New York City is expecting to generate a surplus of $3.7 billion in fiscal year (FY) 2022 due to federal aid, better-than-projected tax revenues, and planned savings, according to a report released today by State Comptroller Thomas P. DiNapoli on the city’s February financial plan. The surplus could reach at least $4.5 billion if revenue and spending remain on their current tracks, according to DiNapoli’s analysis.
“Strong revenue, a rebound in property values, and the restart of the city’s Program to Eliminate the Gap (PEG) will help produce significant recurring savings in the next few years and should help buffer the city from economic and fiscal uncertainty in the near future,” DiNapoli said. “The plan also addresses $1.2 billion in recurring risks my office previously raised. Still, more can be done to prepare for unforeseen risks and to manage challenges as increased spending is spurred by inflation and other fiscal pressures. The city should also look at more ways to generate cost efficiencies and build its reserves to secure a smooth recovery and help ensure the city’s quality of life over the long-term.”
Continued improvement in the city’s economic recovery since the beginning of the fiscal year is expected to provide $1.7 billion in better-than-projected tax revenues in FY 2022, according to its February plan. The restart of the PEG, fueled by reducing vacancies for aggressive hiring targets, is projected to create $866 million in savings in the current year and more than $1.1 billion annually in subsequent years.
The city’s financial position gives it an opportunity to increase its prepayments of FY 2023 spending, enhance its rainy-day fund or retiree health benefits trust, or reduce future expenses in other ways. The city currently plans to use the entire surplus generated this fiscal year to prepay a portion of its FY 2023 debt service, and help it to balance the budget in that fiscal year.
The updated financial plan balances the budget for FY 2023 as the city moves closer to economic and budgetary normalcy. Federal aid will drop from 17% to 10% of projected annual spending, returning to its 10-year pre-pandemic average.
Property tax revenues are now expected to rise in FY 2023 by $1.5 billion from the prior year, an increase of $848 million from the November plan projection, with an anticipated increase in total property valuation of more than 8%. The projected valuation is expected to top the FY 2021 peak three years earlier than expected.
Budget gaps during FY 2024 through FY 2026 will average about $2.7 billion, an amount that has proven manageable historically. With the use of general and capital reserves, budget gaps will average about $1.4 billion, or less than 2% of city fund revenue, in line with pre-pandemic levels.
DiNapoli’s report notes that while the city’s current financial situation is much improved since the pandemic started, there are likely to be significant fiscal challenges ahead including possible impacts of geopolitical tensions and sanctions on Russia, inflation and the Federal Reserve’s response, financial and commodity market volatility, supply chain issues and the number of workers returning to the office.
Revenue growth is expected to average 2.4% from FY 2024 to FY 2026, but an unexpected decline would require at least a short-term fix using the city’s accumulated reserves or adjusting spending.
City-funded spending growth is expected to average 1.9% in the out-years, below expectations for inflation. This rate of growth would be affordable, but spending is unlikely to adhere to current projections.
DiNapoli identified several existing spending risks in the financial plan, including optimistic spending projections for overtime, Carter case spending (involving students with disabilities) and charter school spending. Combined with risks for funding MTA bus and paratransit support, the Public Health Corps initiative and several smaller programs, risks total more than $3 billion annually by FY 2026, with tax offsets bringing the net risk to about $2.1 billion.
Unforeseen risks to economic, revenue and spending projections and foreseeable, but difficult to quantify, concerns such as cost inflation and wage pressures are likely to emerge during the plan period as well.
DiNapoli’s report also found that the city anticipates $6.6 billion in reimbursements from FEMA over three years through FY 2022. As of February 2022, the city has collected or claimed $625 million of the amounts expected for FYs 2020 and 2021. The city has informed OSC staff that the time for claiming, billing and collecting of FEMA funds is taking longer than previous disasters.
DiNapoli encouraged city budget planners to look to further generate cost efficiencies, track the performance of services delivered amid changing staffing trends, and build up reserve levels as part of their overall budget management strategy. These actions would allow the city to address unexpected challenges, including new spending obligations, and to strengthen its fiscal foundation to keep New York City attractive for residents and visitors and create more economic opportunities.
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