Comments on New York City’s Fiscal Year 2015 Adopted Budget

EXECUTIVE SUMMARY

The FY 2015 Adopted Budget The City adopted a balanced and responsible FY 2015 Budget. The City strengthened its financial situation by using a significant portion of FY 2014 resources to boost reserves – increasing the General Reserve to $750 million a year, which is approximately one percent of the FY 2015 budget and depositing $864 million into the Retiree Health Benefit Trust (RHBT). That deposit, coupled with the decision in February to not withdraw $1 billion from the RHBT for FY 2014 budget relief, brings the RHBT balance to $2.3 billion.

The new administration’s first Adopted Budget with the City Council totals $75.03 billion (all-funds) in FY 2015, an increase of $1.112 billion over the Modified FY 2015 Executive Budget released in May 2014. Almost all of the growth, $1.036 billion, comes from City-funds, which comprises 73 percent of the City’s total budget. The increase is due primarily to recognizing the $1 billion payment from the Health Stabilization Fund (HSF) as a revenue source and explicitly recognizing its offsetting labor expenses. This payment, to help offset the cost of wage increases, as agreed upon between the City and the Municipal Labor Committee (MLC), was originally accounted for as an expenditure reduction in the Modified Executive Budget.

In addition to the HSF adjustment, City-funded expenditures in the Adopted FY 2015 Budget are $383 million above the Modified FY 2015 Executive Budget. Funding for City Council priorities accounts for $310 million of the increase, of which $27 million is mayoral funding and $50 million is member items. The City Council, under Speaker Mark-Viverito, changed the process for distributing discretionary Council funding among members, so that members receive equal amounts, with additional funding based on the number of people in poverty in their districts.

An increase to the General Reserve accounts for another $150 million of the FY 2015 spending increase. The increases are offset by additional debt service savings of $134 million from refundings. City-funds revenues are revised upwards by $1.04 billion from the FY 2015 Modified Executive Budget. Aside from the HSF revenue, all other

City-funds revenues for FY 2015 are $36 million above the Modified Executive Budget as a result of $81 million in additional tax revenues and a $42 million decline in miscellaneous revenues, which were realized earlier than expected – in FY 2014 – and a budgeted loss of $3 million in lunch fees from the City Council’s free middle school lunch initiative.

After these revenue and expenditure increases, the Budget still had to close a gap of $347 million. That gap was closed by increasing the prepayment of FY 2015 debt service. In the Executive Budget, the City had planned to make prepayments totaling $1.636 billion. The Adopted Budget raised that amount by $347 million, for a total of $1.983 billion.

The June Financial Plan shows a balanced FY 2015 budget and gaps of $2.63 billion, $1.87 billion, and $3.093 billion in FYs 2016, 2017, and 2018, respectively. However, the vi Comptroller’s Office’s analysis of the Financial Plan indicates that FY 2015 could end with a surplus of $748 million, with gaps in the outyears significantly lower than the Mayor’s estimates at $1.66 billion in FY 2016, $522 million in FY 2017, and $1.19 billion in FY 2018 – due primarily to the City’s more conservative tax revenue forecasts. The Comptroller’s Office estimates that total tax revenues could be above the June Plan estimates by $853 million in FY 2015, $959 million in FY 2016, $1.18 billion in FY 2017, and $1.56 billion in FY 2018.

Risks to the City’s overtime projections and assumption of Medicaid reimbursement for special education services at the Department of Education (DOE) temper some of the impact of the Comptroller’s higher tax revenue forecast. The Financial Plan’s expenditure projections do not include the phase-in of the FY 2014 pension investment gains above the actuarial interest rate assumption of 7 percent. This phase-in will lower expenditures beginning in FY 2016 and result in net expenditure risk of $12 million in FY 2016. In FYs 2017 and 2018, the phase-in of the pension investment gains is higher than the combined overtime and Medicaid risk, resulting in a net reduction in spending of $166 million and $344 million, respectively. Overall, the Comptroller’s Office estimates net additional resources of $748 million in FY 2015, $961 million in FY 2016, $1.35 billion in FY 2017, and $1.90 billion in FY 2018.

The City’s Economy

Despite an unexpected drop in first-quarter GDP, the U.S. economy is forecast to resume moderate growth. National job creation in the first quarter suggested underlying growth momentum and new jobs were added at an even faster pace in the second quarter. Consequently, with the exception of technical adjustments to the 2014 real GDP forecast, the Comptroller’s economic forecasts for the nation and the City remain unchanged from the Comptroller’s “Comments on New York City’s Modified Fiscal Year 2015 Executive Budget”, released in June 2014. The Comptroller’s revised forecast anticipates that U.S. real GDP will grow by 1.6 percent in 2014 as the poor first quarter performance depresses the year-over-year change. The annualized rate of growth is expected to be closer to 3 percent in the second half of 2014 and through 2015.

The City’s economy is forecast to perform slightly better than the national economy in 2014 but should move toward the national rate of growth in the later years of the Plan period. While the City’s rate of job creation shows signs of slowing from the impressive pace of recent years, it should remain satisfactory. Residential construction activity picked up significantly in mid-2013 and promises to remain strong barring any unforeseen disruptions in the financial market. Wall Street appears to have begun 2014 with a relatively weak first quarter but shortterm performance is volatile and unpredictable. With the immediate risks to U.S. economic growth relatively low, the Comptroller expects the local economy to continue on a path of moderate growth.

The New Administration’s Budgeting Priorities

This report examines the cumulative FY 2014 and FY 2015 budget changes from the November Plan, last fall through the Adopted Budget in June. The new administration had $6.4 billion in additional resources when building the FY 2015 budget. The resources include $3.2 billion in higher than forecasted tax revenues, $152 million in non-tax revenues, vii $993 million in prior-year payables and $644 million in debt service savings. In addition, the Adopted Budget recognizes $1 billion from the HSF and $400 million in targeted health care savings.

In managing FY 2014 and crafting the FY 2015 budget, the new administration used the $6.4 billion in resources in only a few areas. The budget puts one-third of these new resources into reserves. It utilizes approximately three-quarters of the remaining new resources for costs arising from the resolution of labor contracts and anticipated labor agreements. The new administration with the City Council used the remaining money for mayoral and Council priorities and expense changes.