Testimony of New York City Comptroller Brad Lander Before the Charter Revision Commission on New Fiscal Framework Proposal

Thank you, Chair Scissura and members of the Charter Revision Commission, for the opportunity to testify before you today. I will be outlining five proposals to strengthen the City’s fiscal management. These proposals would ensure that we (1) accumulate sufficient reserves for times of economic recession, (2) run City agencies more efficiently while avoiding cuts to vital services, (3) maintain the affordability of the City’s debt, (4) overhaul our capital planning to better face the future in an era of aging infrastructure and climate crisis, and (5) start paying our vendors – including our nonprofit human service providers and MWBEs – on time. 

At more than $110 billion annually, New York City’s operating budget is the largest municipal budget in the country by far and is larger than the budgets of all but four states (NY, CA, TX, FL). The City’s capital budget is also expansive, with $88.1 billion in expected commitments from FY 2024 to FY 2028, and the City’s highly-rated debt issuers projected to borrow $70.6 billion over the same period. New York City provides a uniquely broad scope of services for one general purpose government, and to fund that scope of services, has a uniquely broad set of taxes and revenues. Managing those resources efficiently is critical to providing the best possible services to New Yorkers and to securing a vibrant future for the city we love.  

Five decades ago, following the near-bankruptcy of the City during its worst fiscal crisis, caused by a combination of shifts in the global economy and the City’s own weak financial practices, the New York State Financial Emergency Act for the City of New York (FEA) established a framework that has guided the City’s fiscal management for nearly 50 years. The City has consistently closed the fiscal year with a General Fund surplus since FY 1981 and has not issued short-term obligations to sustain its cash balance since FY 2004. Rating agencies and investors in the City’s bonds consistently rank the City’s strong fiscal management as a credit strength, even when other factors may be seen as vulnerabilities. 

Nearly 50 years later, it is time to reflect on the FEA framework (the emergency elements of which largely expired in 2008) and explore how it can be improved upon. While the FEA provisions have served the City well, there are a number of areas where significant risks remain. The creation of this Charter Revision Commission is an opportunity to strengthen the City’s fiscal practices and modernize the overall framework.  

Last week, as part of our report detailing “A Stronger Fiscal Framework for New York City,” my office issued five recommendations to achieve those goals, each of which could be included by this Commission in the ballot proposals you put before voters this fall:  

1. Require the adoption of a rainy-day fund policy to ensure that the City accumulates sufficient reserves to use during economic recessions. While the establishment of the Revenue Stabilization Fund in 2019 and 2020 was a positive and a much-needed development, its operation lacks crucial features, namely: 1) a target size, 2) a formula for deposits, and 3) reasonable rules and guidelines for withdrawals. As a result, annual deposits are left to the vicissitudes of annual budget negotiations between the Mayor and the City Council and fall far short of what would be necessary to see the City through a recession of average length.
 
The City Charter (Chapter 58, Section 1528) should be amended to require the adoption of a formula-driven policy to determine the City’s rainy-day fund target size, deposits, and withdrawals. The Mayor, the City Comptroller, and the City Council should determine the parameters and features of the policy. Reporting on implementation of the rainy-day fund policy should be required annually to the City Comptroller, the State Comptroller, the Financial Control Board, the City’s Independent Budget Office, and the public.

2. Mandate efficiency reviews and long-term savings as a regular part of the budget process and make agencies accountable for judgments and claims against the City. The Mayor has discretion to include Programs to Eliminate the Gap (PEGs) in the financial plan. However, because they are frequently short-term exercises, PEGs are often predominantly comprised of short-term savings, budget re-estimates, and personnel accrual savings. At the same time, the budgets often structurally and unreasonably under-estimate recurring and non-discretionary expenses. To address these weaknesses, the Charter should be amended to require and facilitate the Office of Management and Budget to: 

• • Work with agencies to set customized, multi-year savings targets, which are reviewed and updated regularly (at least annually), as part of the budget process.  
  • Include incentives for agencies to implement efficiencies that produce recurring rather than one-time savings.   
  • On the same timeline, agencies could propose new programs for consideration by OMB and City Hall, along with metrics for determining whether these programs were meeting their outcomes. These new programs could be funded with savings from the efficiency program, in years when the savings are not needed to address budget gaps. 
  • Eliminate the chronic underbudgeting of recurring and non-discretionary expenses and more accurately budget the cost of the City’s workforce to reduce the reliance on personnel accrual savings in the near term.   
  • Establish a regular framework for reporting on savings and efficiency initiatives, reviewed by oversight entities, and hold agencies accountable for them. 
  • Move financial responsibility for certain judgments and claims against the City from central budget to agency budgets, in order to give agencies an incentive to take steps that will reduce such actions. 

The last provision merits a bit more explanation. For the past decade, New York City has spent about $1 billion annually to resolve claims and lawsuits against the City. These include the cost of claims due to injuries and damage from crashes of City-owned vehicles, slips and falls on City property, civil rights violations (e.g. police or correction officer misconduct), wrongful convictions, and others detailed in the Comptroller’s Offices’ Annual Claims Report. 

Judgments and claims are generally paid out of a centrally budgeted reserve fund, so their fiscal impact is not directly felt by agencies responsible for them. As a result, incentives are misaligned: agencies do not internalize the cost of risky and avoidable behavior, nor do they have an incentive to reduce these behaviors because savings accrue centrally. The Comptroller’s Office proposes transferring financial responsibility for paying certain settlements (i.e. those where agency action could effectively reduce those claims) to agency budgets. In this framework, agencies that reduce claims settlements below the budgeted amount would be able to apply a portion of the savings towards other needs, while agencies whose claims exceed their projections would be responsible for covering the additional cost from elsewhere in their budget or through an increase of savings targets (but without affecting service delivery or revenue-generating capabilities). Litigation and settlement authority would remain assigned to the Law Department and the Office of the Comptroller as currently (so the incentive for agencies would be to reduce claims, not simply to delay them by deferring settlements via litigation). 

