NEW YORK CITY IS IN DEEP DOO-DOO

Just in case you didn't already know, the City is in a big heap of trouble.

Here's an alert we received from New York City Comptroller Bill Thompson :

THOMPSON ISSUES ANALYSIS OF FY 2009 BUDGET MODIFICATION AND FOUR-YEAR FINANCIAL PLAN

-         Impact of recession greater than projected -

-         Budget gap as much as $1.9 billion in current fiscal year -

New York City Comptroller William C. Thompson, Jr. today released his analysis of the Mayor's modification to the Fiscal Year 2009 Budget and Four-Year Financial Plan.  The Comptroller's report predicts that the turmoil that had gripped the financial markets and sent the country into a recession will have a greater impact on City finances than the Mayor is projecting. 

Thompson forecasts that the City's budget gap will be as much $1.9 billion in FY 2009, could drop to $1.5 billion for FY 2010 and may balloon to as much as $5 billion by FY 2011.

The full analysis of the Mayor's Budget Modification is available at www.comptroller.nyc.gov . 

"The fiscal challenges facing New York City have deepened with every month that the paralysis of the nation's credit market continues," Thompson said.  "Waves of negative economic developments during Fiscal Year 2008 have given way to a tsunami of financial anxiety and caused us to issue a more pessimistic forecast than was put forth by the Mayor last month."

The Comptroller's Office estimates that the impact of the recession will result in a tax revenue risk of $935 million to the Fiscal Year 2009 budget.  This includes a $525 million shortfall in real estate-related taxes, a $345 million reduction in personal income and business taxes, and $65 million less in property taxes than projected by the Mayor. 

In addition, the uncertainty of the City Council's reception to cancel the property tax rebate and rescind the 7 percent property tax reduction six months earlier than previously scheduled poses an additional risk of $832 million in FY 2009. 

The Comptroller also has identified expenditure risks of $86 million in FY 2009, including $139 million in higher than projected overtime costs and public assistance costs of $5 million.  These risks are partly offset by judgment and claims payments that are likely to be less than the Mayor is projecting. 

Complicating the assessment of risks to the FY 2009 budget is the rapid deterioration of the State's budget.  Since roughly 70 percent of State spending is in the form of aid to localities, the actions taken to balance the budget will most likely result in fewer resources to municipalities. Comptroller Thompson estimates that the risk to the current year budget is $100 million due to the State's fiscal situation. 

"There are some options to help cushion the effects to the Fiscal Year 2009 budget. The $1.8 billion currently being held in the City's Budget Stabilization Account and additional reserves in the form of a draw-down of the General Reserve and the write-off of certain prior payables can be put towards balancing the 2009 budget," Thompson said. 

If the Stabilization Account funds are instead rolled into FY 2010 as currently scheduled, the budget gap for that year will be $1.5 billion with an expected increase to as much as $5 billion for FY 2011.

Outyear Gaps

The analysis performed by the Comptroller's Office on the outyear gaps shows a net increase of $237 million in FY 2010 and $130 million in FY 2011, with virtually no change in FY 2012.

The Comptroller also estimates that thawing credit markets and housing price declines will lead to more transactions and refinancing than assumed in the Mayor's modification.  The resulting tax revenues, nearly $1 billion by 2012, will more than compensate for the weak personal income and business taxes identified in the Comptroller's report.

The Mayor's Office has included in successive financial plan modifications a $200 million expense offset from "health insurance restructuring" in the outyears. However, no proposal has been made public and an agreement would most certainly be reached through collective bargaining with the City's labor unions.

"Since most municipal unions have contracts that extend through FY 2010, achieving such savings in FY 2010 is uncertain," Thompson said.

An accounting rule change requires that the City report certain environmental remediation expenses as operating, rather than capital, expenses starting this fiscal year. New York City is barred by State law from borrowing for operating expenses. The City sought, and received, permission from the Financial Control Board to continue to borrow for these remediation expenses through FY 2010. Starting in FY 2011, these expenses, estimated to reach roughly $500 million per year, will have to be funded in the City's operating budget unless there is a change in State law.

"Uncontrollables," described by the Mayor's Office as including pension costs, employee health insurance and debt service, are slated to grow by 24 percent during the plan period, with debt service alone expected to grow by 30 percent.  Coupled with slow growth in tax revenues, debt service will absorb one of every six City tax dollars by FY 2012.  In order to slow the growth of debt service, the Mayor called for a 20 percent reduction in the FY 2008 to FY 2012 Capital Plan.  The Comptroller's analysis suggests the resulting reduction was closer to 14 percent.

The Mayor is proposing to draw down $1.149 billion of the Retiree Health Benefit Trust Fund (RHBT) to fund a portion of retiree pay-as-you-go health insurance to offset higher projected pension costs for three years starting in FY 2010.  The RHBT was established with the potential to function as a rainy day fund and Thompson said as soon as circumstances permit, the assets should be replenished and a true rainy day fund be established.

"As the economy erodes, the outlook for New York City's fiscal future will continue to change.  My office will be monitoring the situation closely and we will release another report on the City's financial condition in the coming months," Thompson said.