The Office of New York City Comptroller William C. Thompson, Jr. today issued the latest version of, “The C-Note,” the periodic column focusing on economic and budget issues affecting New York City. Today’s column is written by Deputy Comptroller for Budget Marcia Van Wagner and titled: “A Review of the Mayor’s Budget”

You can view the column by visiting www.comptroller.nyc.gov and by clicking on the ticker at the top of the home page. In previous weeks, The C-Note has presented columns on the Comptroller’s priorities to help the City weather the storm created by the current economy, provided an outline to better train our future workforce by streamlining the current outdated skills model used by the city, outlined financial mismanagement in the Yankee Stadium deal, and offered a way for the MTA to help ease its financial problems.

The C-NOTE: A Review of the Mayor’s Budget
By Marcia Van Wagner
Deputy Comptroller for Budget

In January 2009, the Mayor presented his Preliminary FY 2010 Budget and Five-Year Financial Plan, which has been reviewed by the Comptroller’s Office. The Mayor’s plan offers further downward revisions to the economic and tax revenue forecasts. Tax revenues are expected to decline $1.1 billion in FY 2009, $2 billion in FY 2010, $1.8 billion in FY 2011, $2 billion in FY 2012, and $1.9 billion in FY 2013 from the November projections.

The revisions widened the FY 2010 gap to $3.611 billion and increased the outyear gaps in the remaining years of the Financial Plan to almost $7 billion, before implementation of gap closing initiatives. Among the proposed actions to address the increased gaps are additional agency spending reductions, sales tax increases, pension reform, and employee health care restructuring.

Prevented by law from establishing reserve accounts for use in later years, the City uses prepayments of future year expenses (particularly debt service) to “roll” its surpluses forward. This surplus roll grew each year from FY 2001 to FY 2008, reflecting surging revenues that exceeded each year’s expenses. This trend has now reversed.
Of a $4.635 billion prepayment made in FY 2008, the City plans to roll forward only $1.553 billion, using the remaining $3.082 billion to balance the FY 2009 Budget. 
In its review of the Preliminary FY 2010 Budget and Five-Year Financial Plan, the Comptroller’s Office has identified risks and offsets to the Mayor’s projections. On net, these factors could result in significantly larger budget gaps throughout the Financial Plan period.

Instead of budget balance in FY 2009 and FY 2010, the City may face gaps of $54 million and $1.865 billion, respectively. Net risks approximate $3 billion in the outyears, leading to gaps of $6.684 billion in FY 2011, $6.982 billion in FY 2012 and $6.862 billion in FY 2013.

Risks and Offsets to the FYs 2009 – 2013 Financial Plan
 ($ in millions)

In the view of the Comptroller’s Office, the national recession is likely to be deeper than the current consensus forecasts, and the subsequent recovery will be weak. While the Comptroller’s Office anticipates that the City’s downturn in 2009 will not be as sharp as portrayed in the Mayor’s forecast, the local economic recovery will be more tentative, and tax collections more anemic. This more pessimistic view underlies expectations of lower tax collections throughout the Financial Plan period.

In FY 2009, the Comptroller’s Office projects that collections of the business, sales, and real-estate-related taxes will fall short of the Mayor’s forecast based on current collection trends. Legislation to increase sales taxes has not been acted upon by the State Legislature, so $77 million of sales tax revenue are also at risk.

Additionally, the Comptroller’s Office identifies a risk of $242 million pertaining to the City’s assumption that there will be a partial restoration of revenue sharing by the State, and an overtime spending risk of $112 million. These risks will be partly offset by restitution agreements achieved by the Manhattan District Attorney’s Office that is $125 million greater than anticipated in the FY 2009 Budget, and the timing of the enhanced funding for Federal Medical Assistance Percentage from the American Recovery and Reinvestment Act of 2009 that would reduce the City’s Medical Assistance spending by $607 million. Overall, however, the State’s interpretation of language in the Act would leave the City $82 million short of its projections.

Despite a more pessimistic overall tax revenue forecast, the Comptroller’s Office expects a gradual return to normal levels of real estate transactions volume beginning in 2010. As a result, real-estate-related taxes are expected to exceed the Mayor’s projections in FY 2010. Overall, risks to the sales, personal and business income taxes outweigh any upside to the Comptroller’s real-estate-related tax revenues.

In the outyears of the Plan, the bulk of the risks result from gap closing initiatives that rely on actions by third parties. Specifically, the City expects an average of $1 billion annually in budget relief in each of FYs 2010 through 2013 from proposed health insurance restructuring and employee premium contribution, pension reform and the restoration of State revenue sharing.

These actions require either State or labor union approval. In addition, the City’s assumption of additional sales tax revenues from sales tax increases would also require State legislative approval. Until there is some indication from the State or labor unions on how they will proceed with these proposals, the outcomes remain uncertain.

City-funded headcount is projected to decline more than 21,000 from FY 2009 to FY 2010 and remain at about 220,000 throughout the Plan period. The bulk of these reductions occur in the Department of Education. However, pedagogical headcount is likely to be restored with the American Recovery and Reinvestment Act funds.

Reductions slated for the police department may also be at least partially offset with stimulus funds. Since the Financial Plan foresees these headcount reductions to be permanent, stimulus funds may only delay, but not prevent, the reductions.

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