While fiscal uncertainty from federal actions hangs like the sword of Damocles over New York City’s finances, the city budget has already come under pressure from Albany.

According to an Independent Budget Office report on Mayor Bill de Blasio’s $89.1 billion executive budget, the city needs to replace hundreds of millions of dollars in intergovernmental aid after new unfunded mandates were passed in Albany.

De Blasio's executive plan unveiled in late April is up 0.4% from the $88.67 billion preliminary fiscal 2019 budget unveiled in February.

The executive budget for 2018 and financial plan through 2022 is reactive, with increased spending and increased revenues the product of forces largely outside the city’s control,” the IBO said in the report, written by the IBO staff and edited by Director Ronnie Lowenstein, Deputy Director George Sweeting and Chief of Staff Doug Turetsky. “The de Blasio Administration has not used the executive budget to launch new large-scale programs or big-ticket initiatives.”

IBO's Ronnie Lowenstein

Compared with the preliminary budget, the latest plan has about $1 billion of additional revenue in the current year, much of which is the result of changes in federal tax law. It also found an additional $750 million of savings and increased agency revenues in 2018 and 2019 through the Citywide Savings Program. Much of this is being used to fill the funding shortfalls and new unfunded mandates from the state.

“While some fiscal observers have criticized the Mayor’s Executive Budget for its growth in spending and lack of new reserves, IBO finds that a considerable portion of the new spending is driven by state actions and that the budgeted reserves are substantial,” the report said. “There is little in the way of new program spending and the amount of reserves built into the budget exceeds our shortfall projections in two out of the three years for which we estimate there are budget gaps.”

IBO said its most recent economic forecast and re-estimates of city revenues and expenditures suggest the city’s fiscal condition is stable, with near-term budget surpluses and future year gaps of a size that the city has routinely managed in past years.

“We estimate that the city will end 2018 with a surplus of $4.3 billion, $149 million more than the surplus for 2017. The surplus of $825 million we project for 2019 would reduce the 2020 gap to $742 million. Additionally, our forecasts of revenue and expenditures in the last two years of the financial plan reduce the city’s budget gap in 2021 to $1.5 billion and an almost insignificant $124 million in 2022.”

The potential for continued upheaval resulting from the clash between Gov. Andrew Cuomo and the mayor coupled with uncertainty in funding from Washington pose one set of risks to the budget and could force officials to make hard choices about the use of the city’s reserve funds, the IBO said.

However, the potential for a recession poses another and perhaps even bigger fiscal risk.

“In all likelihood the city’s reserves would only be sufficient in the face of a recession to buy some time while policymakers find ways to bring the budget into balance,” the IBO said. “Although the city is carrying a record level of reserves, these funds are best thought of as way to cushion the city against fiscal or economic blows rather than a safeguard to weather all budget storms.

"But sizable reserves can themselves be a risk as recent events have shown. With New York City ‘sitting on’ billions in reserve, Albany felt empowered to make decisions that will cost the city more than $500 million next year and millions more in future years.”

IBO expects the pace of city job creation to moderate in 2018 and then decelerate over the next three years in step with the forecast trend in the national economy.

“After seven years of local employment growth with an average of over 100,000 jobs added annually, IBO expects slower growth this year and next with 70,200 jobs added to the local economy in calendar year 2018 and 60,000 jobs in 2019 — contributing to slower tax revenue growth beginning in fiscal year 2019,” the report said.

Real wages have been declining across many sectors over much of the current expansion but are projected to shift to weak growth over the 2018-2022 period, the report said.

In the first quarter of the year, the city’s unemployment rate stood at an historic low of 4.2%, while the city’s labor force participation rate of 60.9% was slightly lower than 2017’s all-time high.

“Even with slowing payroll employment growth, the city’s labor market will remain tight, with the unemployment rate projected to drop to 3.7% by the middle of 2019, before eventually edging back to 4.5% — still close to full employment — by the end of the financial plan period,” the report said.

The IBO said debt service and fringe benefit costs are the two largest drivers of overall expenditure growth, increasing by an average of 8.4% and 7.0% annually from 2018 through 2022.

The city has $37.6 billion of general obligation debt outstanding as of March 31. Moody’s Investors Service rates the city’s general obligation bonds Aa2, while S&P Global Ratings and Fitch Ratings rate them AA. All three assign stable outlooks.

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