Summary

New York City’s long-run fiscal stability is precarious, and its short-term prospects are uncertain. Major causes of this uncertainty are revenue estimates that may be unreasonably conservative and spending estimates for current programs that are alarmingly understated. The Citizens Budget Commission (CBC), the State and City Comptrollers, and the City Council have each published reports that estimate the City’s financial plan for fiscal year 2025 understates the cost of continuing current programs between $3.0 billion and $3.9 billion.¹

This must be corrected in the Mayor’s Executive Budget so that budget decisions can be made based on a clearer and more accurate picture of the City’s fiscal future.

While current budget projections do not accurately reflect planned spending and perhaps likely revenues, CBC estimates future budget gaps could exceed $8.0 billion annually, even without implementing the State class size reduction mandate, expanding the FHEPS housing voucher program, or possible future costs to serve migrants and asylum seekers. Adding those possible costs, and assuming reasonably conservative revenue estimates, could drive the budget gap up to $17.4 billion by fiscal year 2028.

Mayor Eric Adams recognized the importance of accurate budget estimates in the Preliminary Budget presentation, saying “strong fiscal management means…increasing transparency.” He also added recurring funds to support some underbudgeted education costs.² Good as the additions were, they remedied only a small fraction of the problem.

Making budget decisions based on unrealistic estimates, like flying a plane with a broken altimeter, increases the chance of a crash. Specifically, the Executive Budget should:

• Include reasonable estimates of costs of all planned programs; and
• Provide accurate, but reasonably conservative revenue estimates.

The City Council and others have asserted that more money is available from higher revenues and savings from staffing vacancies, thereby concluding the Mayor’s savings plans and hiring freezes were unnecessary or applied too bluntly across the board. (To be clear, the Council’s budget response asserts that spending on current programs is significantly understated, which it addresses by including $3.0 billion in additional spending in its plan.³) 

While specific strategies like blunt hiring freezes and few productivity improvements have resulted in more service reductions than necessary, the simple truth is that the savings plans have been needed. Reasonable estimates show future budget gaps range from $7.0 billion to $8.6 billion annually; these would be billions of dollars greater without the Mayor’s actions.

Furthermore, if the City implements the State class size reduction law without major exceptions or administrative remedies and fully funds the expansion of City FHEPS housing vouchers, the budget gaps could possibly expand by another $6.3 billion by fiscal year 2028. Another $2.7 billion annually in the future may be needed to serve asylum seekers. If all these risks come to bear, the City’s fiscal year 2028 budget gap could be over $17.0 billion, more than three times greater than even the most optimistic revenue estimates could cover.

Therefore, the Mayor and City Council should:

• Reduce future budget gaps by prioritizing programs that are highly needed and proven to work;
• Implement additional savings plans, focused on increasing productivity and shrinking lower impact and priority programs;
• Allocate funded vacancies to where they are most needed to provide critical services; and
• Put extra funds available now into the Rainy Day Fund and commit to saving it for a recession or severe, one-time emergency.

This year’s budget decisions will shape what City government can do for years to come. Long-run fiscal stability is critical. Myopically balancing next year’s budget without looking further ahead sets the stage for significant budget and service cuts in the future. While there is plenty of debate about how much revenue the City will collect, how much services for asylum seekers and migrants will cost, and which programs should be funded in the baseline, based on the facts there should be no debate about whether budget gaps in future years will be significant. 

Reasonable Estimates Are Important and Legally Required

 “Giving New Yorkers an accurate picture of our financial position is important,” said Mayor Adams correctly.⁴ Without an accurate picture, the City may well add unaffordable programs or reduce important programs it has the funds to support. Neither serves New Yorkers well in the long run.

Furthermore, the New York State Financial Emergency Act requires that “(a)ll projections of revenues and expenditures contained in a financial plan shall be based on reasonable and appropriate assumptions and methods of estimation.”⁵ Undoubtedly, there are differences of opinion as to what are reasonable and appropriate assumptions and methods of estimation; however, the intent is clear and at minimum stand as the foundational, intuitive lens through which the public, policymakers, and monitors view budget figures.

