Testimony of New York City Comptroller Scott M. Stringer, Comments on New York City’s FY 2018 Preliminary Budget Before The New York City Council Finance Committee

Thank you, Chair Ferreras-Copeland and members of the Finance Committee. I welcome the opportunity to discuss the Comptroller’s analysis of the City’s FY 2018 Preliminary Budget.

Joining me is our Deputy Comptroller for Budget, Preston Niblack.

My testimony today will focus on:

— The state of the City’s economy

— The Comptroller’s assessment of the Preliminary Budget

— And the budgetary risks on the horizon.

First, let’s discuss the state of our economy.

The good news is, in terms of job growth, the current expansion will go on record as one of the strongest in recent history.  The city has created 635,000 private-sector jobs since 2009, reaching an historic high of nearly 4.4 million total jobs in 2016.  That’s an average of 90,000 new jobs each year.  Unemployment rates are down across all five boroughs.

The bad news is, the benefits of this growth have not reached all New Yorkers.  We’ve added the most jobs in the sectors with the lowest wages, such as retail, bars and restaurants, and healthcare – and these sectors have seen little or no growth in their earnings after adjusting for inflation.  In contrast, sectors such as information, finance, and professional services, which pay four times as much, have added one-third as many jobs, and have seen wage increases that outpace inflation, often substantially.

As we look ahead to our forecast of the City’s economy over the financial plan period, my office expects the economic expansion to continue, but the rate of that growth will continue to slow down, as it has in the last two quarters. The rate of job creation will be lower than the record levels of the last several years.

In our forecast, we assumed that the Trump administration and the Republican-controlled Congress will enact federal income and corporate tax cuts, and higher defense and infrastructure spending.  This will provide some short-term stimulus to the economy, and we expect economic growth will be sustained at better than 2 percent this year and next as a result.

The problem is, with the economy finally operating close to full employment, that stimulus boost will likely be short-lived.  Overheating the economy will ultimately result in higher interest rates and a stronger dollar – which will slow growth starting in 2019, in our forecast.  And if President Trump forges ahead with his threats to restrict trade and immigration, we’ll likely see an even more drastic slowdown in the years to come.

Let me turn now to the City Budget …

Mayor de Blasio’s Preliminary Budget for 2018 includes a number of new initiatives that I support, from hiring school crossing guards, to providing our schools with better internet access, funding measures to protect our police officers and residents from gun violence, and making investments in our public housing.  These are all important priorities.  But as I will discuss in more detail, I am concerned that, in the face of the threat of federal budget cuts and a slowing economy, we need to do more to prepare for the possibility of challenging times ahead.

Spending in 2018, adjusted for prepayments, is set to rise 2.2 percent.  Over the financial plan period, the City projects that total expenditures will grow by 3 percent per year on average, reaching $95.6 billion by FY 2021.  Total revenues, however, are projected to grow more slowly, at a 2.5 percent average rate.

The mayor’s office expects total tax revenues to grow by 4.3 percent per year on average, to $64.9 billion in FY 2021.  My office also expects tax revenue growth to average 4.3 percent, although on a slightly different trajectory.  Consistent with our economic forecast, we expect growth to be slightly higher this year and next, then to slow down in the outyears of the plan.  Our forecast is consistently higher than OMB’s, largely on the strength of personal income tax revenues next year, and a higher projection of property tax revenues in future years.

However, our expectation of higher tax revenues is offset by our skepticism regarding two elements of the Mayor’s revenue assumptions.  First, the mayor continues to ignore the legislation enacted in last year’s State budget that reduced City sales tax revenues by $600 million over three years, related to the 2014 refinancing of so-called STAR-C bonds.  Although he recognized $200 million of this “intercept” so far, the remaining $400 million must be considered at risk.

Secondly, we also believe the City is unlikely to realize the taxi medallion sales assumed in the financial plan, which were delayed for the fourth year in a row. Given the disruption in the yellow taxi industry from for-hire car service companies, these sales – worth $731 million over the Plan period – are unlikely to occur in the current market.

On the expenditure side of the ledger, my office has also identified risks from overtime pay, Federal Medicaid reimbursement for special education services, and homeless shelters.  We also anticipate that the City will continue to waive NYC Health + Hospitals payments for medical malpractice claims and fringe benefits, which have been made only once in the last four years.

