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New York City Comptroller William C. Thompson, Jr. today reported to the Fiscal Control Board that the City's $50.2 billion budget for Fiscal Year 2006 appears to be on course towards balance, but raised concerns about budget deficits in the years to come.

The City ended FY2005 with an unprecedented surplus of $3.5 billion, mostly due to an unexpectedly strong housing market and economy, which bolstered tax revenues. The surplus enabled the City to prepay a significant portion of projected FY 2006 expenses. Without the prepayments, expenses in FY 2006 would reach $53.7 billion. However, t he City's four-year Financial Plan demonstrates that the City will face a deficit of $4.5 billion in FY 2007, $4.47 billion in FY 2008, and $3.9 billion in FY 2009.

" The City's fiscal condition has greatly improved over the past few years and the budget appears to be reasonably balanced for FY 2006 ," Thompson said. "However, one time revenues in FY 2005 are not expected to recur, and this will produce budget gaps in later years. The City must devise a sustainable plan over the long term to address the disparity between revenues and expenses."

Thompson further cautioned that the City faces risks to the budget. He projects additional expenses of $211 million in FY 2006 and $85 million in succeeding years due to the City's chronic underestimation of overtime expenses, which could require additional resources of $181 million in FY 2006, and the impacts of the State's Flex Fund for Family Services, which may involve additional costs of $10 million.

Additionally, he estimates a minimum of $30 million in retroactive payments to the City's teachers, when a collective bargaining agreement is reached. Thompson noted that these costs could reach $980 million if the teachers' union settlement reflects provisions established in the recent Patrolmen's Benevolent Association arbitration ruling.

Thompson forecasts that although the City could face significant risks in FY 2006, there may be potential resources and offsets through additional revenue to promote budget balance in the out-years.

Thompson believes that the City will likely again collect significantly more tax revenues in the current fiscal year than projected, and that tax revenues derived from housing sales are likely to remain much stronger than the City is projecting. Additionally, the City has not adjusted its forecasts in FY 2005 for actual tax collections, which were greater than anticipated. These factors may result in higher revenues of $1.1 billion in FY 2006.

The report notes that even with these additional revenues, outyear budget gaps remain sizeable. Despite these large deficits, new gap-closing initiatives of just $253 million in the FY 2006 Adopted Budget are among the lowest in more than a decade.

"Instead of relying heavily on the FY 2005 surplus to balance the FY 2006 budget, a higher level of gap-closing actions with recurring benefits would provide budget relief in FY 2006 and narrow the gap in future years. It would also allow the city to retain some surplus as a safeguard against unexpected developments," Thompson states in the executive summary of his report. "The need for an aggressive gap-closing program is obvious given the size and persistence of the outyear gaps."

The Comptroller recommends that in order to help mitigate the ongoing structural imbalance, the City should work to establish a Rainy Day Fund that would require some portion of budget surpluses to be deposited in an account accessible only under specified circumstances.

A Rainy Day Fund would serve the dual purpose of cushioning services during downturns and creating incentives for better fiscal management in good years," Thompson said. "With a Rainy Day Fund, the City would set aside some percentage of excess revenues each year, to be held in a separate account and to be used only in moments of fiscal stress. This account can be funded over a period of years and then used to stabilize City services in a downturn."