A $5.5 billion surplus from last fiscal year and $1.7 billion in savings from the city’s Program to Eliminate the Gap (PEG) have helped New York City balance its $112.6 billion budget for city fiscal year (FY) 2024, despite $2.9 billion in costs in FY 2024 to address the influx of asylum seekers. However, spending and operational pressures from this influx have grown beyond the city’s ability to manage without a comprehensive federal policy response including funding, according to a report on the city’s June 2023 financial plan released today by State Comptroller Thomas P. DiNapoli.
“The city’s adopted budget reflects the stronger than expected revenues and remaining federal pandemic aid that have allowed the city to increase spending at a time when demand for services is on the rise,” DiNapoli said. “Continued fiscal discipline and maximum transparency will be key going forward. The costs for skyrocketing shelter demand are not sustainable without federal help. While the city must take action to prepare for coming fiscal uncertainty, Washington needs to step up with policy solutions and funding.”
Major New Spending Needs Reflected Amid Cautious Revenue Outlook
The FY 2023 surplus resulted from tax revenues that were more than $5 billion above budget projections and PEG savings driven by a reduction in vacant positions. Unanticipated costs for assisting migrants and collective bargaining agreements, which exceeded the 1.25% raises that were set aside, have increased future budget gaps.
The city expects its $5.1 billion budget shortfall in FY 2025 to reach $7.9 billion in FY 2027, with cumulative gaps for the three-year period adding up to $19.8 billion. The deficits average out to 8.2% of the city’s expected revenue each year, the highest at this point in the budget cycle since the beginning of FY 2012. DiNapoli’s office identifies significant spending risks that could drive these gaps higher through FY 2027.
Absent a recession, there is the potential for better-than-projected revenues to continue, as the city is conservatively projecting a 3% decline in city revenue in FY 2024 with average annual revenue growth of 2.3% in the following years of the plan. To close the city’s projected budget gaps, revenue would have to avoid a dip and sustain 2% growth annually instead.
A stronger than expected economic recovery would boost revenue and help keep pace with planned spending growth, highlighting the importance of prioritizing essential services that underlie the city’s economic competitiveness.
Spending Risks Expand Outyear Budget Gaps
The city is likely underestimating planned spending growth. It projects spending will increase by 0.8% in FY 2024 with average annual increases of 3.2% in the years after. Spending grew at an average rate of 5% per year over the decade before the pandemic.
DiNapoli’s office has in recent analyses highlighted unfunded expenses including overtime, charter schools, Carter cases, class size mandates, Metropolitan Transportation Authority subsidies and various social services, which could exceed $3.9 billion by FY 2027.
However, the most significant budget risks are for costs associated with asylum seekers and expanding the CityFHEPS rental assistance program, spending items that were not included at this time last year in the financial plan. Combined, they could cost $5.4 billion or more by FY 2027; the city has not budgeted for either expenditure in that year. The rising cost of shelter is simply not sustainable for the city’s finances without changes in federal policy and a substantial match in federal funding.
Net of higher revenue projections, DiNapoli’s office has identified budgetary risks of $4.8 billion in FY 2025, $6.6 billion in 2026, and $8.3 billion in FY 2027, and projects potential budget gaps of $9.9 billion in FY 2025, $13.4 billion in FY 2026, and $16.2 billion in FY 2027. Tax revenue would have to grow at a rate of 4.75% per year to cover such a growth in costs.
Fiscal Discipline and Federal Choices Will Dictate Budget Outlook
DiNapoli’s office has called for the city to adopt a formal reserve policy to mandate funds be set aside in years when operating revenues are stronger than expected, along with a clear rationale for when such funds are drawn down. Despite substantially higher-than-projected revenues in FY 2023, the city did not set aside any additional monies in its rainy-day fund. New York City is the only one of America’s 10 largest cities that does not have a set target or purpose for reserves.
Building reserves is one important step among several the city can and should take to prepare for the years ahead. Covering growth in expenses and closing budget gaps could force the city to choose between paying for new initiatives or existing ones, making it harder to reach staffing targets and eliminating discretionary flexibility as a greater share of revenue is needed for mandated costs.
Preparing for these uncertainties necessitates greater transparency, including realistic spending projections, clarity on savings generated from PEGs, and explanations for revenue changes that are linked to economic projections. Candid deliberation over new programs and potential savings should be subject to robust public presentation and clear assumptions to funding partners. For its part, the federal government also must provide states and local governments that are struggling with the operational and fiscal pressures due to the influx of migrants, additional guidance on future policy choices and matching funding to manage them.
Other Reports & Fiscal Tracking Tools
Review of the Financial Plan of the City of New York (June 2023)
Fiscal Cliffs Dashboard
Rainy Day Fund Report