Let me speak for a moment about our spending on homeless services.  Citywide, spending on homelessness is projected to total $2.3 billion this fiscal year.  That’s nearly double what the City spent in 2014.  Budgeted spending is already up $460 million this year alone, compared to what we spent in FY 2016.

About half of the increase over the last three years is for activities like anti-eviction legal services, rental assistance, and other measures that are ultimately intended to reduce our shelter population.  But the other half of the increase is due to the relentlessly rising cost of shelter –because our shelter population is growing, and because we are more and more reliant on the use of commercial hotels to house families.  In Calendar Year 2016, we spent $99 million on commercial hotel rooms for the homeless.  This has helped drive the average annual cost of sheltering a homeless family from $40,000 in FY 2014 to $52,000 in FY 2017 this year.  The plan announced by Mayor de Blasio Tuesday aims to eventually reduce reliance on commercial hotels by opening more shelters citywide.  I have spoken often about the urgent need to eliminate the use of commercial hotels, and so I welcome this.  Nonetheless, the plan does not envision a significant reduction in the overall shelter population, and so we believe that shelter spending is unlikely to decline next year from this year’s level.

Taken together, our revenue and expense re-estimates result in a modest addition to the surplus for FY 2017.  But we are projecting slightly larger gaps than the Administration in the remaining years of the plan, starting with a gap of $141 million in FY 2018, growing to $3.7 billion in FY 2019, and then declining to $2.5 billion by FY 2021.

Our gap estimates are not significantly larger than those projected by the Mayor.  But we face other risks to our budget.  The biggest risk of all that confronts us is the federal budget.  We’ve heard this week that the President could propose cutting federal non-defense discretionary spending by about 9 percent.  That’s equal to blowing a $670 million hole in the City budget.

And we know programs that help the poor and vulnerable are not this Administration’s highest priority.  As my office has reported, a wide range of City human services programs rely on federal aid for a significant share of their funding, for everything from Section 8 housing vouchers, to home energy assistance for the poor and elderly, to workforce development programs, and services for people with HIV and AIDS.  And that’s not to mention NYC Health + Hospitals, whose heavy reliance on Medicaid support will be seriously threatened by Medicaid cuts and repeal of the Affordable Care Act.

We will not know what the federal budget looks like until later this year, so there is no way to quantify the risk quite yet.  But that does not mean we should not prepare, because we all know it’s coming.  And I am concerned that we are not as ready as we need to be.

The Mayor took significant steps in both November and January with the Citywide Savings Program, which totals a combined $2.1 billion in FY 2017 and FY 2018, and I applaud this.  But agency efficiencies, by our reckoning, make up only 7 percent of total savings in the first two years of the plan – just $139 million.  Agency savings represent just one percent of total agency spending.

A more robust savings program is one way to build up our reserves, and reduce the likelihood of cuts to city services.  In years past, agencies were asked to meet specified targets for savings.  I did not agree with the Bloomberg administration’s approach to applying those targets across the board, but I do believe we need to ask our City agencies to work harder to identify efficiencies without impacting vital services.  The Mayor has indicated that we will see an additional $500 million savings program in the Executive Budget, and it is my hope that we will see substantial recurring savings in agency budgets as a result of that exercise.

Because as things stand now, I’m concerned that our reserves are in a weaker position than they should be.  Our budget cushion is the amount we have available at the beginning of each fiscal year to help us weather an economic downturn, or another big storm, like Sandy – or federal budget cuts.  At the beginning of FY 2009, for example, we had built up a budget cushion equivalent to over 17 percent of spending.

We started FY 2017 with a cushion of $9.4 billion, or 11 percent of spending – including the $4 billion surplus from 2016, plus nearly $4 billion in the Retiree Health Benefits Trust Fund, and $1.5 billion in reserves.  As of the Preliminary Budget, however, we would start 2018 with a cushion of only 10 percent of spending, or $8.6 billion, largely because our surplus roll is $983 million less than our surplus from FY 2016.

To reach even the bottom of the optimal range, which we consider to be between 12 percent and 18 percent of adjusted expenditures, we would need to add more than $1.7 billion to our cushion.

In conclusion, while for now our economy continues to grow, it’s losing some speed, and we face unprecedented uncertainty about the future.  But in the meantime, we cannot stop investing in our City.  We must meet the needs of New Yorkers while also ensuring we are ready for a rainy day. By taking actions now to identify efficiencies, budget savings will compound over time, and we can prevent cuts to vital services if our worst fears come true.

Thank you very much.  I’m happy to answer your questions.

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