Report: Pressures Cloud New York City Budget Picture

Uncertainty from labor contracts to taxi medallions to bond interest rates could pressure New York City’s finances and skewer its financial projections, the city’s Independent Budget Office said Wednesday.

“The city’s fiscal outlook is not as strong as it appears,” said Ronnie Lowenstein, director of the publicly funded, nonpartisan agency.

IBO, in a report that included an overview of New York in general, including the growth of industries unrelated to Wall Street, reported that under Mayor Michael Bloomberg’s plan, which the agency adjusted for its revenue forecast and spending re-estimates, the city will end the current fiscal year with a $1.2 billion surplus, $160 million more than Bloomberg’s administration had expected, and finish 2014 with a $427 million surplus.

But while IBO projected narrow gaps in the out-years, it warned about variables.

Expired contracts with municipal unions, Lowenstein said, could pose the most costly threat. She said settling expired labor contracts could cost the city $4.5 billion through 2013, including the higher cost of pensions and payroll taxes due to the rise in wages as well as extending the pay hike to nonunion employees, as the city typically does.

For 2014 and each year thereafter, the additional cost would be $1.8 billion annually, the report said.

John Hallacy, the head of municipal research at Bank of America Merrill Lynch, saw the IBO report as mostly favorable.

“Obviously, they can work through most of these issues,” said John Hallacy, the head of municipal research at Bank of America Merrill Lynch. “It seems like programmatic spending is really under control, for the most part, while employee benefits, health care and labor contracts appear to be the biggest pressure points.”

Hallacy noted that the city saving roughly $230 million this year by refinancing $3 billion in debt this year, thanks to continued low interest rates for bonds, is a big plus.

“There’s been talk about the Fed changing its posture, but to the extent that rates are low, they’ll continue to have these savings. They’re getting some pretty significant savings,” Hallacy said.

Bloomberg presented his preliminary $70.1 billion budget in January. The 51-member City Council must approve one by June 30.

Another variable is the continued expectation of $1.5 billion in revenue from the proposed sale of new taxi medallions, which is pending a court case.

Bloomberg, in the final year of his 12 in office, submitted a $39.3 billion capital plan in January, covering 2013 through 2016. The total represents $5 billion, or 14.4% from the capital plan of last October, with much of the increase in planned spending related to recovering from Hurricane Sandy.

The current capital plan classifies the entire $3.1 billion in Sandy-related capital projects as city funds, although the city expects full reimbursement from the federal government.

Moody’s Investors Service rates the city’s general obligation bonds Aa2, while Standard & Poor’s and Fitch Ratings assign AA ratings.

IBO sees a downward trend in new-money issues, which peaked at $7 billion in 2010. The city’s Office of Management and Budget projects $4.6 billion in new issuance for 2013, about $1 billion less than in the previous fiscal year, with that amount to rise to $5.6 billion in 2014 before declining again in the phase-out years of the financial plan.

The city expects general obligation and Transitional Finance Authority new-money issuance for the remainder of 2013 through 2017 to total $23.1 billion.

City pension costs, according to IBO, are expected to level off over the next few years. “That’s some good news,” said Hallacy. “And in a lot of programmatic spending, they will hold the line.”

IBO projects $7.9 billion in pension costs for 2013 and $8.1 billion in 2014, then rising to $8.5 billion ins 2017.

The report also said that in the aftermath of Wall Street layoffs -- IBO called it an “altered terrain” -- other industries are driving the city’s job growth, “industries not much linked to the fortunes of Wall Street or that have become less tied to its fate.” They include technology, education, health, and social assistance services, and professional services.

Debt service, according to IBO, is projected to rise by 5.2% in 2014, which reflects reduced planned borrowing and savings from refunding.

“The report confirms the administration’s success in improving our finances, growing our economy and creating new jobs – all of which will strengthen the city in the years ahead,” said OMB media relations officer Lauren Passalacqua.

New York City’s schools stand to receive an additional $364 million in aid -- $8.3 billion, up 4.6% -- under a budget the state Senate approved at 4:30 a.m. Wednesday after an up-all-night session. The $240 million penalty the state levied against the city in January for not reaching  agreement with the teachers union on an evaluation system still holds.

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