To implement these changes, we propose the following amendments to the City Charter: 

i. The budget process (Chapter 10) should be modified to include the formulation of annual efficiency reviews and long-term savings initiatives for City agencies. The Charter should mandate annual reporting to the City Council, the City Comptroller, and the City’s other fiscal monitors on the implementation of these efficiency measures and long-term savings initiatives and allow fiscal oversight entities to access information that is necessary to provide independent assessments.  

ii. The expense budget (Chapter 6) should be amended to require the creation within each agency’s expense budget of a unit of appropriation for judgments and claims.    

3. Maintain the affordability of the City’s debt. Annual debt service as a share of local tax revenue is a key measure of debt affordability. The City’s 15 percent limit, a widely accepted benchmark of fiscal prudence, is included in the City’s Debt Management Policy. However, there is currently no procedure for ensuring that the target is maintained.  

The City Charter (Chapter 10, Section 258) should be amended to require that: 

i. Annual debt service does not exceed 15 percent of City tax revenues in each year of the financial plan. 

ii. The financial plan includes a Capital Stabilization Reserve in each year of the plan in a minimum amount to be indexed over time. This reserve is already included by the Mayor in each year of the financial plan as a matter of policy.  

iii. The City deploys the Capital Stabilization Reserve to pre-pay debt service in any fiscal year within the financial plan where debt service is projected to be above the 15 percent threshold. 

4. Overhaul the City’s approach to infrastructure assessment, capital planning and budgeting to better address the City’s aging infrastructure, prepare for the climate crisis, align with plans for growth, and comply with Government Finance Officers Association (GFOA) and Municipal Finance Officers’ Association (MFOA) best practices.

To address its substantial infrastructure needs, the City publishes a Ten-Year Capital Strategy projecting future commitments; the strategy for FY 2024-2033 is nearly $170 billion. However, the strategy currently does a poor job of establishing clear priorities for several reasons.

First, the City’s Asset Inventory Management System (AIMS) is intended to provide an annual condition assessment of the City’s capital infrastructure. Unfortunately, the AIMS report does not accurately identify the true costs of maintaining the structural integrity of the City’s major infrastructure assets, as shown in an audit by the Office of the Comptroller.

Second, the Ten-Year Capital Strategy serves more as a list of agency-generated projects than a strategic set of priorities.

The City needs to modernize its capital planning and budgeting process to include better infrastructure assessments (including more effective use of technology) and a process for prioritizing long-term infrastructure investments based on clear criteria that address aging infrastructure, climate resiliency, criticality, and the cost of deferred maintenance.

To implement these changes, the Commission should propose to amend Chapter 49, Section 1110-a of the City Charter to: 

i. Explicitly state that the purpose of the infrastructure assessment is to inform the Ten-Year Capital Strategy.  

ii. Require the inventory to include pertinent details about the function, location, structural dependencies, estimated useful life, and most recent condition assessment of each asset. 

iii. Require that each agency is responsible for conducting a realistic assessment of its capital assets based on a protocol developed by the Office of Management and Budget.  

iv. Require the identification of the capital needs to be included in the 10-year capital strategy based on considerations including: the level of deterioration (particularly any asset conditions that jeopardize public safety), the criticality of an asset to an agency function or mission, and federal and state requirements that may apply to certain types of assets.  

v. Require a justification for the exclusion of recommended capital needs from the Capital Commitment Plan.  

5. Mandate timeframes for each stage of the contracting process. Late registration and payment of contracts is a longstanding flaw within the City’s financial management practices. Over three-quarters of the City’s contracts with nonprofit organizations are registered late, with an average retroactivity of eight months. As a result, nonprofit human service providers, MWBEs, and other vendors struggle with cash flow and face severe financial difficulties. In February 2022, my office, together with Mayor Adams, released an Action Memo: A Better Contract for New York: A Joint Task Force to Get Nonprofits Paid On Time. The first recommendation in the memo was to establish timeframes for each stage of the procurement and contracting process in order to hold the City and vendors accountable for the timely registration of contracts and ensure that the City has the ability to pay its vendors on time. Currently, there are no mandated timeframes that govern the City’s procurement process outside of the 30-day review period that is mandated by the City Comptroller’s Office as set forth in the Charter. Over two years later, the City has yet to implement this recommendation. 

I urge the Commission to propose a ballot proposition to amend Chapter 13, Section 311 of the City Charter to require that the Procurement Policy Board set prompt contracting timelines for each step of the procurement process and report regularly on how well each contracting and oversight agency is complying with those timelines. 

These improvements to the City’s financial management practices would strengthen the City’s reserves, generate a budgetary cushion, potentially bolster the City’s credit rating, better plan for the future, and expand the pool of vendors who can productively do business with the City.  

None of those good outcomes, however, are the primary objective. Overall, these changes would allow the City to better deploy its sizable but still scarce resources — taxpayer dollars, federal and state funds, and other revenues — to most effectively meet the needs of all New Yorkers for a safer, thriving, healthy, well-educated, affordable, and well-managed city, and strengthen the City’s fiscal resilience.  

That is the fiscal framework New York City deserves for the next fifty years. 

Thank you very much for this opportunity.

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