Officials Warn of N.Y.C.'s Vulnerability to European Crisis

New York City’s economy faces severe risks from the European debt crisis, city Comptroller John Liu and New York State Comptroller Thomas DiNapoli said in separate reports on Thursday.

Liu’s office lowered revenue forecasts on personal income taxes to $8.63 billion from $8.72 billion in July, and business taxes to $5.48 billion from $5.52 billion, also in July.

Budget risks, according to Liu, place the potential city deficit at $1.7 billion in fiscal 2012. DiNapoli’s report said the city’s projected gaps of $2 billion in fiscal 2013, rising to $4.9 billion in fiscal 2015, do not reflect further cuts in federal and state funding.

Liu’s forecasts, part of the annual “State of the City’s Economy and Finances” report, also anticipate continued weakness in the national economy.

“Mounting concern over the Euro zone remains a wild card and our city’s potential exposure to a European collapse is significant,” Liu said in a statement.

According to data from the Federal Reserve, European banks have more than $1 trillion in assets in New York City, accounting for nearly two-thirds of all foreign bank assets there.

“They also have extensive ties to other financial firms in the city, have thousands of employees here, and are active lenders in the city economy. Many of the city’s non-financial firms also have significant business relationships with European firms, and the city attracts millions of European business and leisure travelers each year,” Liu said.

While the city economy outperformed the national economy in 2011, 1.9% annualized in the first three quarters, compared with 1.2% nationally, growth for both slowed from the previous year, according to Liu.

Job growth also faltered, Liu’s office said. By October, the number of private payroll jobs in the city was only 20,300 above the level of the previous October.

Until employment opportunities open up again, Liu does not expect significant improvement in the housing sector as younger people in the city put off buying homes.

Moody’s Investors Service rates the city’s general obligation bonds Aa2. Fitch Ratings and Standard & Poor’s rate them AA.

DiNapoli’s review noted that the securities industry lost nearly $3 billion for the third quarter of 2011, reducing year-to-date profits to $9.6 billion.

“With its prospects dimming, the industry has begun to cut costs and reduce employment and employee compensation, actions which will ripple throughout the New York City economy,” DiNapoli said in a statement.

His analysts also expect city-funded debt service to increase by 45% between fiscal 2011 and 2015, consuming a higher share of resources.

His analysts also found that in the past two fiscal years, the city has generated surpluses averaging $3.7 billion, but for fiscal 2012 it projects a surplus of only $12 million.

City fund revenues, he said, are forecast to increase by 3.9% in fiscal 2012, but spending is projected to rise by 12.5%, largely due to expiring federal stimulus aid and an increase in city funds to replace state aid cuts.

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