State Board Warns of N.Y. City Financial Risks

New York City should budget even more conservatively to offset risks of up to $900 million in its four-year financial plan, said the New York State Financial Control Board.

The board, which the state legislature created amid the city's financial crisis in 1975 and functions today as a monitor, cited a slowdown in tax revenue growth; uncertainty over world events including Great Britain's planned exit from the European Union; and rising expenditures including wage hikes from collective bargaining settlements. It met Tuesday afternoon.

Acting executive director Jeffrey Sommer also referenced as pressure points high health-care costs; a projected 23% rise in debt service through fiscal 2020 to support the city's capital program; pensions; and increased subsidies for the teetering Health + Hospitals unit.

The overall effect on budgets, he said, could start at $200 million in fiscal 2017, which began June 30.

"The city's fiscal management for years has been institutionalized and they have been very responsible -- building up reserves, conservative revenue forecasts," Sommer said in an interview. "That kept them ahead of some other troubles faced by municipalities and states since the recession.

"The concerns expressed at the meeting were that we're in a transition period with the revenues and with the economy, and the city needs to be even more conservative as we go ahead."

According to state Comptroller Thomas DiNapoli, other risks include employee overtime costs, pension fund investment earnings falling short of target, the delayed sale of taxi medallions and related market uncertainty.

Mayor Bill de Blasio touted the city's $4 billion surplus at the end of fiscal 2016.

He said beefed-up reserves in the adopted $82.1 billion budget for fiscal 2017 are a positive to bond rating agencies. The buildup includes the addition of $250 million for the retiree health benefits trust fund, to nearly $4 billion; a $1 billion annual general reserve; and a further $500 million in a stabilization reserve dedicated to the capital program.

Savings initiatives include bond refinancings. City Comptroller Scott Stringer told the board his staff and the mayor's office collaborated to save $688 million over the life of those bonds.

"Our management of the city's budget has continued to result in the highest credit ratings in New York City's history," de Blasio told the panel.

Moody's Investors Service rates the city's general obligation bonds Aa2. Fitch Ratings and S&P Global Ratings assign AA ratings. All three have stable outlooks.

The board voted unanimously to remain in sunset mode.

"What that means is that we have no approval authority, but we're a monitor," said Sommer. "We issue quarterly reports on the city's financial plan and their modifications to it. The private members meet with the mayor and the governor's office continuously."

From 1975 to 1986, the board had control over the city's financial plan, plan modifications, bond issuance and large contracts.

By law, the board can re-activate control if it discovers certain red flags, such as an operating deficit of more than $100 million or a default on bonds or notes.

"They go back to when the city was recovering," said Howard Cure, director of municipal bond research for Evercore Wealth Management.

"Today, I think they're more concerned with structural issues. New York City has better accounting today. Internally they're much better and they use a much truer accounting system. There are more checks and balances, and the city is not in as dire a condition."

The Financial Emergency Act, which the state enacted in 1975, required the city to budget under generally accepted accounting principles.

Stringer still sees the control board as useful.

"This is an important exercise because this is a transparent way to talk about the health of the city with independent monitors, the state comptroller and the state budget director," he said after the meeting. "This is a tradition that is necessary and we should keep to it.

"Back in the 1970s we were on the edge of bankruptcy. Budgets were calculated on napkins and put away in drawers and we've come a long way with our complicated budget system, but you need to have built-in protection and this is part of that oversight function, which I think is critical."

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