The State of the City’s Economy and Finances
December 15, 2014
I. Executive Summary
The City’s fiscal position is strong. The current Financial Plan benefits from low outyear budget gaps, thanks to stronger revenue projections in the November 2014 Financial Plan. Until there is a significant downturn in the growth of revenues, the City is on a stable budget path and should achieve balance through FY 2018 with relative ease. The Comptroller’s Office’s projections of higher than anticipated revenues over the duration of the Plan period offsets the identified budget risks and further bolsters the outlook.
The growth to New York City’s economy in FY 2014 helped the City’s financial position. The rate of growth in the City’s economy outpaced the national rate over the first three quarters of the year. New York City’s real gross city product (GCP) grew at an average annualized rate of three percent over the first three quarters of the year, almost one percentage point more than the U.S. during the same period.
The city’s strong job creation over the last several years continued in 2014 with gains in private sector jobs of 24,100 in the first quarter, 38,400 in the second quarter, and 21,500 in the third quarter (seasonally adjusted). Despite strong job growth, wage gains have remained tepid as growth skewed towards relative low wage industries. Another contributing factor to slow wage growth is that, with a few exceptions overall, wage growth for existing jobs has been sluggish. Strong personal income tax withholding growth in the third quarter of 2014 and a sharp increase in measured private-sector wages in October provide some hope that growth in New York City wages is starting to pick up.
Assessment of the November Financial Plan
The FY 2015 Budget totals $76.94 billion after a $1.9 billion increase in all-funds made in the November Modification. Federal aid accounts for more than three quarters of the increase. Tax revenues in FY 2015 are $766 million higher, mainly as a result of revisions to property tax, personal income tax (PIT), and tax audit revenue estimates. The additional tax revenues are largely offset by a reduction in non-tax revenues due to stretching out the taxi medallion sales, with some of the revenues that were anticipated in FYs 2015 through 2017, now shifted to FY 2018 and beyond.
FY 2015 City-funds expenditures in the November Modification are $179 million more than the Adopted Budget. This leaves the City with available resources of $105 million to prepay FY 2016 debt service. The expenditure increase stems primarily from higher agency spending, offset by $95 million in debt service savings. The November Modification and Financial Plan includes health insurance savings of $55 million in FY 2015, growing to $454 million in FY 2018, from lower than expected premium rate increases. The City is allocating these savings to the healthcare reform savings targets negotiated in the labor settlement. Since those savings were already embedded in the Financial Plan, no new savings are recognized in this Plan.
Since budget adoption, higher outyear City-funds revenue projections along with lower City-funds expenditure estimates reduced the outyear budget gaps by a combined $2.8 billion to gaps of $1.84 billion, $1.19 billion, and $1.77 billion in FYs 2016 through 2018, respectively. The Comptroller’s Office’s review of the November Plan finds that the outyear gaps could be even lower than projected in the Plan.
The Comptroller’s Office projects tax revenues to be higher than in the November Plan by $522 million in FY 2015, $668 million in FY 2016, $966 million in FY 2017, and $1.29 billion in FY 2018. Partially offsetting the higher tax revenue forecasts is this report’s identification of higher City-funds expenditures — risks of $462 million in FY 2015, $307 million in FY 2016, $299 million in FY 2017 and $296 million in FY 2018. The higher expenditures come primarily from the recent labor agreements with the Council of School Supervisors and Administrators (CSA) as well as the Uniformed Superior Officers Coalition (USOC), which were announced after the City released its November Plan. Part of the labor cost of these agreements is above the pay pattern already budgeted — established by the initial agreements earlier this year. In addition, this report’s labor expenditure risk includes the cost of applying the pattern of the USOC agreement to all remaining unsettled uniformed groups, which include all rank-and-file members who do not yet have a settled contract. The Comptroller’ Office estimates the additional labor costs for uniformed workers to total approximately $600 million in FYs 2015 through 2018. The other risks identified in this report include the assumption of higher overtime spending and lower Federal Medicaid reimbursements for special education services in the Department of Education which will result in an increase to City-fund expenditures.
Overall, this report identifies net additional resources of $70 million in FY 2015, growing to $991 million in FY 2018. After accounting for the Comptroller’s Office’s budget risks and offsets, the Comptroller’s Office’s restated budget gaps are $1.46 billion in FY 2016, $516 million in FY 2017 and $780 million in FY 2018. This report estimates a modest budget surplus of $70 million in FY 2015 (which, if added to the Budget Stabilization Account, would increase it to $175 million and reduce the FY 2016 restated gap to $1.39 billion).
Last Year’s Actual Expenditures as Shown in the CAFR
The FY 2014 Comprehensive Annual Financial Report (CAFR) shows how the City’s budget closed last year. To get a clear picture of the City’s position at the close of the fiscal year, it is essential to examine which resources the City rolled forward to future years and which prior-year resources the City utilized in FY 2014. Adjusting for those resources yields the operating surplus or deficit of the City. When looking at spending actions and netting out the reductions from changes to prior-year receivables and payables, FY 2014 shows an operating deficit of $632 million. In essence, the City’s FY 2014 expenses were higher than the revenues it generated in FY 2014 despite realizing $3.5 billion in higher than anticipated revenues. FY 2014 had an operating deficit $34 million higher than in FY 2013 and is the sixth straight year, since the Great Recession that the City ended its fiscal year with an operating deficit.
Hopefully, the City will reverse that pattern and add to its vital fiscal cushion in FY 2015. Since we do not know when the next financial downturn will occur, the Administration’s November announcement that it will seek agency efficiencies will be an essential tool for the City to build up resources for the future. More details on those cost savings actions are expected in the Mayor’s FY 2016 Preliminary Budget.