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The Comptroller's Comments on the Adopted Budget for Fiscal Year 2010 and the Financial Plan for FYs 2010 - 2013
July 2009
In compliance with State law, the City of New York adopted a balanced budget for FY 2010 on June 19, 2009. The size of the budget, $59.59 billion, is roughly the same as that presented in the Executive Budget released at the beginning of May. However, the Adopted Budget required new resources to address nearly $700 million in additional spending and a reduction in expected revenues of more than $200 million. These were funded through a variety of mechanisms that included eliminating a $530 million prepayment scheduled for FY 2011 and shifting a portion of it to FY 2010.
Tax revenues have evaporated as a result of the recession. FY 2010 baseline revenues are expected to be $1.56 billion less than in FY 2009. Personal income tax collections alone are expected to be approximately $3 billion less in FY 2010 than they were two years ago, a reduction that exceeds 30 percent.
The City has struggled to maintain budget balance since the impacts of the economic downturn became evident in mid-FY 2008. At that point, the FY 2010 budget was projected to total $65.8 billion, or $66.8 billion after adjusting for prepayments. The Adopted FY 2010 Budget, adjusted for prepayments, totals $65.226 billion, a reduction of $1.6 billion from the level forecast in January 2008. The reduction is even larger when considering only the City-funded portion of the budget, which was trimmed $1.9 billion during that period.
The spending reductions were coupled with significant revenue-raising actions, most notably in FY 2009 a mid-year property tax increase that is expected to yield $1.2 billion in FY 2010. The Adopted Budget includes an additional $879 million in revenue from sales tax increases and business tax reform, as well as $2 billion in Federal stimulus funds, including Medicaid cost relief.
This budget exhausts the considerable reserves that had been accumulated from FY 2003 to FY 2008. A portion–$1.8 billion– of the accumulated surpluses from these years helped to balance FY 2009. For FY 2010, prior year resources were used to prepay debt service, health insurance, subsidies to various entities and to fund other actions that reduced spending obligations by $5.636 billion.
In its review of the FY 2010 budget, the Comptroller’s Office does not anticipate significant expenditure risks and takes a more optimistic view of tax revenue collections for the current year. The City’s overtime projection is, as always, optimistic, and the Comptroller cautions that the City will face nearly $140 million in additional overtime expense. The Comptroller also anticipates that FY 2010 tax revenues may exceed the City’s projections by $1.2 billion. Consequently, there may be additional resources of $1.096 billion in the current year that could be available for unexpected contingencies or to apply to FY 2011 gap-closing programs.
Risks to the budget mount in the outyears of the Financial Plan. The City’s projected gaps grow from $4.9 billion in FY 2011 to $5.6 billion in FY 2013. However, substantial risks in the City’s gap-closing program, and its assumption that it will continue to be held harmless by the Financial Control Board from certain standards promulgated by the Governmental Accounting Standards Board, outweigh potential additional tax revenues, and could lead the gaps to grow $300 million in FY 2011, $700 million in FY 2012 and well over $900 million in FY 2013.
The Mayor is required by the City Charter to submit a Preliminary Budget for the coming fiscal year to the City Council in January. Therefore, in six months time a preliminary plan to close the $4.9 billion FY 2011 gap must be in place. Even the additional resources anticipated by the Comptroller’s Office would address only a fraction of the gap. Given the prolonged period of budget retrenchment the City has already endured, there are a dwindling number of gap-closing options that do not entail noticeable service impacts or tax increases.
Since FY 1987, when measured as a percent of revenues, the ensuing fiscal year’s budget gap at the time of budget adoption has been higher than the projected gap for FY 2011 in only two instances: at the FY 2003 Adopted Budget and the FY 2006 Adopted Budget. In 2003, the gap was closed with an aggressive program to eliminate the gap, which included substantial tax increases and significant spending reductions. In FY 2006, tax revenues resurged unexpectedly to help eliminate the gap. Since this resurgence was a byproduct of the “bubble economy” characterizing the last economic expansion, the Comptroller believes that a similar performance is unlikely to be repeated in the near future.
As we have documented in previous reports, a large portion of gap-closing actions over the past 18 months have had recurring impacts. However, the gap-closing program is dwarfed by the magnitude of one-time actions that artificially reduced FY 2010 spending obligations. Although the use of surplus resources to prepay obligations has greatly assisted the task of balancing the FY 2010 budget, those obligations recur in the outyears of the Financial Plan but the resources do not.
The budget includes initiatives meant to contain spending growth over the longer term. Pension costs, debt service, and employee health insurance costs have grown robustly in recent years. The City has reduced significantly its capital program to slow the growth rate of debt service, although the benefits of this action won’t be felt in the short run and are obtainable only if future capital budgets are smaller than in the current year. While the Municipal Labor Committee has agreed to certain changes in the distribution of the health insurance cost burden, additional savings included in the Financial Plan have yet to be negotiated and are at risk. Similarly, the creation of a new pension tier is yet to be approved by the State legislature.
Labor costs may also be higher than projected in the Plan. Annual wage increases of 1.25 percent have been budgeted for the next round of collective bargaining agreements. The United Federation of Teachers and the Council of School Supervisors and Administrators are the only unions that have not reached agreements with the City under the last round of collective bargaining, which granted 4.0 percent annual increases.
Pressure from the budget has led the City to abandon two practices that bolstered its long-term fiscal position. Starting in FY 2004, the City had haltingly begun to implement a “pay-as-you-go” component to its capital financing plan, which would in the long run reduce the City’s overall debt service burden. In the January 2008 Financial Plan, $700 million in funding for “pay-go” was removed from the financing program. In addition, in FY 2006 the City established a fund to hold assets to offset accumulating liabilities for retiree health benefit expenses. This fund is now being tapped to free up resources for gap-closing purposes. No replenishment of this fund is scheduled during the Financial Plan period. This is unfortunate and the City should make every effort to resume both initiatives.
One year ago, the Comptroller noted that the City would face a lengthy period of stagnating revenues and increasing costs, making the task of balancing the budget extremely challenging. Indeed, laboring against strong headwinds, the City has succeeded in reducing the projected FY 2011 budget gap by slightly more than $200 million since the FY 2009 budget was adopted in June 2008. The potential for a surplus in FY 2010 and the availability of funds from the general reserve and other sources could provide some resources to partially address the gap; however, absent additional aggressive actions there still would remain a substantial shortfall even under an optimistic scenario.
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