New York City’s economy has proven to be more resilient than previously projected, while a surplus from the last fiscal year combined with savings from a program to cut budget gaps, helped keep the books balanced despite rising costs from addressing the influx of migrants.
While fiscal 2024 growth projections suggest a modest slowdown, the city rebounded in several key sectors coming out of the pandemic, according to an analysis released last week by city comptroller Brad Lander.
“Rumors of New York City’s demise are greatly exaggerated,” Lander said. “New York City’s strong recovery from the pandemic is not only a testament to our resilience, but an affirmation that an economy built around diversity, density, and creativity — an open and welcoming city — is the best way to face the future.”
Analysts said the city’s economy remained robust.
“It never ceases to amaze me how resilient the city’s economy is and its ability to generate revenues,” said Howard Cure, a partner and director of municipal bond research at Evercore Wealth Management LLC.
While Lander’s report examines the strengths of the city’s economy it also underscores a need for a plan to deal with future uncertainty.
On the positive side, private-sector employment rebounded to pre-pandemic level,s with employees in office jobs now reaching an all-time high. Tourism has bounced back and pushed up the demand for hotel rooms.
On the negative side, housing affordability and the rising costs of providing shelter and services to migrants are proving to be ongoing challenges.
“Based on prior reports, the city comptroller doesn’t consider the potential decline in commercial real estate due to new work-from-home employer initiatives, as a major decline in property tax revenues,” Cure said. “I am still skeptical of the true impact and expect more losses as an increasing number of offices remain vacant.”
He noted a housing crisis in the city exists for middle-class residents.
“This is particularly concerning if it drives young, professional families to seek living outside the city or [to] choose an entirely different region of the country,” Cure said. “Throwing money at this problem may not be the most efficient use of tax revenues. Rather, changes to zoning laws and state tax abatement programs for affordable, which has been permitted to expire, need to be re-implemented and improved upon. “
Cure said the New York City Housing Authority is becoming an increasing burden for the city.
“I sincerely doubt NYC has the financial resources and expertise to address this situation. Some form of privatization in running and maintaining these facilities may be the only way to address this situation,” Cure said.
Lander noted other stresses being placed on the city’s finances, both now and in the future.
“We face serious impending challenges: the rising costs of providing shelter and services for asylum seekers without adequate state or federal support puts a real strain on the city’s budget,” Lander said. “Washington and Albany must do more to help New York City meet the federal obligation to provide safe refuge for those seeking asylum, along with the right-to-shelter, which is grounded in the state constitution.”
While the city comptroller’s office is projecting higher revenues than the Mayor’s Office of Management and Budget for each year of the financial plan, these revenues are outstripped by growing expenditure estimates. The report projects that gaps will hit $1.96 billion in fiscal 2024, $9.65 billion in fiscal 2025, $12.62 billion in fiscal 2026, and $13.98 billion in fiscal 2027.
“Reserve funds included in the city budget could nearly close the fiscal 2024 gap, but the outyear gaps underscore the importance of implementing long-term strategies that address these financial challenges and stabilize the city’s fiscal trajectory,” Lander said.
The report said one of the biggest fiscal risks was the rising cost to shelter migrants. The comptroller’s office used a mid-range of estimates to model the risks, seeing annual costs of $3.65 billion starting in fiscal 2024. This model saw possible costs of $750 million in fiscal 2024, $2.94 billion in fiscal 2025 and $3.65 billion in fiscal year 2026 and 2027.
“I also agree that the migrant crisis in the city has the potential to bust the budget without state and federal aid,” Cure told The Bond Buyer. “Federal help would also include expediting work visas for the asylum seekers so they can begin to lead productive lives to support themselves rather than being a burden on the city.”
DiNapoli also outlined the city’s strengths and weaknesses in a report issued last week.
A $5.5 billion surplus from fiscal 2023 combined with $1.7 billion in savings from the city’s “Program to Eliminate the Gap,” helped keep the current fiscal 2024 budget balanced, despite $2.9 billion in additional costs to address the migrant crisis, the report 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,” DiNapoli said.
Last year’s surplus resulted from tax revenues that were $5 billion above budget projections while the PEG savings were driven by a reduction in vacant positions. However, costs for assisting migrants and collective bargaining agreements, which exceeded the 1.25% raises that were set aside, increased future budget gaps.
“New collective bargaining agreements have gone beyond the 1.25% budgeted raises and contribute to the out-year gaps. Also, as is typical, lack of overtime management, particularly in the police force, creates another budget hazard,” Cure said. “Another concern is the recent court decision for retiree health insurance through the Medicare Advantage Program. Savings anticipated from this lengthy negotiation process may not materialize, which gives some indication about the difficulty in changing established benefit programs.”
The city’s Health and Hospitals Corp. recently was forced to renegotiate contracts with substantial raises as they were losing employees to other area hospitals.
“HHC, as the city’s safety-net hospital system, has been under tremendous strain, made worse by the migrant crisis. I think this organization has the potential to be an added financial burden, particularly if the state is forced to make cuts to the Medicaid program,” Cure said.
“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.
The city expects a $5.1 billion shortfall in fiscal 2025 to hit $7.9 billion in fiscal 2027, with budget gaps 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 fiscal 2012,” the report said.
DiNapoli’s office also sees spending risks that could drive these gaps higher through fiscal 2027.
There is a possibility for better-than-projected revenues to continue if a recession doesn’t occur, the report said, since the city has conservatively projected a 3% decline in revenue in fiscal 2024 with average annual revenue growth of 2.3% in the next years of the plan.
To close the city’s projected budget gaps, revenue would have to avoid a dip and see 2% growth annually, the report said.
Cure also noted the difficulties the public school system faces.
“There is undoubtedly learning loss in our public K-12 system, which is just beginning to be studied. Many parents with the financial resources or interest have enrolled their children in private or charter schools,” Cure said. “This is another area, if enrollment continues to decline, and the state is forced, due to its own budget concerns, to reduce state aid, that can become more of a financial burden to the city.”
The city is one of the biggest issuers of municipal bonds in the nation. Its general obligation bonds are rated Aa1 by Moody’s, AA by S&P and Fitch and AA-plus by Kroll Bond Rating Agency.
In the second quarter of fiscal 2023, the city had about $39.3 billion of GO bonds outstanding. This doesn’t include the city’s Transitional Finance Authority which has $45.1 billion outstanding or the the city’s Municipal Water Finance Authority’s $32.3 billion of outstanding debt.
DiNapoli’s office wants the city to adopt a formal policy to mandate funds be set aside in years when operating revenues are stronger than expected.
“Despite substantially higher-than-projected revenues in fiscal 2023, the city did not set aside any additional monies in its rainy-day fund,” DiNapoli said. “New York City is the only one of America’s 10 largest cities that does not have a set target or purpose for reserves.”