Comments on New York City’s Modified Fiscal year 2015 Executive Budget
June 4, 2014
I. Executive Summary
It is now nearly five years since the end of the Great Recession, but the national economy continues to experience slow and uneven growth. In the view of the Comptroller’s Office, the disappointing economic performance is due in part to a deficiency in aggregate demand. There are also indications, however, that the economy has entered a period in which its underlying growth potential is diminished, and that the growth rates achieved in previous expansions will not be attained in the near future.
Despite lackluster growth in the national economy, New York City has posted an impressive job creation record since the end of the recession. Total payroll employment in the City through April 2014 is 5.5 percent above the pre-recession peak. However, the City’s overall economic product has not been growing briskly, primarily because its high-wage, high-value added industries such as Finance and Legal Services continue to struggle in the new financial and regulatory environment. The City’s net private sector employment gain in 2013 was a solid 74,500, but many of the jobs created were in low-wage industries (such as Retail Trade and Food Service). The average inflation-adjusted hourly wage of the City’s private-sector workers is still more than 4.0 percent below its pre-recession peak.
Within this mixed economic context, the City released the FY 2015 Executive Budget and Financial Plan on May 8th which was subsequently modified on May 21st (discussed below). The Budget and Financial Plan include funding for the settlement of all labor contracts based on the pattern of the agreement between the City and United Federation of Teachers (UFT). The agreement with the UFT covers the nine year period from November 1, 2009 to October 31, 2018, with the first two years of the agreement corresponding to the unsettled prior round when most municipal employee unions negotiated contracts including two annual wage increases of four percent. The City assumes that the economic substance of the UFT agreement will apply to other unions which did not reach a settlement with the City in the prior round and that the latter seven years of the UFT agreement will serve as a pattern for unions which had settled the prior round. The May 21st modification was made to reflect a change in the budgetary treatment of lump sum payments to prospective retirees which are provided for in the UFT contract in the Executive Budget. The budget changes were jointly agreed to by the Comptroller and the Administration after the Comptroller indicated that the accounting treatment of these payments would be different from that initially anticipated in the unmodified Executive Budget.
The City estimates that the Citywide cost of the settlement will total $13.56 billion through FY 2018. However, the City expects that the Financial Plan impact will total only $5.65 billion after netting out the expected health savings from the agreement, the use of funds from the Health Stabilization Fund (HSF) and funding already in the City’s labor reserve.
Mainly as a result of the funding for the new contracts, the outyear gaps in the Modified May Financial Plan have widened from the February Plan by $1.51 billion in FY 2016, $1.45 million in FY 2017 and $2.74 billion in FY 2018 to yield modified gaps of $2.57 billion, $1.88 billion, and $3.11 billion in FYs 2016 through 2018, respectively. However, the Comptroller’s Office’s analysis of the budget indicates that these gaps could be smaller than projected in the Financial Plan. The Comptroller’s Office estimates that the gaps would be $1.77 billion in FY 2016, $406 million in FY 2017, and $914 million in FY 2018. The Comptroller’s Office also estimates surpluses of $138 million in FY 2014, and $797 million in FY 2015 which, if rolled into FY 2016 would further reduce the FY 2016 gap to $844 million.
The reason for the smaller gap projections lies in the Comptroller’s Office’s higher revenue projections. The Comptroller’s Office’s revenue forecasts are above the Plan projections by $131 million in FY 2014, $881 million in FY 2015, $983 million in FY 2016, $1.65 billion in FY 2017, and $2.37 billion in FY 2018. However, the Comptroller’s Office’s estimate of overtime spending, Medicaid reimbursement to the Department of Education for special education services, cost of fair hearings for social services recipients, and debt service result in a net increase in expenditures of $84 million in FY 2015 and $180 million in each of the outyears of the Plan.