Huge challenges remain for New York City, notably unsettled labor deals and the lingering costs of Hurricane Sandy, the New York City Independent Budget Office said Thursday in its fiscal outlook.

While the publicly funded, nonpartisan watchdog agency praised Mayor Michael Bloomberg for his fiscal management over his 11 years in office, it also cited several important issues the city faces beyond the revenue and spending projections that Bloomberg's administration presented in last month's financial plan.

According to IBO, the city faces a budget shortfall of $811 million in the upcoming fiscal year, a "relatively modest" 1.6% of the agency's forecast for city-generated revenues. IBO's projected shortfall for the following year, fiscal year 2015, is $1.7 billion, or 3.1%.

"People tend to gauge the city's financial health on the out-year gap numbers. These forecasts are relatively small, but I think they are misleading. The outlook is not as strong as the mayor's financial plan would indicate," IBO director Ronnie Lowenstein said in an interview.

The report cited the lack of current labor contracts with nearly every union in the city. The teachers' union deal expired in 2009, while contracts with the union for principals and other school administrators and District Council 37, the city's largest public employee union, expired in 2010. Contracts with other large unions expired a year or more ago.

"There is little money set aside in the budget plan to fund contract settlements covering these past years," the report said.

The city has yet to finalize the costs of post-Sandy rebuilding, including hardening the city's infrastructure to lessen the effects of future storms. "The biggest question is how much the city will be reimbursed. The $60 billion President Obama is requesting for congressional approval is less than what the governors are requesting," said Lowenstein.

Under-the-radar variables related to Sandy include property-tax forecasts, as businesses and residents in flood-prone parts the city consider whether to rebuild.

"Are people less likely to rebuild in the low-lying areas? We haven't begun yet to take stock in how the businesses and residents feel," Lowenstein said. "There are different kinds of worries than after 9/11, but there are worries nonetheless."

But John Hallacy, head of municipal research for Bank of America Merrill Lynch, sees positives.

“There are still reasons to be optimistic,” he said. “The MTA getting back up and running so quickly was a positive for the city overall. We still have tourists flocking here in big numbers. And while Sandy provided a bit of a property tax impact in terms of value, what we experienced in New York were speed bumps compared with other places experienced.

“The budget gaps have dropped considerably. I remember just a couple of years ago when they were more than $4 billion. $1.7 billion is less than half of that. They do a reasonably good job. They’re still selling debt through the Transitional Finance Authority as well as the GO, so that lowers the cost of their financings.

“The fiscal cliff, though, is still a bit of a wild card.”

The biggest uncertainty regarding the property tax revenue forecast, according to Lowenstein, is the fate of the coop and condo abatement.

The city has never introduced a long-term solution to the abatement, a stop-gap measure adopted in 1997 as a temporary fix to begin addressing the differences in tax burdens between owners of conventional homes and apartments.

The latest version expired in June after several extensions and Albany has yet to enact permanent legislation to continue the benefit. For now, the city's revenue forecast us based on a straight extension of the current abatement.

Other questionable assumptions, according to IBO, include taxi revenue, state education aid and Medicaid reimbursements. With Bloomberg's proposal to sell more taxi medallions tied up in court, the mayor has pushed projected revenue from the sale back for a second time.

IBO anticipates an increase of more than 76,000 jobs this calendar year and nearly 51,000 next year in the city, while its projection for wage gains is relatively flat.

"Over the past few years the city has weathered a number of diverse challenges, from the economic storm of the deepest national recession since the 1930s to the post-Christmas blizzard that knocked out much of the city's transportation routes for days to the most recent super storm," IBO said.

With term limits prohibiting Bloomberg from a fourth run at the mayor's office, the 2013 mayoral race is open-seat.

"The fiscal difficulties that lay ahead for the next mayor and City Council may be more prosaic than a historic recession or mammoth storms, but the potential challenges remain no less real," the IBO report said.

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

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