Comments on New York City Fiscal Year 2017 Executive Budget

While the U.S. economy is in the seventh year of one of its longest economic expansions, it has also become evident that the underlying growth potential of the economy has lessened. In the 15 years from 2000 to 2015, the national economy grew at a real average annual rate of 1.8 percent, compared to an annual rate of 3.4 percent in the 15 preceding years. The sustained period of slow growth suggests that structural factors are at work. Aggregate demand, which dropped in the aftermath of the financial crisis and recession has not recovered to its pre-recession growth rate even as household debt ratio declined. Real consumer spending grew by 2.7 percent in 2014 and 3.1 percent in 2015, compared to a 3.6 percent real average annual rate from 1985 to 2000. Productivity growth, a fundamental driver of economic growth, has also slowed, growing at half the rate in the last ten years as the prior ten years. Moreover, many technological advances of recent years have tended to conserve resources and physical capital rather than to stimulate their expansion, thereby dampening their multiplier effects. New York City’s economy has been outpacing the nation’s, but the growth of the local economy in the current recovery has also been moderate compared to earlier expansions. Nevertheless, job creation has been impressive; the City’s private sector added 45,700 jobs in the first four months of 2016.

However, the gains are driven by a disproportionate expansion of local service jobs. These local sectors will eventually become saturated without a further increase in employment in industries that serve national and international markets. While the City’s economy remains strong, there are signs of potential slowdown in the economy. There is already some indication of retrenchment in the retail sector, which has been a significant creator of jobs throughout the recovery. However, retail employment citywide was 3,600 lower in April 2016 compared to a year earlier. In addition, pretax net income of NYSE member firms fell by 10.5 percent in 2015, on the heels of a 4.5 percent decline in 2014. Although the City’s economy has begun to diversify from its over reliance on financial services, the financial sector still accounts for over 20 percent of wages in the private sector. As a result, the recent declines in financial services profits and compensation portend lower spending throughout the local economy. Consequently, the Comptroller’s Office has lowered its forecast for the economically sensitive tax revenues for the Plan period. However, the Comptroller’s Office’s tax revenue forecasts are still above the Plan forecast in each year of the Financial Plan. The Comptroller’s Office projects that tax revenues will be above the Plan projections by $600 million in FY 2017, $270 million in FY 2018, $204 million in FY 2019, and $434 million in FY 2020. v The $82.22 billion Executive Budget is $108 million more than the Preliminary Budget.

However, after adjusting for prepayments and reserves, the Executive Budget totals $84.08 billion, $1.17 billion or 1.4 percent more than the adjusted Preliminary Budget. Additional City-funds agency spending accounts for $1.2 billion of the increase. Part of the additional spending is offset by spending reductions of $701 million from the Executive Budget Citywide Savings Program.1 The rest of the increased expenditures are supported by the roll in of additional resources from FY 2016. These additional resources results from a $539 million increase in FY 2016 City-funds revenues and a $522 million savings from the Citywide Savings Program which increase the roll to $3.36 billion. In addition, the Modified FY 2016 Budget includes a $250 million deposit into the Retiree Health Benefits Trust (RHBT). The Citywide Savings Program is expected to generate new savings of $1.25 billion over FYs 2016 and 2017 and $3.5 billion over the Five-Year Financial Plan. These savings are in addition to the Citywide Savings Program in the January Preliminary Budget which projected savings of $1.1 billion in the first two years. Combined with the savings program proposed in January, savings would total $2.3 billion in FYs 2016 and 2017. Agency spending reductions account for less than a quarter of this total and are 0.8 percent of the combined FY 2016 and 2017 City-funds agency expenditures. In the past, agency savings averaged 2.6 percent of City-funds agency expenditures. The remaining savings are from Federal Medicaid re-estimate, debt service reductions, funding shifts and reductions in the miscellaneous budget, and other revenue initiatives. Within agency spending, about 64 percent of the savings are due to expected delays in hiring, year-to-date shortfalls in spending, and re-estimates of service needs. However, most of those reductions would have been reflected in the Budget even in the absence of a savings program. The April 2016 Financial Plan wholly or partially addressed a number of risks and offsets previously identified by the Comptroller’s Office. Risks to Universal PreKindergarten (UPK) funding and public assistance were fully addressed in the Plan. Other previously identified risks for homeless shelters, special education Medicaid reimbursement, and Health + Hospitals (H+H) were partially addressed. Despite these adjustments, the Comptroller’s Office continues to project larger outyear gaps of $3.34 billion in FY 2018, $3.84 billion in FY 2019, and $3.06 billion in FY 2020 than the City. The larger gaps result from the Comptroller’s Office’s projections of net risks of $607 million in FY 2018, $863 million in FY 2019, and $789 million in FY 2020. The largest risk over the Plan period is the potential need for additional City support for H+H. While the City has removed its assumption that H+H will reimburse the City for its debt service expenses from the Plan, it continues to assume reimbursements for fringe benefits and medical malpractice in the Plan. It is likely that H+H will not be 1 The Citywide Savings Program totals $728 million, which results in $701 million in expenditure reductions and $27 million of additional revenues. vi able to make these payments. H+H has made only one such payment out of the four yearperiod from FYs 2013 to 2016.

Further, given the size of H+H’s deficit reduction plan, under which many of the revenue actions will require Federal and State approvals, there is a risk that the City will need to increase its subsidy to H+H. Together, City support for fringe benefits and medical malpractice and increased subsidy results in risks of $365 million in FY 2017 growing to $515 million in FY 2020. Overtime spending estimates continue to pose significant risks to the Financial Plan. The Comptroller’s Office projects that overtime spending will be above the Plan by $302 million in FY 2017 and $250 million annually in the outyears. Other expenditure risks include risks to homeless shelter and special education Medicaid reimbursement estimates in the outyears. While the City has added additional funding for homeless shelters in FY 2017 the funding does not extend to the outyears. The Comptroller’s Office estimates that the City will need an additional $130 million annually to maintain the same level of support. Similarly, the City has reduced its special education Medicaid reimbursement by $79.5 million in FY 2016 and $56.5 million in FY 2017. The outyear assumptions remain unchanged. As such, the Comptroller’s Office estimates residual risks of $30 million in FY 2018 and $80 million in each of the outyears of the Plan. With regards to the Plan’s non-tax revenue projections, the Comptroller’s Office continues to risk the assumption of taxi medallion sale revenues. The Plan projects revenues of $107 million in FY 2018, $257 million in FY 2019, and $367 million in FY 2020. Until there is greater clarity in the taxi medallion market, the proposed sales of taxi medallion remains uncertain, putting the assumptions of revenues from these sales at risk. Partially offsetting the risk to taxi medallion sales revenues is the Comptroller’s Office’s projections of higher fine revenues from speed and bus lane violations, “quality of life” violations, and penalties for late building permit filing or lack of building permit. The City has benefitted from one of the longest postwar recoveries. However, there are signs of a potential slowdown in the economy. In addition, the Comptroller’s Office is projecting larger outyear gaps than the Plan. As such, it is essential that the City continues to build its budgetary cushion to be in a position to weather a slowdown without cutting essential services. It is encouraging that the City has added $250 million to the Retiree Health Benefits Trust in the current Plan. But, the City’s budget has also grown and the City now needs to add more than $300 million to the budgetary cushion simply to maintain it at the same level as a percent of the adjusted budget. The City needs to grow the cushion by $1.6 billion to reach 12 percent of the adjusted FY 2017 Budget.