Comments on New York City’s Preliminary Budget for Fiscal Year 2016 and Financial Plan for Fiscal Years 2015-2019

EXECUTIVE SUMMARY

New York City is now in the sixth year of recovery from the last recession. The national economy continues to grow, but at a slower rate compared to the growth experienced in the 1990’s. For four of the last five years, the City’s economy grew faster than the nation’s. In 2014, the City added 86,400 new jobs and the unemployment rate
averaged 6.2 percent – the lowest rate since 2008. One factor contributing to the City’s faster growth is the concentration of successful industries in New York City, such as technology, media and information firms that compete nationally and internationally.

Despite the continued recovery, wages have not kept pace with inflation over this period, which means in real terms, that they have declined. Wage stagnation in New York City is exacerbated by the fact that new jobs have been increasingly concentrated in lowwage
industries. Despite the uneven composition of job creation, overall economic growth should continue through 2015.

The Preliminary FY 2016 budget totals $78.55 billion, reflecting an increase of $773 million in revenues and a decrease of $1.06 billion in expenditures since the November Plan. The expenditure reduction is the result of a $1.47 billion increase in the roll from FY 2015 into FY 2016, enabled by re-estimates of FY 2015 revenues and expenditures. FY 2015 revenues were increased by $1.07 billion while expenditures were reduced by $400 million. Netting out the impact of the increase in the roll, City-fund expenditures in FY 2016 are $326 million above the November estimates. The growth is primarily due to increased agency spending and additional costs related to the labor agreement with the Uniform Superior Officers Coalition (USOC) applied to all uniformed employees, and the agreement with the Council of School Supervisors and Administrators (CSA).

The roll, reflected in the Plan in the FY 2015 Budget Stabilization Account (BSA), is lower than the roll in last year’s Preliminary FY 2015 Budget.1 The FY 2015 BSA totals $1.58 billion compared to the FY 2014 BSA of $1.77 billion from the Preliminary FY 2015 Budget. However, the FY 2015 BSA is expected to increase throughout the current fiscal year; the general reserve will likely be taken down further, revenues are likely to come in above projections and prior year payables will be taken down.

From FY 2015 through FY 2019, total expenditures are estimated to grow 9.9 percent. Salaries and wages, which comprise about 30 percent of the City’s expenses, are budgeted to grow 15.1 percent during that period. The salary and wage growth in the Financial Plan is largely attributable to the costs stemming from labor agreements between the City and employee unions, and their assumed pattern applied to the unsettled groups.

Pension contributions, which comprise about 11 percent of the City’s budget, remain essentially flat over the Plan period — growing by $2 million. The slower pension contribution growth continues a trend that began in FY 2013. In the seven fiscal years from FY 2013 through FY 2019, actual and projected yearly pension contribution growth is in the single digits or declines. The last seven year period that had comparable slow growth was FY 1993 – FY 1999. Pension contributions experienced double digit growth in all but three of the intervening years between those two periods. The City’s current low pension contribution growth is a result of high investment returns — an average of 13.4 percent over the past five years, changes to the actuarial cost methods and amortization schedule made in 2012 and the introduction of less expensive pension plans for new employees. Current stability in City pension contribution growth helped offset some of the growth in salary and wage expenses.

After examining the City’s Preliminary FY 2016 Budget, the Comptroller’s Office has identified additional resources throughout the Five-Year Financial Plan. The Comptroller’s Office projects tax revenues to be above the City’s forecast in each year of the Financial Plan by a cumulative $4.5 billion, driven primarily by strength in the property tax and personal income tax collections. The Comptroller’s Office also anticipates a cumulative $31 million in additional revenues from speed cameras. Through February, those revenues are already just shy of the City’s total budgeted amount for the  fiscal year.

The Comptroller’s Office anticipates that FY 2015 expenditures will be less than in the February Plan and estimates that the City will spend $100 million less on debt service, will generate $500 million in savings from a re-estimate of prior-year payables, and will not need to use the $300 million left in the General Reserve.

Risks to the Financial Plan include the City’s underestimation of overtime spending and overestimation of successful Medicaid claiming by the Department of Education (DOE). The Comptroller’s Office projects that uniformed overtime spending in the Police Department and Department of Correction will exceed the budgeted amount by $76 million in FY 2015, $174 million in FY 2016 and $100 million a year beginning in FY 2017. Lower than estimated successful Medicaid claiming by DOE could increase the risk to the Financial Plan by $60 million in FY 2015 and $80 million a year beginning   in FY 2016.

Compared to the City’s stated gaps, the net resources identified by the
Comptroller result in available funds of $1.1 billion in FY 2015 and $509 million in FY 2016 and reduce the three outyear gaps to a combined $1.67 billion. When applying the Comptroller’s Office’s risks and offsets to the City’s plan, FY 2015 is projected to be the first time in seven years that the City will have an operating surplus. In contrast to recent years, the Comptroller’s Office projects that the City will generate more resources in the current year compared to its current year expenses.

The prospect of the City achieving an operating surplus is a positive development. However, the need for a larger roll and budget cushion cannot be overstated. Unexpected events can necessitate increased expenditures and cause revenues to decline. While the current Plan is prudent, it is critical for the City to prepare for a downturn. The City can build its budgetary cushion by implementing a citywide agency efficiency program. In past years, a program to eliminate the gap (PEG) saved the City billions of dollars. The historical pattern during the years of the recession was for the City to implement PEGs of about $1 billion. If a similar program with recurring savings were implemented and maintained over the course of the Financial Plan period, the City could save $10 billion by FY 2019. A program of half that size would still yield $5 billion by the end of the Plan period. In November, the Administration requested City agencies to generate savings proposals which are to be incorporated in the Executive Budget in the spring.

Current economic conditions have helped generate manageable outyear gaps. That does not however, diminish the need to maintain discipline in city budgeting. Regularly evaluating costs and incorporating efficiencies is essential for achieving budget discipline. In order to weather unexpected events, the Comptroller’s Office believes it is necessary for the City to have a multi-billion dollar budgetary cushion to make it through a downturn. The City must ensure it is in a position to set aside more resources for its future.