Total revenue for New York City’s budget is expected to drop by 9.4% to $101.1 billion in Fiscal Year (FY) 2023 amid lower tax revenue and a decline in federal aid. The city also faces sustained challenges from a possible recession, federal monetary policy and turmoil in the financial markets, according to a report on the city’s FY 2023 financial plan released today by State Comptroller Thomas P. DiNapoli.
“The city’s adopted budget reflects both extraordinary efforts by the federal government to boost the economy over the last two years and an economic slowdown due in part to unanticipated factors,” DiNapoli said. “Higher revenues in Fiscal Year 2022 allowed the city to build reserves and other budgetary cushions, but many of the questions plaguing the city’s economy remain out of its control. The magnitude of these risks means the city should continue to identify areas for savings, track how its services are delivered amid changing staffing levels and build reserves to guard against these pressures.”
The improvement to the city’s fiscal footing in FY 2022 stemmed from tax revenue collections that exceeded the city’s projections by over $6.2 billion, additional extraordinary federal aid, a record year for pension returns in FY 2021 and savings from lower-than-planned staffing levels. DiNapoli’s report notes the unanticipated resources generated from the combination of these factors is not likely to occur at the same level again, however, and some factors have already begun to reverse as the city enters FY 2023.
While the city’s published gaps are manageable by historical standards, averaging 5.3% from fiscal years 2024 through 2026, the city will have to prepare for the potential negative budgetary implications of geopolitical tensions and their effect on supply chain issues, as well as inflation and the response of central banks.
The city projects tax revenues, which make up 92% of all city funds, to decrease by 1.2% in FY 2023. This figure, while reasonable, does not reflect the potential impact of a recession. City fund revenues declined by 4.2% in FY 2002 and 5.9% in FY 2009, the first two full fiscal years of the last two recessions, which would be equivalent to between $3.1 billion and $4.4 billion if similar drops occurred in FY 2023. City funds are projected to account for 73% of total revenues, or $73.3 billion, in FY 2023.
The city also had substantial savings from much stronger-than-expected pension investment gains in FY 2021, but that did not continue in FY 2022. DiNapoli’s analysis suggests the city’s pension contributions will need to rise again to make up a shortfall of approximately 15.6% in FY 2022. The effects would not be felt until FY 2024 but could rise to an additional $3 billion by FY 2026.
Education funding levels remain uncertain at this time. On August 5, 2022, a Manhattan Supreme Court judge found that the city had violated required procedures and ruled that the city must return education spending to FY 2022 levels until the FY 2023 education budget is re-approved in accordance with such procedures. A few days later, however, the ruling was stayed, allowing the existing FY 2023 budget to remain in place pending the outcome of the city's appeal.
While it has added substantial labor reserves since a year ago (more than $4.6 billion over the five-year financial plan period), the city could also incur collective bargaining costs beyond the amounts assumed in the June Plan depending on the outcome of ongoing negotiations. If wages were to rise at the projected inflation rate without offsetting savings, costs would increase beyond the amounts assumed in the June Plan by an estimated $1.5 billion in FY 2023 (including retroactive pay) growing to $3.6 billion in FY 2026, with recurring costs of nearly $4 billion annually thereafter.
In FY 2022, the city also created additional spending pressures with new programs funded only in FY 2023, presenting new fiscal cliffs. These are in addition to a number of budgetary risks DiNapoli has previously identified, including for the MTA, education and housing.
In total, DiNapoli has calculated risks to the city’s budget that could exceed $2 billion annually by FY 2024. The risk assessment grows to $5.9 billion in FY 2026, which could raise the budget gap in that year to nearly $9.9 billion, excluding some of the fiscal cliffs, the potential cost of labor contracts and the risk of recession, all of which are fluid.
The city will have to continue to see an improvement in its economic recovery, and associated revenues, even as the rest of the country’s growth slows, to avoid a series of difficult decisions on revenue enhancements, service adjustments and how to close its budget gap.
FY 2022 revenue after budget adoption came in $900 million higher than expected, providing an opportunity for the city to build reserves and other fungible resources further. This could bring these resources to more than $9 billion, which could mitigate the impact of fiscal deterioration on service delivery.
These strong year-end revenue results also underline the importance of fiscal governance, which remains a critical component for systematizing the city’s response and preparation for managing future budget gaps. DiNapoli recommends the city further formalize its budgetary practices, such as its reserve policy, to help ensure wise budgetary policy making going forward.
Other Reports & Fiscal Tracking Tools
Strengthening New York City's Rainy Day Fund
Review of the Financial Plan of the City of New York, April 2022
Identifying Fiscal Cliffs In New York City's Financial Plan
New York City Industry Tracker Dashboards
Track state and local government spending at Open Book New York. Under State Comptroller DiNapoli’s open data initiative, search millions of state and local government financial records, track state contracts, and find commonly requested data.