Comments on New York City’s Preliminary Budget for Fiscal Year 2017 and Financial Plan for Fiscal Years 2016-2020
EXECUTIVE SUMMARY
While the City’s January 2016 Financial Plan forecasts manageable budget gaps in FY 2017 through FY 2020, the Comptroller’s Office projects larger gaps that could grow to $3.77 billion in FY 2020. The Comptroller’s identified risks to the Financial Plan are a greater concern given the prospect for continued strong economic growth has diminished in recent months. Moreover, while New York City has experienced six consecutive years of economic growth, characterized by robust job creation, many new jobs have been concentrated in low-wage sectors.
Economy
New York City enjoyed its sixth consecutive year of economic expansion in 2015. The most striking aspect of the current expansion is the pace of job creation. Since 2009, over 525,000 private sector jobs have been created, with the number of jobs added exceeding that in each of the last two economic expansions. The job growth is led by the retail super-sector which grew by nearly 30 percent, or 180,000 employees. This supersector includes traditional retail consumer goods outlets, as well as food service, and leisure and hospitality establishments. The business super-sector, comprising finance, insurance, real estate, legal services, accounting, architecture and engineering, and corporate headquarters, has recovered from the recession but unlike previous expansions is not the main driver of job growth.
More New Yorkers are employed today than ever before, but the benefits have not been evenly distributed. A disproportionate share of the jobs created since 2009 has been in low-wage industries compared to medium-wage and high-wage industries. Low-wage industries have accounted for 57 percent of the net gain in jobs while medium-wage and high-wage industries have accounted for 20 percent and 23 percent, respectively. In contrast, during the previous economic expansion, from 2003 to 2008, 35 percent of the job gain was in the high-wage industries while 41 percent was in the low-wage industries.
Another area of concern is the slow growth in wage rates. Since 2009, average private-sector weekly earnings have grown at an annual rate of 1.6 percent. This growth is driven primarily by wage increases in industries that already paid the highest wages. After adjusting for inflation, wages in high-wage industries grew by more than 10 percent from 2009 to 2014. Over the same period, real wages in medium-wage industries grew by 4.1 percent but declined by 3.2 percent in low-wage industries.
While there are risks to the City’s economy from the stock market decline and potential impact of China’s economic slowdown on the global economy, both the U.S. and the City’s economy show few of the usual signs of an impending recession. The City’s overall economic growth and job creation should continue through 2016, though at a slower pace than 2015. The Comptroller’s Office projects that real gross city product (GCP) will grow at 2.6 percent compared to 3.4 percent in 2015.
FY 2017 Preliminary Budget
The FY 2017 Preliminary Budget reflects the continuing expansion of the City’s economy. The FY 2017 Preliminary Budget totals $82.1 billion, an increase of $1.2 billion in total funds revenues from the November Plan. Tax revenues are $723 million above the November projections, while non-tax City-funds revenues show a net decline of $83 million. The decrease in non-tax City-funds revenues is driven primarily by the postponement of planned taxi medallion sales. Upward revisions to Federal and State grants account for most of the remaining increase.
City-funds expenditures, excluding the roll of the FY 2016 $500 million Capital Stabilization Reserve (CSR) into FY 2017, is $1.06 billion more than the November Plan. The higher expenditures results from an increase in agency spending of $744 million, additional pension contributions of $582 million due primarily to the adoption of improved retiree mortality assumptions, and $5 million to fund the City’s plan to raise the minimum wage of City employees and contract social service workers to $15 an hour by December 31, 2018. These additional expenditures are partially offset by $270 million in spending reductions from the Citywide Savings Program. Together, the changes in Cityfunds revenues and expenditures and the roll of the CSR increase the FY 2017 gap projected in November from $1.2 billion to $2.16 billion. This gap is closed by prepaying an additional $2.16 billion of FY 2017 debt service in FY 2016. The prepayment reduces FY 2017 expenditures by a commensurate amount.
