A drop in Wall Street's profits is putting strain on the budgets of New York City and New York state, top financial officers said yesterday before the state's Financial Control Board.
Comptroller Thomas DiNapoli's office projects that city tax collections will decline by 5.9%, based on economic assumptions of national and local recessionary trends. In a report, DiNapoli said that it was "unlikely" that the securities industry would recover in the second half of 2008 to generate $7.1 billion in profits, as assumed in the city's financial plan.
By comparison Wall Street profits reached $20.9 billion in 2006. Although the city expects Wall Street to lose 25,000 jobs from its recent peak in September 2007 of 188,000, only 4,000 jobs had been lost as of May. The comptroller's office expects reported job losses to accelerate as severance packages run out. The city projects Wall Street bonuses will decline by more than 20% in 2008, which would decrease the average industry salary by 7.3% in 2008 and by 11% in 2009.
The state depends on the financial services sector for 20% of its tax revenue and the city gets about 9%.
While Mayor Michael Bloomberg stretched out the New York City's four-year capital plan into five years, debt service will rise to $6.4 billion by 2012. Debt service burden as a percentage of city fund revenues will grow from 9.6% in fiscal 2008 to 14% in fiscal 2012, the state comptroller's report said.
New York City Comptroller William Thompson Jr. said that while the city's move to eliminate pay-as-you-go financing for capital projects was appropriate in the near term to deal with revenue decline, it needed to resume in the long term.
"Pay-as-you-go financing must be returned to the plan as soon as possible," he said.
Despite the gloom, both DiNapoli and Thompson praised Bloomberg's conservative budgeting for creating a cumulative surplus of $6.6 billion that will soften the impact of the downturn.
"From a fiscal perspective, the city is relatively well positioned to cope with the impact of a deteriorating economy and a softening housing market," Thompson said.
The Financial Control Board was created by the state during the city's fiscal crisis of the 1970s and was charged overseeing city budgets. Its ability to impose a control period ended on July 1. Several news outlets reported yesterday that the governor will recall the Legislature to make cuts to the fiscal 2009 budget which was adopted in April. Gov. David Paterson will deliver a speech in the early evening on the economy that is expected to cover the state's financial problems.
With a $5 billion budget deficit looming next year, Paterson said the state had to act.
"We don't have that cushion that the city has, nor do I get that anyone seems to be all that panicked about it," he said. "We don't have to panic because there are ways we can respond, but we are going to have to respond immediately."
Wall Street's woes are hitting the city in other ways. The city will have to increase its annual pension contributions by 9.9% to $6.1 billion in fiscal 2009 and to $6.8 billion by fiscal 2012. The reasons are a combination of factors including wage increases, early retirement for school teachers and an anticipated shortfall in pension fund investment earnings in fiscal 2008.
The city's pension funds earned 18.2% in fiscal 2007, which was 10.2% higher than the assumed rate of return. With the stock market in bear territory, the city projected the pension fund earned nothing in fiscal 2008, but the state comptroller's office estimates that it actually lost 4.8%.
Annual costs of other post-employment benefits are expected to reach $2.1 billion in fiscal 2012, a 75% increase from fiscal 2006. The present value of projected OPEB benefits totaled $102 billion, according to calculation made last year. The city set up an OPEB fund, called the Retiree Health Benefits Trust Fund, in 2006 deal with growing costs. The city put $2.5 billion into the account while the economy was hot but has no plans to contribute more in the current four year financial plan.
Bloomberg blamed Albany and unions for driving up the costs of retirement benefits because the state government, rather than municipalities, can change pension deals.
"Unfortunately every time we negotiate a contract with the unions, the unions then go around us to Albany, and Albany gives away the store," Bloomberg said. "We all know there's a train coming down the road and its heading straight toward us and we have to address these issues no matter how difficult they are. We will continue to work with Albany and try to explain to them that these unfunded liabilities they are giving us are inappropriate and something the city cannot withstand."
Paterson said that the mayor had a "frustrated" point of view based on some past actions by Albany.
"The mayor has some merit for feeling this way but I've assured him from the time I got here in mid-March that every piece of legislation that come before us will be assessed for fiscal impact," Paterson said.