“Next year’s budget will be balanced, but there are still significant out-year budget gaps to be closed and risks to be managed,” DiNapoli said. “The city has relied heavily on reserves and other one-shot sources of revenue, leaving fewer reserves to cushion the impact of potential budget risks.”
According to DiNapoli’s report, the major budget risks include the pace of the economic recovery, Wall Street restructuring, future reductions in federal aid, the cost of new labor agreements and the timing of the receipt of proceeds from the sale of additional taxi medallions.
Since June 2011, the city has closed a $4.6 billion budget gap for FY 2013 and narrowed the out-year gaps to $3 billion in FY 2014 and an estimated $3.5 billion in subsequent years. This improvement is attributable to freeing up nearly $5 billion in reserves, $1 billion in anticipated revenue from the sale of taxi medallions and savings from agency actions.
Preliminary employment data had indicated that New York City recovered only half of the jobs lost during the recession and that job growth slowed markedly during the second half of 2011, which raised concerns about the pace of the economic recovery. Newly released revised data show that New York City has regained all of the jobs lost during the recession even though the unemployment rate remains high at 9.3 percent.
Wall Street, a key driver for the city economy, faces continued challenges as it adjusts to regulatory reforms and recovers from the recent financial crisis. Broker/dealer operations of the member firms of the New York Stock Exchange (the traditional measure of Wall Street profitability) had a strong first half in 2011, but lost $4.9 billion in the second half. For the year, profits totaled $7.7 billion, the second year that profits declined by more than 50 percent and the lowest level of profitability since 2002. In response to weaker profits, Wall Street has reduced cash bonuses and is expected to resume downsizing.
The report also found that:
• The city currently projects a surplus of $1.3 billion for FY 2012, which the city will use to help balance next year’s budget. The FY 2012 surplus comes mostly from a draw down in reserves and is substantially smaller than last year’s surplus of $3.7 billion.
• The FY 2013 budget includes $3.5 billion in nonrecurring resources, including $1 billion from the sale of taxi medallions and $1 billion from the Retiree Health Benefits Trust. The city deposited surplus resources into the Retiree Health Benefits Trust during the last economic boom to fund the future cost of retiree health benefits, but the city has been redirecting these resources ($3.1 billion) to help balance the budget.
• Most of the reserves accumulated during the last economic expansion will be exhausted by FY 2014, leaving the city with a much smaller cushion against future budget risks.
• Debt service is projected to grow from $4.8 billion in FY 2011 to $7.2 billion by FY 2016, an increase of 49 percent. Debt service is projected to consume 13.5 percent of city fund revenues in FY 2016, compared with 10.8 percent in FY 2011.
• As of January 2012, New York City exceeded its prerecession job level by 17,200, with 162,200 jobs added since the recession ended.
• The Governor’s budget for New York State includes a number of initiatives that would impact the city, including significant increases in education aid (contingent on reaching agreement with the teacher’s union on a teacher evaluation program), a new pension plan that would decrease benefits for future government employees and a three-year takeover of the growth in the local share of Medicaid. These initiatives are subject to state legislative approval.