Comments on New York City’s Fiscal Year 2017 Adopted Budget

EXECUTIVE SUMMARY

Netting out the impact of prepayments and reserves, expenditures in the FY 2017 Adopted Budget totals $84.6 billion, 3.2 percent more than the adjusted FY 2016 expenditures. The adjusted City-funds portion of the FY 2017 budget totals $61.8 billion, an increase of 5.4 percent from the FY 2016 budget. Since the Executive Budget in April, City-funds expenditures have increased by $543 million. Funding for City Council priorities accounts for $473 million of the increase including additional recurring funding over the Plan period of $21 million to improve access to libraries and $38.5 million for Summer Youth Employment Program.

The increase in adjusted spending is well above assumed growth in tax revenues of 1.6 percent in FY 2017. The gap between budgeted revenues and expenditures in FY 2017 is closed with the help of a $4 billion prepayment at the end of FY 2016. If tax revenues proceed as forecast by the Comptroller’s Office, revenue growth will be higher. However, the rate of growth has recently declined. In FY 2016, tax revenues are projected to have grown only 3.6 percent, significantly less than average growth of 6.5 percent over the prior four years. The U.S. economy is expected to continue its tepid recovery in the remainder of 2016, leaving the nation more vulnerable to external shocks. The unexpected Brexit vote has added a further layer of uncertainty to the economic forecast as the United Kingdom faces negotiation of the terms of the exit and other European nations weigh its political ramifications.

The increased uncertainty in the economy has heightened the importance of implementing spending efficiencies and bolstering the City’s budget cushion against a downturn. Unfortunately, the Administration’s actions to safeguard against economic uncertainties fall short. The FY 2017 Adopted Budget includes an additional $135 million in savings from a new round of Citywide Savings Program, bringing the total savings to $1.1 billion in FY 2017 and $2.8 billion for FYs 2016 and 2017 combined. However, efficiency initiatives account for only a small part of the savings program. Only 7.4 percent of the combined FYs 2016 and 2017 savings are from efficiency initiatives. The remaining savings reflect mainly expenditure re-estimates, debt service savings, and funding switch – reductions which previously, in the absence of a Citywide Savings Program, were reflected as budget adjustments. Of the $135 million in additional FY 2017 savings, only $391,000 is due to efficiency savings. The remaining savings are from debt service savings and the spillover headcount shortfall from FY 2016. The June 2016 Headcount Plan calls for FY 2016 year-end total-funds full-time headcount to be at 294,018. However, with one month left in the fiscal year, full-time headcount on May 31st was 285,964. Eleven months into the fiscal year, the City has managed to achieve only 52 percent of the planned increase for FY 2016. Because of this shortfall, headcount will be below the level assumed in the Plan for most of FY 2017.

Last year, the Comptroller’s Office determined the City should maintain a budget cushion in the range of 12 percent to 18 percent of adjusted expenditures to mitigate the need for austere actions such as service cuts, layoffs, and tax increases during an economic downturn. While it is encouraging to see that the City has been adding to its v budgetary cushion since FY 2013, it is still short of the lower threshold of the optimal cushion range. The City will begin FY 2017 with a cushion of $9.4 billion, an increase of $900 million from the cushion at the beginning of FY 2016. The $9.4 billion cushion is only 11.1 percent of adjusted FY 2017 expenditures, $762 million short of 12 percent of adjusted expenditures. It is critical that the City build up its cushion when tax revenue collections are strong.

The Comptroller’s Office’s evaluation of FY 2017 Adopted Budget and Financial Plan also projects larger outyear gaps than forecast by the Administration. The Comptroller’s Office finds additional resources of $104 million in FY 2017 and net risks of $762 million in FY 2018, $1.0 billion in FY 2019 and $1.1 billion in FY 2020. As a result, the Comptroller’s Office projects outyear gaps of $3.6 billion in FY 2018, $4.0 billion in FY 2019, and $3.4 billion in FY 2020. The greatest risk is the City’s estimates of subsidies to Health + Hospitals (H + H). A significant portion of H + H revenue actions in its deficit reduction plan relies on Federal and State approval which is not certain. As a result, the City will likely have to increase its subsidy to H + H to make up for any shortfall in the deficit reduction plan. In addition, the City will likely have to pay for H + H’s medical malpractice and fringe benefits cost as H + H has reimbursed the City for these expenses in only one out of the four years spanning FYs 2013 through 2016. Altogether, the risks posed by H + H total $365 million in FY 2017 and grow to $515 million by FY 2020.

Consistent with past practices, the City continues to under-budget overtime spending in the Adopted Budget, creating a risk of $302 million in FY 2017 and $250 million annually thereafter. The Comptroller’s Office has also identified risks of $30 million in FY 2017 and $80 million annually in the outyears in the City’s assumption of Federal Medicaid reimbursement for special education students in the Department of Education. In addition, the Comptroller’s Office estimates that beginning in FY 2018, expenditures for homeless shelters could be above the Plan estimates by $130 million annually and spending on students in shelters could exceed Plan estimates by $10 million annually. Furthermore, the June Plan does not reflect additional pension contributions resulting from a shortfall in pension investment returns against the actuarial interest rate assumption. The Comptroller’s Office estimates the shortfall will result in additional pension contributions of $122 million in FY 2018, $244 million in FY 2019, and $366 million in FY 2020. Offsetting some of the expenditure risks is the Comptroller’s Office’s revenue projections which are above the Plan forecast by $601 million in FY 2017, $158 million in FY 2018, $53 million in FY 2019, and $208 million in FY 2020.