The two dirty words in NYC’s budget

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As the New York City Council met for a budget hearing on Mayor de Blasio’s $88.67 billion fiscal year 2019 preliminary budget, two little words had a big impact on the proceedings — Albany and Washington.

The Council’s Finance Committee, chaired by Councilperson Daniel Dromm, held an all-day hearing into the budget and financial plan on Monday, featuring testimony from the Mayor’s Office of Management and Budget, the Department of Finance, the Comptroller’s Office and the Independent Budget Office.
“Our emphasis in the preliminary budget is caution,” said Melanie Hartzog, the new OMB director. "As the mayor noted in the budget presentation, we face substantial risks from Albany and Washington.”

She said the proposed New York State budget could cost the city over $750 million a year, which includes a cost shift of $400 million for education and child services and a shift of $150 million in charter school costs and a new capital commitment for transit.

“On top of this, the Trump tax act made changes to bond refinancing that may cost the city up to $100 million annually in savings,” she testified. “Further, lowering the corporate tax rate to 21% devalues low-income housing tax credits, which impacts our affordable housing plan by some $200 million annually.”

Council Speaker Corey Johnson stressed his priorities for the upcoming budget hearings.

“I want to focus on what will be a recurring theme of these hearings: Ensuring that the city budget is fair, transparent and accountable to New Yorkers,” Johnson said.

He added that one concern for the Council was the pattern of spending growth.

“Since Fiscal 2015, the city’s budget has grown by 20%.The preliminary financial plan projects the city budget to hit $95.2 billion by fiscal 2022,” Johnson said. “To ensure that indispensable social services will be sustainable in the event of an economic downturn, the city must consider how much of this spending would be better used to increase our reserves.”

The Council will hold a series of public hearings in the next few weeks after which it will respond to the mayor’s preliminary budget. In April, the mayor will release his executive budget – an updated proposal based on the Council’s response to the preliminary budget. The Council will then hold a second round of hearings after which the council and the mayor will negotiate adjustments to the executive budget. Agreement must be reached before July 1, the beginning of the next fiscal year.
Finance Chair Dromm said he wanted to look at the budget with a fresh perspective.

“I intend to scrutinize both the presentation of the budget, with an eye toward achieving the transparency and clarity envisioned by the City Charter, and the allocation of spending, to make sure it is done sensibly while still adequately funding our priorities.”

The city has about $37.7 billion of general obligation debt outstanding. 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.

Looking ahead, the city is planning to issue capital purpose GOs of about $2.2 billion in fiscal 2018, $3 billion in fiscal 2019, $4.8 billion in fiscal 2020, $4.8 billion in 2021 and $4.4 billion in fiscal 2022.

At Monday’s hearing, the IBO released to the Council its analysis of the mayor’s budget.
“The February 2018 preliminary budget is the de Blasio Administration’s first financial plan of its second term, and while the budgets proposed during the first term included commitments for high profile and costly initiatives such as affordable housing development and expanding early childhood education, this new budget is more focused on sustaining and expanding prior initiatives than starting new ones,” the IBO report said.

“Given the risks to the city’s fiscal condition emanating from Albany and Washington, as well as the fiscal challenges facing agencies which are not part of the city’s budget but inexorably linked to the city’s overall health such as Health + Hospitals, New York City Housing Authority, and the Metropolitan Transportation Authority, such cautious budgeting seems warranted.”

IBO Director Ronnie Lowenstein testified before the Council that de Blasio’s preliminary budget contained little in the way of new initiatives or spending, but rather built upon those championed in the mayor’s first term

She testified that the IBO is “expecting somewhat more of a surplus than OMB, we’re expecting a little over $700 million more than OMB expects for a surplus of $3.3 billion.”

She added that “I think we can characterize this budget as ‘cautious.’ That’s the good news. The bad news is that there are way too many reasons to be cautious at this moment.”

The report highlighted some of the warning signs coming from Albany and Washington.

“The state is currently in the process of attempting to close a $4.4 billion budget gap for the coming year and Gov. Cuomo has already signaled his willingness to find savings at the city’s expense. The governor’s current budget assumes millions of dollars less for the city than the mayor estimates in his current financial plan. If these changes were to be adopted, the city would have to find ways to make up for these lost funds, either through reduced services or by finding other funding sources, most likely from the city itself,” the report said.
“Even more uncertainty exists at the federal level where the Trump administration and Congressional leaders have presented budget proposals that have the potential to negatively affect the city’s finances. Thus far these proposals have had little impact as the President and Congress have been unable to adopt a federal budget, instead opting to provide short-term funding resolutions that keep the federal government in operation, and postponing tough budget choices … Meanwhile, the Trump Administration has released its budget proposal for the federal fiscal year that will start in October. Although the President’s budget was greeted with skepticism, a budget combining some portions of the Trump budget proposal with those of the Congressional leaders is likely to eventually pass. IBO assumes that such a budget would have a net negative effect on the city’s budget and economy.”

Jacques Jiha, Commissioner of the Department of Finance, testified that while the overall financial position of the city was relatively strong right now, there were several areas of concern for the future.

“Through February, New York City’s revenue totaled about $46 billion, an increase of 11% over last year. This increase is partly the result of taxpayers prepaying their taxes in December because of the new federal tax law limiting the deductibility of state and local taxes,” he said.

“The corporation tax continues to underperform, declining by about 4% so far this fiscal year. The real property transfer and the mortgage recording tax, which are indicators of the health of the real estate market, have declined by about 6% and 5%, respectively,” he added.

“There are also economic uncertainties which, when combined with recent stock-market volatility and concerns over the still-developing national economic policies of the Trump administration, give us reason to approach the FY19 budget cycle with caution.”

In his testimony, Comptroller Scott Stringer while lauding the mayor for his policies on closing Rikers Island, replacing heating systems in the New York City Housing Authority, and expanding the 3-K For All education program, noted that his office is seeing warning signs of a slowing economy.

“As I have said in the past, and will repeat with more urgency today, we need to do more to prepare for the possibility of challenging times ahead,” Stringer testified. “More than ever, our spending decisions must be data-driven and evidence-based. We must ensure that no dollar is going to waste.”

He said he believed there were two assumptions in in the mayor’s revenue plan that present financial risks.
“First, the budget for FY 2019 continues to assume that the state will not recapture all savings from the STAR-C bond refundings. Thus far, they have intercepted city sales tax revenues in each of the last three years, and we therefore assume a $150 million risk in next year’s budget,” he said. “Second, we believe the city is unlikely to realize the taxi medallion sales revenues assumed in the financial plan. As I’ve said before, given the disruption in the yellow taxi industry from for-hire car services, these sales – worth $929 million over the plan period – are unlikely.”

On the expenditure side, he said his office has identified budgetary risks from overtime spending and Federal Medicaid reimbursements for special education services. And they anticipate the city will continue to waive H+H payments for medical malpractice claims and fringe benefits, which have been made only once in the last four years.

“My message to you today is that the robust economic growth we’ve seen for the last near-decade is slowing, and the warning signs for the future are increasingly apparent. We cannot stop investing in our city,” Stringer said. “But we can only afford to do so if we are getting real, measurable results for our spending. We must meet the needs of New Yorkers while also ensuring we are ready for a rainy day. And we can do so, and prevent the possibility of cuts to vital services, if we put in the hard work now.”

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