Projected Spending Is Understated

The Preliminary Budget’s spending projections for fiscal years 2025 and beyond are below what is needed to continue planned programs. The Executive and Adopted budgets should include reasonable projections for what will be needed to support planned programs and functions. If those monies are not available, programs will need to run more efficiently, shrink, or be eliminated.

CBC found the Fiscal Year 2025 Preliminary Budget was $3.6 billion short of what would be needed to continue current services.⁶ The State Comptroller and City Comptroller reported the underbudgeting as $3.2 billion and $3.9 billion, respectively.⁷ The City Council, in its response to the Preliminary Budget, recommended setting aside $3.0 billion next year for this shortfall.⁸

Underbudgeting affects both ongoing activities, like overtime and special education “Carter Cases,” and fiscal cliffs—when budgeted federal or City money for ongoing programs will run out. For example, rental assistance programs, primarily City FHEPS housing vouchers, are expected to cost $849 million this year, while next year’s budget includes just $171 million.⁹ It is hard to understand how an 80 percent year-to-year reduction in spending, without an explicit change in policy or demand, could be “based on reasonable and appropriate assumptions and methods of estimation.” Also, the budget will be without $86 million for Department of Education mental health services due to the expiration of federal COVID-related aid.¹⁰

On the positive side, the City has increased in-year budget reserves—the general reserve and the capital stabilization reserve—to $1.45 billion.¹¹ Still, these would only cover between 40 percent and 58 percent of the projected underspending and fail to fully mitigate the danger of underbudgeting.

The total underbudgeted amount is partly offset by underspending. Often vacancies go unfilled and planned spending is not fully realized. While this occurs in the normal process of management or when program budgets are originally too high, underspending also occurs when the Administration uses strict controls to keep agency spending below appropriated levels and freezes hiring to such an extent that agencies are not allowed to fill budgeted positions. (Overly tight hiring freezes constrain spending overall; CBC strongly advocates shifting funded vacancies within and among agencies so that critical services can be adequately staffed.¹²)

Strong and effective budget management is one of the Office of Management and Budget’s (OMB) crucial functions. Agencies cannot be allowed to overspend, since it risks the City’s fiscal stability. Still, the best way to maximize services and stay within budget is to provide agencies and programs funding the City can afford and ensure those programs are executed within their budgets. While OMB’s input and management are critical, making decisions about which programs to fund and how to prioritize and trade off between competing programs is primarily a policymaking, not fiscal management, function. Staying within budget by stopping agencies from spending or hiring within their budgets is not the foundation of good management and can weaken services. 

Revenue Estimates May Be Too Conservative

OMB’s revenue projections have been extremely conservative coming out of the pandemic. Projecting tax revenues is always challenging. Recently—right before, during, and coming out of the pandemic with an unsteady recovery—challenges have been significant. While basing the budget on reasonably conservative revenue estimates is the best way to ensure stability and stave of the worst potential harm when a recession occurs, the significant upward revisions and others’ estimates indicate the City’s projections may have been too conservative.

OMB in January revised its tax and non-tax revenue estimate upward a combined $3.1 billion for fiscal years 2024 and 2025.¹³ Still, fiscal monitors and the City Council project revenues over these two years will be between another $900 million and $3.3 billion higher.¹⁴

Still, the City should be reasonably prudent given the downside risk of too-high projections. The City Council’s proposal to budget based on its tax revenue forecast—the highest among the five forecasters—is extremely risky. (See Figure 1.) It could lead to devastating cuts, should the projections be too high or if the economy enters a recession.

Future Gaps Exceed $8.0 Billion; Expanded Programs, Risks May Push to $17.4 Billion

New York City’s future budget gaps may exceed $8.0 billion annually, when including the full cost of continuing current programs, but without added costs to implement the class size reduction law, the FHEPS expansion, or potential future asylum seeker costs. (See Figure 2.)

Even with the most optimistic revenue forecast, the City Council’s projected out-year gaps would be between $4.8 billion and $5.5 billion a year, not including their proposed increase in spending on new and restored programs. Future budget gap estimates from the City Comptroller and State Comptroller (excluding costs from asylum seekers, the class size reduction mandate, and the FHEPS voucher expansion discussed below) are between $7.3 billion and $8.6 billion annually.

