Strong revenue growth may allow New York City to generate at least an additional $2.4 billion in operating surplus in city fiscal year (FY) 2022 compared to the Executive Budget released in April. However, better-than-projected fiscal performance may be short-lived amid inflation, geopolitical tension and supply chain issues, according to an analysis released today by State Comptroller Thomas P. DiNapoli. DiNapoli urged the city to put a substantial portion of the surplus funds into reserves and protect itself against uncertainty.

“New York City’s revenues continues to outpace expectations, but it would be wise to set aside surplus funds to withstand future budget volatility,” DiNapoli said. “The city’s recovery relies on its ability to provide public services while adapting to an uncertain economic landscape. This approach will help the city maintain financial flexibility and strengthen its fiscal foundation to remain attractive for residents and visitors and continue to create economic opportunities.”

The release of New York City’s $99.7 billion FY 2023 Budget - $104.9 billion when adjusted for surplus transfers - and Financial Plan (the “April Plan”) shows the city has benefited from stronger than anticipated tax collections, outsized federal grant revenue from relief programs, savings in pension contributions from extraordinary asset gains in FY 2021, and announced additional savings programs, including significant vacancy reductions since June 2021.

These unanticipated resources have enabled the city to plan to make a $5.3 billion surplus transfer and an additional $200 million deposit into its Rainy Day Fund (RDF) for FY 2022. Since the April Plan, tax collections, fueled by personal incomes taxes, have exceeded projections. OSC now expects the city to generate an additional $2.4 billion in surplus before the close of FY 2022. Setting aside an unanticipated revenue windfall now and systematizing an approach for depositing funds during periods of fiscal strength would give the city budgetary flexibility to work towards its recovery objectives. DiNapoli has noted in the past that the city lags national peers in formalizing components of its reserve policy.

The city has added funds for services to address quality of life, public safety and related concerns in the FY 2023 Budget. It has also recognized that wage increases for collective bargaining units were unlikely to be funded solely through efficiencies, funding a half-percent base wage increase in each of the first two years of the new bargaining round. The city has budgeted $495 million by FY 2026 for the additional anticipated labor costs.

The city’s out-year gaps in FY 2024 and FY 2025 have decreased slightly from an average of nearly $4 billion in June 2021 to an average of $3.7 billion in the April Plan and are manageable given historical comparisons.

DiNapoli’s report shows city-funded spending is projected to increase by $3.7 billion, or 5.2%, in FY 2023, before slowing considerably to an average of 1.4% in the out-years (excluding reserves). Planned city-funded spending in FY 2023 has risen by $2.3 billion since February.

DiNapoli’s report found the largest quantified risks that could increase the budget gaps include higher-than-projected overtime, optimistic assumptions for spending on education and MTA subsidies, and unbudgeted housing costs. These risks collectively could exceed $1.8 billion annually by FY 2026, on top of city-identified budget gaps. The city has also funded some recurring non-mandatory spending with federal aid, creating additional “fiscal cliffs” that are not yet funded in the out-years, and represent over $550 million in additional spending pressure.

Additionally, the city faces difficult-to-quantify risks to the budget related to a potential recession, the outcome of labor negotiations in the next round of bargaining, the effect of lower-than-anticipated market returns on the city’s pension contributions, and the impact of escalating cost pressures from inflation.

Report
Review of the Financial Plan of the City of New York

Related Reports
Impact of the Pandemic on New York City’s Municipal Workforce
Strengthening New York City’s Rainy-Day Fund

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