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Changes in Federal Policies Pose Significant Risks for New York City's Budget

Projected budget gaps for New York City in the coming years appear manageable, but tax changes and budget cuts on the federal level pose a significant threat to the city’s finances, according to a report released by State Comptroller Thomas P. DiNapoli.

"Major shifts in federal fiscal policies constitute the greatest risk to the city since the Great Recession," DiNapoli said. "New York City’s economy is strong, the 2018 budget is balanced and the out-year gaps are manageable under current conditions, but difficult times may lie ahead, depending on the effects of what happens in Washington."

The November update to the city’s four-year financial plan covering fiscal years 2018 through 2021 projects budget gaps of $3.2 billion in fiscal year (FY) 2019, $2.3 billion in FY 2020 and $1.6 billion in FY 2021. Although the city is not currently projecting a surplus in FY 2018, the out-year gaps are smaller than those projected in June, reflecting the impact of a citywide savings program and better-than-expected pension fund investment earnings last year.

The gaps are relatively small as a share of city fund revenues (averaging 3.5 percent) and the city has reserves that could be used to narrow the budget gaps if not needed for other purposes. The city’s financial plan has a general reserve of $1.2 billion in FY 2018 and $1 billion in each subsequent year. The city also has a capital stabilization reserve of $250 million annually.

Since 2009, the city has added 630,000 jobs through 2016 and is on pace to add another 74,000 jobs in 2017. Job growth has come primarily in the business services, health care, and leisure and hospitality sectors, which have accounted for 60 percent of the gains. Job growth, though slowing, is expected to continue at a moderate rate. However, changes in federal policies could affect the city’s economy and finances.

The House of Representatives and the Senate have reached agreement on a tax plan, which limits the deductibility of state and local taxes and mortgage interest resulting in higher federal taxes and home ownership costs for many city residents. The bill also eliminates the health insurance mandate under the Affordable Care Act, which could increase the number of uninsured people and cause health care costs and insurance premiums to rise.

Under the legislation, the size of the federal deficit would likely grow, increasing pressure on Congress to reduce future spending. The city anticipates receiving $8.3 billion from the federal government in FY 2018, which represents nearly 10 percent of its operating budget. A loss in federal funding at the state level could affect the amount of aid the city receives from Albany.

The Governor is scheduled to release his executive budget for FY 2019 in mid-January 2018. In the past, the Governor has proposed gap-closing actions that would have had impacts on the city’s budget. New York City’s financial plan does not anticipate the potential impact of such actions, but it does assume that it will receive $465 million more in state education aid next year.

The city projects business tax collections will exceed last year’s level by $337 million in FY 2018 despite a sharp decline during the first four months of the fiscal year. Budget experts have speculated that the weakness could be related to a behavioral response in anticipation of changes to the federal tax code. If that is true, collections could pick up in the second half of FY 2018. Collections also could benefit from higher securities industry profits, which totaled $17.8 billion through the first three quarters of 2017, higher than for all of 2016.

Unless business tax collections improve, even the revised forecast for FY 2018 is unlikely to be met. Any additional shortfall, however, would likely be offset in the current fiscal year by a reduction in the property tax reserve and by unplanned audit revenue.

DiNapoli’s office also identified budget risks that could increase the size of the FY 2019 budget gap by as much as $821 million. More than one-third of the risk stems from the potential for lower business and sales tax collections, which the city has acknowledged in FY 2018 but has not reflected in the out-years of the financial plan.

Other risks include:

  • The city’s financial plan does not reflect its last payment ($150 million in FY 2019) of sales tax revenue as the state recoups savings that accrued to the city from refinancing bonds of the Sales Tax Asset Receivable Corporation;
  • Costs for housing the homeless and overtime in the uniformed agencies could be higher than planned;
  • Proceeds from the sale of taxi medallions could fall short of expectations given the competition from other providers, such as Uber; and
  • The Health and Hospitals Corporation continues to face serious financial challenges.

Read the report, or go to: http://osc.state.ny.us/osdc/rpt8-2018.pdf

For access to state and local government spending, public authority financial data and information on 140,000 state contracts, visit Open Book New York. The easy-to-use website was created by DiNapoli to promote transparency in government and provide taxpayers with better access to financial data.