Comments on New York City’s Preliminary Budget for FY 2015 and Financial Plan for Fiscal Years 2014-2018
EXECUTIVE SUMMARY
Nearly five years since the end of the last recession, the City’s economy and finances continue to improve although sometimes erratically and unevenly. In 2013 the City added 96,100 private sector jobs, the most in any calendar year since 1999. The City’s unemployment rate, which had remained stubbornly high during much of the economic recovery, finally showed an indication of improvement, as the year-end unemployment rate was over one percent lower than at the same point the year before. But this news is tempered by the fact that other key economic indicators have not reclaimed their pre-recession momentum. For the fifth straight year, New York City workers’ wages have not kept pace with cost of living increases and the City has seen only modest growth in overall economic output.
The City’s economic attainments in 2013 far outshined the country as a whole. U.S. economic growth, which seemed to finally be gaining some momentum, slowed down in 2013 as Gross Domestic Product (GDP) grew only 1.9 percent during the year. Federal fiscal policies and the uncertain political circumstances in Washington were the primary causes of economic growth deceleration in 2013. The Comptroller’s Office is optimistic that a more favorable economic policy outlook for 2014 will reinvigorate the national economy. Certain key economic indicators have begun to exhibit positive momentum particularly relating to the nation’s housing market. As a result of these factors, the Comptroller’s outlook for the U.S. economy is for continued moderate growth over the next few years. The Comptroller expects U.S. economic growth to reach 3.0 percent in 2014 for the first time since 2005.
The national economic forecast presages similar growth at the city level. New York City’s economy should continue its stable growth over the next few years. Job creation is expected to continue at a strong pace although not necessarily the benchmark set by 2013. Employment growth is seen across major industry sectors, a positive sign that New York City’s economy is diversifying from an over-reliance on the traditional finance and insurance sectors. The Comptroller forecasts that the growth in employment will continue to cut into the City’s unemployment rate. Wage rate growth is forecast to gain some potency in the coming years but may be partially offset by an increase in the inflation rate.
The City’s economic recovery has facilitated a strengthening of the City’s budgetary outlook. The financial plan released in November 2013 was the first time in memory in which the next year’s budget was balanced prior to the issuance of the Preliminary Budget. The February Financial Plan, with no budget gaps to close in the coming fiscal year, presents a City budget that has relatively small outyear gaps and a good deal of resources available. But, as with the City’s economic forecast, this good news is somewhat tempered by uncertainty, particularly as it relates to collective bargaining and the settling of expired municipal union contracts.
The FY 2014 budget totals $73.82 billion in the February Financial Plan, which includes an additional $862 million of City-funds. This increase is driven primarily by vi stronger than expected tax collections in the current year. These additional resources coupled with savings, particularly in debt service costs, enabled the City to restore certain services that had previously been cut from the budget as well as to replenish the Retiree Health Benefits Trust (RHBT) which had been scheduled to be depleted in the current fiscal year. The FY 2014 budget contains $1.77 billion of resources planned to be used to pay for FY 2015 expenses. This is a decrease in the magnitude of the prepayment from the prior fiscal year when the City utilized $2.8 billion of FY 2013 resources to pay for FY 2014 expenses.
The Preliminary FY 2015 Budget totals $73.71 billion, an increase of $970 million since the November Plan. The growth in the FY 2015 budget is primarily the product of an increase of $999 million in the City-funds budget. The additional Cityfunds revenues result from an increase of $1.12 billion in tax revenues and a decrease of $125 million in non-tax revenues. The additional tax revenues are comprised of an estimated $600 million of additional tax receipts coupled with $530 million of funds to be collected as a result of a planned personal income tax (PIT) surcharge. This surcharge on high-income earners would provide a dedicated funding stream for an expansion of the City’s pre-kindergarten program as well as for after-school programming for middle school students. In addition to funding these programs, the additional FY 2015 resources are planned to add $300 million to the City’s general reserve, increasing the reserve from $300 million to $600 million in FY 2015 and in each of the outyears of the Financial Plan.
While the Preliminary FY 2015 budget is balanced, there are significant risks that if realized could create large funding gaps. The single largest risk to the budget is the absence of funding for collective bargaining agreements for all of the City’s municipal labor unions. Currently all of the City’s over 150 collective bargaining units are working under the terms of expired contracts. The cost of settling such contracts could add significant costs to the Financial Plan. Furthermore, the City’s forecast of an additional $530 million in FY 2015 resulting from the implementation of a PIT surcharge is dependent upon approval in Albany. If the State does not approve the surcharge, it will need to provide another reliable and stable source of funding for the UPK program.
Additional risks to the Plan include the City’s underestimation of overtime spending and overestimation of Medicaid reimbursement to the Department of Education (DOE). The Comptroller estimates that uniformed overtime spending in the Police Department and Department of Correction will exceed the budgeted amount by $128 million in FY 2014, $122 million in FY 2015, and $100 million annually beginning FY 2016. Lower than estimated Medicaid reimbursements in the DOE could increase the risks to the Financial Plan by $30 million in FY 2014, $110 million in FY 2015, and $140 million annually beginning in FY 2016.
These risks are partially offset by the Comptroller’s revenue projections. The Comptroller’s Office expects tax revenues to be above the City’s forecast in each year of the Financial Plan driven primarily by strength in the property tax. As a result of the higher tax revenue forecasts, the Comptroller projects additional resources of $510 million in FY 2015, $324 million in FY 2016, $997 million in FY 2017, and vii $1.7 billion in FY 2018. These additional resources would offset the Comptroller’s risks, resulting in surpluses of $510 million in FY 2015, $467 million in FY 2017 and $1.3 billion in FY 2018 and narrowing the FY 2016 gap to $735 million.