NYC’s reserves, capital needs come into focus ahead of budget negotiations
New York Mayor Bill de Blasio won praise for cost-cutting in his $92.5 billion budget proposal but drew criticism from those who said he didn’t go far enough to prepare for an economic downturn.
The fiscal 2020 executive budget released Thursday was larger than the $92.2 billion proposed in the preliminary 2020 budget unveiled in February and the $89.2 billion final budget for fiscal 2019 approved last June.
“What you're going to see in this budget presentation is a real focus on the fiscal responsibility and ensuring that the city will be strong despite a number of challenges that we have faced,” de Blasio said at a City Hall press briefing. “And this budget, you will see, is for a new era that we're entering into where we will focus on fiscal caution, that we will make sure that savings is even more a part of what we do going forward. And there will be some investments, but they will be limited.”
There are other views.
“It’s modestly tighter as far as expenditures,” said Howard Cure, director of municipal bond management for Evercore Wealth Management, adding that the plan was cutting back, but not by that much.
He said that while the expected state cutbacks of $600 million seen in the preliminary budget turned out to be $300 million after the state budget was adopted, he would “like to see a little more frugality” on the part of the city.
“The mayor is acting like a recession is not eventually approaching. The budget is only maintaining the reserves and not increasing them,” Cure said. “As a bondholder, I’d like to see the city be better prepared for a recession.”
Cure added that the city council was also concerned about the level of reserves the city would need to weather tough times.
About $916 million in savings were recorded in the new operating plan, exceeding the $750 million the mayor wanted from city agencies under the program to eliminate the gap, or PEG, which was announced in February.
By contrast, the 10-year capital plan through 2029 increased to $116.9 billion from February's $104.1 billion.
“This administration believes in aggressive capital spending, with a watchful eye toward debt service,” de Blasio said, citing schools, infrastructure, affordable-housing and borough-based jail needs for the extra spending.
“Under the mayor’s latest budget, the 10-year plan for capital spending jumps by about $13 billion to nearly $117 billion, mostly due to the plan to replace the dysfunctional jails on Rikers Island,” said Doug Turetsky, the New York City Independent Budget Office’s chief of staff. “Not surprisingly, debt service remains one of the fastest-growing items in the budget, yet is expected to consume less than 15 cents of every tax dollar, the level used as a common marker of debt service affordability.”
Office of Management and Budget Director Melanie Hartzog said the debt-service levels remained manageable.
Listen here to OMB Director Hartzog talk with Chip Barnett about debt service
“ … We have the city's debt service obligation … we keep our debt-service payments below 15% of the city tax revenue. This is a benchmark for responsible capital financing. Even as our capital investments grow over time, we still maintain a responsible level of debt-service payments in relation to city tax revenue,” Hartzog said.
The mayor also addressed the issue of the city’s shrinking payroll.
“In the previous five budgets, headcount consistently increased and that was for strategic reasons. … This is the first time in the six budgets I've done — this is the first time the headcount is decreasing. It as a modest decrease — a total reduction of 357 positions. But it indicates that we've gotten to a point where at this moment, we can say we're stable essentially on our head count and not expecting it to grow going forward.”
The council, which earlier this month called on the de Blasio administration to raise budget reserves by $250 million as a safeguard against an economic slump, was not happy with the new plan.
“The Council is disappointed that Mayor de Blasio has failed to fund many significant citywide Council priorities in the Fiscal 2020 Executive Budget, including many social service programs as well as $250 million in reserves,” Council Speaker Corey Johnson, Finance Committee Chair Daniel Dromm and Capital Budget Subcommittee Chair Vanessa Gibson said in a joint statement.
“The reserves are necessary to protect the city in the event of an economic downturn and should not have been excluded in the Executive Budget. This is the fiscally responsible path for our city and the Council is once again demanding we prioritize reserves.”
The mayor released the preliminary budget in February, after which the 51-member city council held a round of budget hearings. The council will now hold a second round of hearings, then it and the mayor will negotiate adjustments. By law, the council must vote on a budget by July 1. The last three budgets were all approved well ahead of schedule.
The Citizens Budget Commission said the new plan needed to focus more on preparing for future downturns.
"Mayor de Blasio’s stay-the-course budget does not take the steps needed to preserve services or forestall tax increases in the eventual hard times,” said CBC President Andrew Rein. “City-funded spending increases roughly 3.6%, which is lower than the administration’s prior average 4.6%. The highly anticipated Program to Eliminate the Gap provides savings, but fails to deliver resources needed to address any upcoming downturn. Its size and components are in line with the administration’s prior savings programs. A majority of the savings are from expense re-estimates, increased revenues, funding shifts, and debt service savings, rather than from improved efficiency. Credit is due for a reduction in headcount of 1,600 vacant positions on a recurring basis.”
The city council also wants its budget funding priorities to be taken seriously.
“By not funding vital services, the de Blasio Administration is engaging in the same ‘budget dance’ that it had once pledged to end. This is completely unfair to the nonprofits who run these programs and who are now unable to plan their future. This is unacceptable, and they deserve to be treated better than this,” the statement said.
“The Council did not propose $1 billion in Alternative Savings to the PEG Program to only have the Administration take many of those savings and not fund many of our priorities — priorities that were included in the Fiscal 2019 Adopted Budget,” the members said.
The city is one of the largest issuers of municipal debt in the U.S. As of Dec. 31, the city had about $38 billion of general obligation debt outstanding.
Last month, Moody’s Investors Service raised its rating on the city’s general obligation bonds to Aa1 from Aa2. Moody’s said the upgrade “reflects continued strengthening and diversification of New York City's economy, reducing its reliance on volatile financial services.”
The city is rated AA by both S&P Global Ratings and Fitch Ratings.