antonio, Dallas and San Jose report unrestricted fund balance as a share of general operating expenses at more than 20%. New York City’s unrestricted reserve levels were 0.6% at the end of FY 2021, however additional forms of budgetary cushion increase these levels to about 8% of expenditures.

The review found that other large cities typically:

• Publish a statement of the reserve policy on their websites;
• Define the purpose of the unrestricted general fund reserves, including each account (e.g., an emergency and contingency reserve account, and a stabilization account to accumulate excess resources during periods of economic expansion);
• Define the total amount of reserves to be set aside and the methodology to be used to determine if they are adequate;
• Make annual deposits required until the policy target is achieved, which creates fiscal certainty of the amount to be deposited into the fund each year;
• Provide a strong legislative check on the drawdown of emergency reserves; and
• Require replenishment of all resources drawn down from the reserves as soon as possible.

By comparison, New York City does not currently have a published policy defining the purposes of its rainy-day fund, a reserve target, or guidelines for how resources would be replenished after a drawdown.

The report notes that recent reviews by credit rating agencies suggest that governments that develop and maintain robust fiscal reserve policies may receive improved ratings, based on stronger fund balance, cash reserves, and financial management policies, which would lower the cost of borrowing.

DiNapoli recommended:

• Defining the purposes of the rainy-day fund, the conditions for withdrawal and the order in which accounts would be drawn; and earmarking a portion of reserves for emergencies;
• Establishing targets for the amount of money to be set aside in the fund and setting forth a mechanism for determining annual deposits.
• Modifying state law and the city charter, as needed, to require annual deposits into the fund until the targets are met;
• Requiring the mayor to provide a clear rationale for any amount withdrawn and requiring additional legislative approval to withdraw resources from any emergency account.
• Adding a provision which requires that amounts drawn down be replenished as soon as possible.

Some cities also have a policy to gradually increase their reserves by intercepting a portion of excess revenues they generate during periods of economic expansion.

Each year, the city realizes surplus resources generated after each budget adoption that are transferred to future fiscal years to prepay expenses (mostly debt service). DiNapoli estimates that if the city had been authorized to establish the fund in FY 2010 and deposited 1% of the surplus resources generated during each of the years since, it would have added an additional $452 million in its rainy-day fund.

Report
Strengthening New York City’s Rainy-Day Fund

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