View State of the City's Economy Report

Comptroller William C. Thompson, Jr. today issued his charter-mandated report on the State of the City's Economy and Finances, indicating the City could end Fiscal Year 2006 with a surplus nearly $700 million greater than the $1.7 billion surplus projected by the Mayor.

Thompson noted that the Fiscal Year 2007 budget gap could decline to about $1.5 billion, compared with the $4.5 billion that was projected when the budget was adopted. This gap could be reduced further if the additional FY 2006 funds are available to be applied to FY 2007 expenses.

The report contains an analysis of the Mayor's November Modification to the Fiscal Years' 2006-2009 Financial Plan.

“The City appears to have entered a stable economic period and is headed in the right direction for next year,” Thompson said. “The reduction of the FY 2007 budget gap creates an opportunity for the City to develop a cost-containment plan that will address longer-term fiscal imbalance.”

Thompson pointed out that the most significant changes for Fiscal Year 2006 in the November Modification are $1.97 billion in projected tax revenues from the real estate market and a stronger job market, additional costs of $626 million resulting from the collective bargaining agreements reached in October and November, and the recognition of a one-time benefit of $450 million stemming from the implementation of a new State policy designed to limit growth in the local share of Medicaid expenses. The cost of the collective bargaining agreements will grow in the outyears of the Financial Plan.

The Comptroller identified a number of risks and offsets to risks in the November Modification, which together may result in net additional resources of $692 million in FY 2006, $759 million in FY 2007, $198 million in FY 2008, and $296 million in FY 2009.

Thompson noted that changes to the actuarial methodology and assumptions for computing the City’s pension costs, which were approved by the Boards of Trustees of all five Pension Funds prior to the November Modification, would provide substantial additional resources in Fiscal Years 2006 and 2007 but will increase costs in the long-term.

As a result, pension contribution is expected to be $192 million higher than the City’s projection by FY 2009. Elements of the changes have yet to be enacted into law by the State Legislature.

Risks to the City’s FY 2006 projections include a potential tax revenue shortfall of $64 million and unfunded overtime costs of $97 million.

Furthermore, the federal budget may pose a long-term risk. Federal budget priorities include reductions in discretionary domestic spending, with much of the emphasis placed on entitlement spending for welfare and low-income programs that could have a significant impact on the City’s budget.

Thompson’s report shows a healthier picture of the City’s economy and finances than was reflected in the Adopted Budget. Thompson’s analysis shows that the City is likely to reap nearly $900 million in additional property tax revenues from Fiscal Year 2007 to Fiscal Year 2009 as a result of the continued strength of the City’s real estate market.

However, Thompson warned that despite the additional resources identified in his report, large budget gaps remain in the outyears. He estimates that the gaps will reach nearly $4 billion and $3.2 billion in Fiscal Years 2008 and 2009, respectively. In addition, balancing the current fiscal year’s budget required substantial prepayments from Budget Stabilization Account funds accumulated in Fiscal Year 2005. Those funds are only partly replenished in the November Modification.

A mix of borrowing, tax increases, funding shifts, and spending reductions has allowed the City to overcome challenges due to the September 11th attacks and the 2001-2002 recession.

“Progress has been made in containing costs, notably with the State Medicaid cap and the negotiated cost offsets and productivity measures in the new union contracts,” Thompson said. “However, the persistence of outyear gaps combined with the current-year reliance on last year’s surplus demonstrates that the City is still struggling to gain control of its expenditures.”

###