The increase in the FY 2016 prepayment results from the recognition of $3.56 billion of additional resources in FY 2016 in the current Financial Plan. Upward revisions of $873 million and $281 million to tax and non-tax revenues, respectively, and spending reductions of $804 million from the Citywide Savings Program account for $1.96 billion of the increase. The remaining $1.6 billion of additional resources is due to a $700 million reduction of the FY 2016 general reserve, a re-estimate of prior-year receivables and payables resulting in a net reduction of expenditures of $400 million in the Plan, and the roll of the $500 million CSR from FY 2016 to FY 2017. Part of the additional resources are used to fund Health + Hospitals’ debt service, medical malpractice and fringe benefits expenditures totaling $337 million; additional pension costs of $569 million due primarily to the adoption of enhanced mortality assumptions; and $492 million in additional agency spending. The remaining $2.16 billion are rolled into FY 2017, through the pre-payment of FY 2017 debt service, to balance the FY 2017 budget.
The Citywide Savings Program in the January 2016 Financial Plan is similar to the savings program in the May 2015 Financial Plan in that it is a voluntary program with savings targets established by the participating agencies. The program is projected to save $1.07 billion over the first two years of the Financial Plan and $1.85 billion over the five years of the plan period. While the savings over the first two years of the Plan are modestly higher than $1.05 billion savings in last year’s Plan, the total savings of $1.85 billion over the five-year period is 36 percent less than last year’s savings of $2.91 billion.
Homeless Services
Spending to support citywide homeless services is allocated among three agencies, the Department of Homeless Services, the Department of Social Services, and the Department of Youth and Community Development with the bulk of the spending concentrated in the Department of Homeless Services. Homeless services expenditures are projected to be $1.72 billion in FY 2016, a 46 percent increase from FY 2014. Driving this increase is the growth in rental assistance programs which have grown more than five times from $23 million to $122 million, primarily in support of the Living in Communities (LINC) program. Spending on homeless services is projected to drop to $1.55 billion in FY 2017, due mainly to an expected decline in shelter operations. Additionally, the City has not yet fully recognized anticipated Federal and State grants, particularly for family shelter operations. However, if the shelter population does not decline as forecast by the City, there could be a risk of about $100 million in the projected spending on adult shelter operations, which is about 80 percent supported by City funds. Adult shelter census hit a new peak of 13,216 in February and has shown little signs of slowing down.
Risks and Offsets
In addition to the risk in adult shelter spending estimates, the Comptroller’s Office has identified additional risks in the City’s assumptions of NYC Health + Hospitals reimbursements; overtime spending; Federal Medicaid reimbursement for special education services; Universal Pre-Kindergarten funding; and Public Assistance spending. NYC Health + Hospitals is required to reimburse the City for debt service, medical malpractice claims, and fringe benefits costs incurred on the system’s behalf but has only made the full payment once in the last four years. If the payments are not made in full, the City will have to cover expenses averaging $350 million annually over the next four years. The Comptroller’s Office also does not anticipate that the scheduled taxi medallion sales, which are projected to generate revenues of $107 million in FY 2018, $257 million in FY 2019, and $367 million in FY 2020, will take place before FY 2020 given the current uncertainty in the taxi industry.
Offsetting some of the risks is the Comptroller’s Office higher tax revenue and camera fines projections, and the expectation that variable interest rates will be below the City’s estimates. In addition, the Comptroller’s Office does not anticipate that the $300 million in the FY 2016 General Reserve will be needed for FY 2016 budget balance.
All together the risks and offsets identified by the Comptroller’s Office result in additional resources of $599 million in FY 2016 and gaps of $200 million in FY 2017, $2.72 billion in FY 2018, $3.83 billion in FY 2019, and $3.77 billion in FY 2020. The cumulative gaps projected by the Comptroller’s Office over the five years of the Plan are $1.96 billion more than the Plan projections.
Given the uncertainty of the economy, large outyear budget gaps are now a greater cause for concern and reinforce the need for prudent fiscal management.