Spending on Migrants and Asylum Seekers May Be Underbudgeted, Starting in Fiscal Year 2026

Services for migrants and asylum seekers may cost an additional $1.5 billion in fiscal year 2026, increasing to between $2.0 billion and $3.5 billion in fiscal year 2028, according to estimates by the State and City Comptrollers.¹⁵

State Class Size Reduction Mandate and FHEPS Expansion Would Drive Gaps Even Wider

The class size reduction mandate and FHEPS expansion present significant additional risks to the City’s fiscal stability and are not currently reflected in the City’s financial plan. The class size mandate reduction could increase City spending by nearly $500 million in fiscal year 2026 and by $1.4 billion in fiscal year 2028.¹⁶ This does not account for any increase in debt service due to additional capital spending, which could be hundreds of millions of dollars, based on a Department of Education estimate that $30 billion to $35 billion of capital investment may be needed.¹⁷

The expansion of the FHEPS housing voucher program would increase City spending by billions of dollars. Enacted by Council override of the Mayor’s veto, FHEPS expansion has not been implemented, except for the elimination of the 90-day length of stay requirement, and is the subject of litigation.¹⁸ The State Comptroller estimates it will cost approximately $750 million in the first year, increasing to $2.1 billion in the second year, and reaching $4.8 billion by the fourth year.¹⁹ The City Council estimates the cost at $370 million in the first full year, increasing to $3.3 billion when fully implemented.²⁰

Potential Budget Gaps Are Massive

While estimates vary, they all paint a clear picture of potential massive out-year gaps well. (See Figure 3.) For example, the gaps would increase to $12.0 billion in fiscal year 2026 and $17.4 billion by fiscal year 2028 when including:

• The class size reduction mandate which may cost $450 million, $900 million, and $1.4 billion in fiscal years 2026 to 2028, respectively;
• City FHEPS expansion which may cost $2.2 billion in fiscal year 2026, $3.6 billion in fiscal year 2027, and $4.9 billion in fiscal year 2028; and

Higher than budgeted costs for asylum seekers and migrants of $1.5 billion, $1.7 billion, and $2.7 billion in fiscal years 2026 to 2028, respectively.

Spending Has Already Grown Significantly

Some view service deficiencies and conclude the City must increase spending significantly. However, it is important to put current spending in context. Adjusted for inflation, the Mayor’s Preliminary Fiscal Year 2025 budget, plus $3.2 billion in expenditure re-estimates, is already 8.1 percent higher than 2019 ($6.6 billion); without spending on migrants and asylum seekers, it would still be 3.7 percent above inflation ($3.0 billion).²¹ Despite a pandemic, recession, recent rapid inflation, and multiple rounds of budget savings, City-funded spending has grown.

Service levels and quality are not simply about how much is spent. It is about how costs and the programs themselves are managed.

Recommendations to Improve Fiscal Accuracy and Stability

The long-term fiscal stability of the City is threatened, not only by current spending trends, but also by mandates and calls to increase spending well beyond sustainable levels. Stability is also threatened when projected spending is understated and revenues are either radically conservative or too optimistic. Rather than increase unaffordable spending and potentially face massive budget cuts and severe service impacts in a few years, the City should act now, in the Executive and Adopted budgets.

CBC implores City leaders to:

• Include reasonable estimates of costs of all planned programs in the budget. It is what is legally required, what the people deserve and expect, and the only way to have a clear and realistic view of the City’s fiscal picture;
• Provide accurate, but reasonably conservative revenue estimates;
• Allocate funded vacancies to where they are most needed to provide critical services;
• Allow agencies to hire into funded positions and spend their budgets on needed programs;
• Reduce future budget gaps by prioritizing spending to fund what is needed and proven to work;
• Implement additional savings plans, focused on increasing productivity and shrinking lower impact and priority programs; and
• Put extra funds available now into the Rainy Day Fund and commit to saving it for a recession or severe, one-time emergency.