The City of New York has four institutional fiscal monitors—the State Comptroller, the Financial Control Board (FCB), the City Comptroller, and the Independent Budget Office (IBO)—that regularly assess its budget and financial plans. They released reports last month on the City’s November budget modification.[1] The consensus was generally optimistic about the City’s fiscal health, while recognizing substantial uncertainty regarding federal policy and state fiscal factors that could dramatically upend these assessments.

Assessment

Overall, the local economy is considered relatively strong. While all of the monitors foresee a slowdown, none of the monitors go so far as to forecast a recession during the plan period. 

Revenue Risks

An economic slowdown is expected to impact revenues, and the monitors caution there is weakness in certain revenue streams.  Table 1 presents the net revenue risk of each monitor, compared to the New York City Office of Management and Budget’s (OMB’s) plan, for tax and non-tax city-funds revenue.[2]  The monitors cite recent weakness in business income taxes and real estate transfer taxes, as well as slower growth in sales tax revenue, offset by positive forecasts for the real property tax. Additionally, more than $700 million in revenue from new taxi medallions is considered at risk over the financial plan period by the State and City Comptrollers.

The State Comptroller’s revenue risks are larger than the other monitors, exceeding $500 million per year in fiscal years 2019 through 2021.  The FCB varies slightly but is close to OMB overall. The City Comptroller is positive in the short term, but forecasts revenue below OMB levels in the later years.  Only the IBO is more optimistic than OMB each year, with projections of $800 million to $1.3 billion more in tax revenue over the financial plan.

Expenditure Risks

While the monitors believe OMB estimates for some city-funded expenditures are overstated in the financial plan, they generally expect expenditures to exceed OMB projections. (See Table 2.)  The one exception is IBO’s forecast for fiscal year 2021, which puts expenditures $94 million below OMB. However, there is substantial variation between the monitors with net risks ranging from just more than$100 million to nearly $1 billion.  The City Comptroller foresees the largest expenditure risk, followed by the FCB and the State Comptroller, with IBO generally the most optimistic. 

The monitors concur on many expense-side risks with variation in the magnitude of estimates. The expenditure risks are summarized graphically for fiscal year 2018 in Figure 1. All monitors believe overtime is underestimated by $75 million to $150 million. Expenditures for homeless services are forecasted to be more costly with estimates between $125 million and $142 million. New York City Health + Hospital’s (H+H’s) fiscal problems may require the City to forgo up to $165 million in reimbursement for fringe benefits and judgments and claims.[3] There a multiple risks at the Department of Education; the cumulative estimate ranges from $35 million to $170 million in fiscal year 2018, increasing significantly by fiscal year 2021.[4] (See Figure 2.)

There is consensus that debt service costs will be lower than budgeted due to low interest rates and conservative OMB assumptions.  IBO is the only monitor to quantify potential savings for health insurance for employees; in recent years these costs have come in under budget due to conservative OMB assumptions.

Net Difference

Figure 3 shows the net difference between each monitor’s estimates and the OMB projection of the City’s budget gap. OMB projects budget gaps of $3.2 billion, $2.3 billion, and $1.6 billion in fiscal years 2019, 2020, and 2021 respectively. Three of the monitors project larger deficits, ranging from $386 million to $821 million greater than OMB in fiscal year 2019 and $287 million to $1.1 billion greater in fiscal year 2021. The IBO’s positive outlook on revenues and health insurance costs results in projected gaps that are smaller than OMB’s by $554 million in fiscal year 2019 and $1.4 billion in fiscal year 2021.

Risks Not Estimated

The biggest risk to the monitors’ projections is what is missing: substantial state and federal exposures that have not been quantified due to insufficient information. 

The State budget is showing signs of distress, but the proposed actions and extent of the potential impact on New York City will not be known until Governor Andrew Cuomo releases the New York State Executive budget later this month.[5] 

The federal tax bill was nearing passage as the monitors prepared their reports and while certain features–such as a cap on the deductibility of state and local taxes from federal income—were being actively discussed, developing complex models to account for the multitude of moving parts in the enacted legislation will take time.  Furthermore, it is not clear whether and how the State and City will take action to adjust local tax policy.

Lastly, a reduction in federal spending could result in the loss of federal dollars supporting City services and dramatically impact entities such as the New York City Housing Authority and H+H. There also may be cuts to federal resources flowing to New Yorkers, such as food stamps, putting additional pressure on the City budget.

While it is understandable that the monitors did not quantify these risks, the potential magnitude is substantial and could alter the overall assessment of the City’s fiscal health.

Conclusion

The generally optimistic assessments released by the monitors are likely to be revised in the early spring after the City and the monitors have had time to assess and estimate the impact of state and federal actions on the City’s revenues and expenditures.  Until then, the projections contained in the December monitor reports should be taken with a grain of salt.