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A new report by Comptroller William C. Thompson, Jr. finds that the City’s expectation of a $3.3 billion surplus at the end of Fiscal Year 2006 will significantly help to balance the next Fiscal Year’s budget, but raises concerns about budget gaps in Fiscal Years 2008 through 2010.

“The $3.3 billion surplus is a testament to the way the City has prudently managed its finances, given the challenges of the fiscal recession just a few years ago,” Thompson said. “The Mayor deserves credit for proposing to use this year’s surplus to balance the FY 2007 budget and to create a new special-purpose fund for retirees. But the surplus will only benefit the City in the short run, and the budget faces substantial gaps in the outyears that must be addressed.”

Thompson’s report on the Mayor’s Five-Year Financial Plan for Fiscal Years 2006 to 2010 cautioned that the Mayor’s measures to benefit the budget after FY 2007 are small in comparison with the large budget gaps of $3.447 billion in FY 2008, $3.5 billion in FY 2009, and $2.711 billion in FY 2010. The gaps will occur because the City relies on large non-recurring actions to balance FY 2007, chief among which is the use of the entire FY 2006 Budget Stabilization Account to prepay certain FY 2007 expenses.

The Comptroller’s review shows that these gaps could be somewhat less because revenue is likely to be higher than the City projects, offsetting risks and lowering the gaps by $335 million in FY 2008, $60 million in FY 2009, and $120 million in FY 2010.

Thompson’s report states that the City relies too heavily on non-recurring actions to balance the budget and that trends that generated surplus this year are not likely to continue. The housing market is slowing, as well as the overall economy. The financial markets are facing uncertainty due to rising interest rates and high debt levels. Extraordinary expense savings such as this year’s lower pension costs and the benefits from the State Medicaid cap are unlikely to occur in the outyears.

The Comptroller highlights the steps that Mayor Bloomberg has taken with surplus resources that have become available this fiscal year. The Mayor is using the FY 2006 surplus to balance next year’s budget, devoting $1 billion to a new Retiree Health Benefits Trust Fund in FY 2006 and another $1 billion in FY 2007, and continues to fund a $200 million annual “pay-as-you-go” capital financing program to help reduce the growth of debt service over the long run.

Thompson reports that despite this year’s revenue increases and expense savings, the City is adding only about $700 million to its rolling surplus during the current fiscal year, after accounting for the $3.5 billion brought forward from FY 2005 and the $1 billion deposit to the Retiree Health Benefits Trust Fund.

The City’s projected FY 2007 spending, after adjusting for net prepayment, is $56.4 billion. This is an increase of 4.2 percent from expected FY 2006 expenditures of $54.1 billion. From FY 2006 to FY 2010, expenditures, after adjusting for pre-payments, are projected to grow by 10.7 percent, outpacing revenue growth by 4.5 percentage points.

Spending increases in FY 2007 and the outyears of the Financial Plan are dominated by growth in pension contributions, health insurance costs, Medicaid spending, debt service and judgments and claims settlements. The combined spending in these areas, which accounts for approximately 33 percent of FY 2007 spending, is projected to grow by 14.5 percent, or $2.3 billion from FY 2006, and 36.2 percent over the Financial Plan period. All other expenditures including wages and salaries are expected to remain relatively flat with growth of 0.1 percent over the same period.

“While the surplus provides one-time budget relief to FY 2007, it does not address the central budgetary challenge: the fact that the growth of the City’s expenditures outpaces the growth of its revenues over the financial plan period,” Thompson said. “Reliance on non-recurring revenues allows the City little margin for error in the event of increases in labor, education and health care costs or another economic downturn.”

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