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Comptroller William C. Thompson, Jr. today issued his charter-mandated report analyzing Mayor Bloomberg’s Fiscal Year (FY) 2007 Executive Budget showing that the City’s FY 2006 surplus is expected to be $5.4 billion. The surplus will go towards balancing the FY 2007 budget, narrowing the FY 2008 gap, and creating a Retiree Health Benefits Trust Fund.

“The robust housing and commercial real estate market, combined with the strong showing on Wall Street, higher than normal revenue collections, and a one-time savings in pension contributions is expected to generate an extraordinary surplus of $5.4 billion in FY 2006,” Thompson said. “The City is headed in the right direction by using the surplus to balance the budget in FY 2007 and narrow the gap in FY 2008, when it is expected that residential and commercial real estate activity will return to more normal trends.”

Thompson’s report highlights the City’s prudent measures for the budget surplus thus far, and suggests ways to begin setting aside revenue to prepare for future economic downturns.

Thompson supports the City’s plans to create and fund a Retiree Health Benefits Trust Fund (RHBTF) by the end of FY 2006 with a $1 billion deposit this year and an additional $1 billion in FY 2007. The assets accumulated in the RHBTF will partially offset the liabilities related to post-employment benefits, such as retiree health insurance coverage, which governments will be required to compute and disclose on their entity-wide financial statements beginning in FY 2008.

However, Thompson points out that while the use of these surplus monies reduces FY 2007 spending to $53.392 billion and enables budget balance, there are spending pressures looming in the future. In the next four years, debt service growth will outstrip tax revenue growth by 37 percentage points. Pension contributions will increase from $4.0 billion in FY 2006 to $5.7 billion in FY 2010. Employee health care costs are projected to grow an average of 8.9 percent per year.

Expenses such as debt service are difficult to control due to their rapid growth. However, Thompson recommends incorporating more pay-as-you-go financing into the capital plan and using it to maximize future savings, which would help trim debt service expenses over the long run. In the past few budgets, pay-go funds have been used for short-term budget relief rather than the capital projects for which they were intended.

“My office estimates that if a $200 million pay-as-you-go program had been put in place in FY 2004 and maintained until 2010, we could realize full annual debt service savings of $100 million,” Thompson said during testimony before the New York City Council. “Over the life of such a program – until the last bond was due in 2040 – total savings would be about $3 billion.”

Thompson’s report also cautions that despite prudent use of this year’s surplus, the outyears continue to show large budget gaps of $3.579 billion in FY 2008, $4.202 billion in FY 2009, and $3.588 billion in FY 2010. It is predicted that both the local and national economies will slow, having an effect on revenue collections.

Thompson’s report states that there are several unresolved issues in the FY 2007 budget. The State has yet to present a plan to fully address the Court decision in the Campaign for Fiscal Equity (CFE) lawsuit. Some progress appeared to have been made in the 2006 legislative session, when Albany lawmakers agreed to provide additional state funding for school building projects.

The agreement includes $1.8 billion in school construction financing from proceeds of bonds issued by a State authority, and creates a mechanism for assigning State building aid to pay debt service on $4.87 billion in New York City Transitional Finance Authority (NYCTFA) bonds. Details of this latter portion of the agreement have yet to be finalized, and adequate appropriations must be made by the State Legislature for the State building aid allocations.

Additionally, Thompson points out potential risks to the City’s budget by the indirect efforts of the State to control Medicaid costs. Although the City’s Medicaid spending will be capped because of recent legislation, pending Medicaid cost reduction actions by the State may have a significant negative impact on the Health and Hospitals Corporation, but this may not be known until resolution of a dispute between the Governor and the Legislature over the latter body’s constitutional powers to alter budget items.

Overall, Thompson’s report shows a healthy picture of the City’s economy and finances. The Comptroller commended the Mayor and New York City Council Speaker Christine Quinn’s recent efforts to improve transparency in budgeting by providing Units of Appropriation (U of A), which is a more meaningful budget category so that New Yorkers can better understand how their tax dollars are being spent.

A copy of the report can be viewed at the Comptroller’s web site: www.comptroller.nyc.gov