DiNapoli: City must prepare for tough economic times
Recession, financial turmoil are possible
Total revenue for New York City’s budget is expected to drop by 9.4 percent to $101.1 billion in Fiscal Year (FY) 2023 amid lower tax revenue and a decline in federal aid.
The city faces sustained challenges from a possible recession, federal monetary policy and turmoil in the financial markets, according to a report on the city’s FY 2023 financial plan released Wednesday by State Comptroller Thomas P. DiNapoli.
“The city’s adopted budget reflects both extraordinary efforts by the federal government to boost the economy over the last two years and an economic slowdown due in part to unanticipated factors,” DiNapoli said. “Higher revenues in Fiscal Year 2022 allowed the city to build reserves and other budgetary cushions, but many of the questions plaguing the city’s economy remain out of its control.”
The improvement to the city’s fiscal footing in FY 2022 stemmed from tax revenue collections that exceeded the city’s projections by over $6.2 billion, additional extraordinary federal aid, a record year for pension returns in FY 2021 and savings from lower-than-planned staffing levels.
DiNapoli’s report notes the unanticipated resources generated from the combination of these factors is not likely to occur at the same level again, however, and some factors have already begun to reverse as the city enters FY 2023.
While the city’s published gaps are manageable by historical standards, averaging 5.3 percent from fiscal years 2024 through 2026, the city will have to prepare for the potential negative budgetary implications of political tensions and their effect on supply chain issues, as well as inflation and the response of central banks.
The city projects tax revenues, which make up 92 percent of all city funds, to decrease by 1.2 percent in FY 2023. This figure, while reasonable, does not reflect the potential impact of a recession. City fund revenues declined by 4.2 percent in FY 2002 and 5.9 percent in FY 2009, the first two full fiscal years of the last two recessions.
The city also had substantial savings from much stronger-than-expected pension investment gains in FY 2021, but that did not continue in FY 2022. DiNapoli’s analysis suggests the city’s pension contributions will need to rise again to make up a shortfall of approximately 15.6 percent in FY 2022. The effects would not be felt until FY 2024 but could rise to an additional $3 billion by FY 2026.
Education funding levels remain uncertain at this time. On August 5, 2022, a Manhattan Supreme Court judge found that the city had violated required procedures and ruled that the city must return education spending to FY 2022 levels until the FY 2023 education budget is re-approved in accordance with such procedures. A few days later, however, the ruling was stayed, allowing the existing FY 2023 budget to remain in place pending the outcome of the city’s appeal.
While it has added substantial labor reserves since a year ago, the city could also incur collective bargaining costs beyond the amounts assumed in the June Plan depending on the outcome of ongoing negotiations. If wages were to rise at the projected inflation rate without offsetting savings, costs would increase beyond the amounts assumed in the June Plan by an estimated $1.5 billion in FY 2023.
In total, DiNapoli has calculated risks to the city’s budget that could exceed $2 billion annually by FY 2024. The risk assessment grows to $5.9 billion in FY 2026, which could raise the budget gap in that year to nearly $9.9 billion, excluding some of the fiscal cliffs, the potential cost of labor contracts and the risk of recession, all of which are fluid.
The city will have to continue to see an improvement in its economic recovery, and associated revenues, even as the rest of the country’s growth slows, to avoid a series of difficult decisions on revenue enhancements, service adjustments and how to close its budget gap.
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