Comptroller's Comments on the Adopted Budget For FY 2009 and Financial Plan for Fiscal Years 2009-2012
July 27, 2007

The past year has seen a long economic expansion unravel dramatically. The financial model that promoted the widespread securitization of residential and commercial mortgages and a variety of other assets proved seriously flawed: inadequate underwriting by financial institutions, deficient evaluation by private ratings agencies, and insufficient regulation by government led to collapsing asset values and a freezing of credit channels. The nation’s financial institutions are expected to suffer losses approaching $600 billion on residential loans and securities alone, consumer spending is weakening, and skyrocketing energy prices are generating inflationary pressures. The credit markets, which lubricate economic activity, are still sorting and repricing risks and have failed to stabilize despite unprecedented interventions by monetary authorities.

Nonetheless, in FY 2008 the City of New York was able to preserve surpluses built up in prior years and add nearly $2 billion to the fund that is enabling it to balance FY 2009 and considerably narrow the FY 2010 budget gap. The accumulated surplus of $6.6 billion will make available additional resources of $3.81 billion in FY 2009, $2.45 billion in FY 2010 and $350 million in FY 2011. FY 2009 has already benefited from actions taken in FY 2007 that reduced FY 2009 spending by $675 million.

The Bloomberg Administration has prudently set aside surplus resources as a hedge against the city’s volatile economy and tax revenues. Arguably, the strength of the city’s tax collections during much of the Mayor’s tenure has made such decisions less difficult than they would otherwise have been. However, the pressure to use resources for current benefits–such as increased services or tax reduction–can be tremendous, and the Mayor is to be commended for balancing immediate needs with preparation for the inevitable economic downturn. As a consequence, the level of City services and tax rates will be more stable in the coming period. Even greater commendation would be in order if the City would establish a formal budget reserve–a “rainy day fund”–to institutionalize the practice of smoothing the City’s volatile revenues.

Despite the significant reserves devoted to reducing future budget gaps, the City still projects large out year budget gaps of $2.344 billion in FY 2010, $5.158 billion in FY 2011 and $5.108 billion in FY 2012. These projections would be much larger but for the assumption that the 7 percent reduction in the property tax that was enacted in FY 2008 will be rescinded in FY 2010. Without these additional revenues, the projected out year gaps would reach $3.567 billion in FY 2010, $6.456 billion in FY 2011, and $6.467 billion in FY 2012.

Stated spending is projected to decline from $62.94 billion in FY 2008 to $59.39 billion in FY 2009. However, these figures are artifacts of the way in which surplus resources are transferred from one year to the next. Adjusted for the transfers, spending will grow 4 percent from FY 2008 to FY 2009, and growth will average 4.1 percent per year for the entire Financial Plan period. While revenues are projected to grow at the same rate, they start from a lower base and thus the persistent gaps in the out years are created.

Furthermore, in most years of the Financial Plan period, risks identified by the Comptroller’s Office outweigh potentially favorable developments. On net, the City is likely to experience a gap of $68 million in FY 2009, additional resources of $295 million in FY 2010, and increments of $538 million and $334 million to the gaps in FYs 2011 and 2012, respectively. As a result, the Comptroller’s projected FY 2010 gap narrows to $2.049 billion while the FY 2011 and FY 2012 gaps widen to $5.696 billion and $5.442 billion, respectively.

For FY 2009, the gap emerges because tax revenues lag the City’s projections and overtime expenditures exceed them. In subsequent years of the plan, the Comptroller’s Office expects revenues to exceed the City’s projections. Overall, the Comptroller’s economic outlook, while gloomy, does not yield as sustained a fall-off in tax collections as does the City’s forecast. The Comptroller expects more robust property values and a quicker return to income growth than the City, although the Comptroller expects outyear business tax revenues to grow more slowly.

Spending risks in the out years of the plan are considerable and derive from four sources. First, the City’s proposed $200 million annual savings from health insurance restructuring would be welcome, but no plan is in place to achieve them. Second, the City continues to present optimistic projections of overtime costs, which the Comptroller expects will exceed planned amounts by $100 million per year. Third, pension costs will be higher because FY 2008 investment returns fell short of the zero percent return reflected in the Adopted Budget, and the City will be required to make additional pension contributions that the Comptroller’s Office estimates will grow from $83 million to $225 million during the plan period. Fourth, changes in accounting standards will prevent the City from borrowing for certain activities that have been considered capital expenditures, unless there is a change in State law. These expenditures are estimated to total $500 million per year. Therefore, despite the Comptroller’s forecast of lower judgments and claims costs than those projected in the Financial Plan, spending risks grow from $275 million in FY 2010 to $799 million in FY 2012.

The City continues to grapple with its cost structure. Rate increases for employee health insurance are projected to be 9.4 percent in FY 2009 and 8.0 percent annually thereafter. Although pension fund contributions are slated to grow at a very moderate 1.2 percent in the outyears of the Financial Plan, this moderation could be in jeopardy if investment returns do not recover quickly from FY 2008 results.

The increasing burden of debt service is cause for concern. Debt service is projected to increase 7.6 percent per year from FY 2008 to FY 2012. This growth is fueled by General Obligation debt borrowing that will average $6 billion per year and push the City’s debt burden (debt service as a percent of tax revenues) from 13.8 percent in FY 2009 to 15.1 percent in FY 2012. Overall, New York City gross debt outstanding totaled more than $7,000 per capita in FY 2007. In the face of dwindling revenues, the City removed pay-as-you-go capital spending from its financing program to free resources for other purposes. While this is an appropriate short-term measure to lessen the impacts on services of shrinking resources, the City has removed this financing method from each year of the Financial Plan. Since the benefits of pay-as-you-go financing to the City’s overall debt burden and the long-term costs of the capital program are cumulative, pay-as-you-go financing should be returned to the plan as soon as possible.

The City’s budget will continue to be under pressure for some time to come, as the scenario of falling or stagnating revenues combined with rising costs continues to unfold.The judicious use of reserves to smooth out revenues has afforded the City some time to develop gap-closing initiatives to address the large budget gaps in FY 2010 and beyond. The best interest of New Yorkers will be served if these initiatives appropriately balance necessary services with the City’s high tax burden and do not borrow from our future. In any event addressing the City’s looming budget problems will require shared sacrifices.

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