Staff Report. JANUARY MODIFICATION FYs March 13, 2017 NEW YORK STATE FINANCIAL CONTROL BOARD

Transcription

1 Staff Report JANUARY MODIFICATION FYs March 13, 2017 NEW YORK STATE FINANCIAL CONTROL BOARD

2 STAFF OF THE NEW YORK STATE FINANCIAL CONTROL BOARD ACTING EXECUTIVE DIRECTOR Jeffrey L. Sommer SENIOR STAFF Barbara Marin Administration Steven A. Bollon - Acting Expenditure and Covered Organization Analysis Martin Fischman - Acting Economic and Revenue Analysis Jewel A. Douglas Finance and Capital Analysis ANALYTIC STAFF Sew-Lian Ang Iwona Matusiak Michelle McManus Jean L. Schwartz Edward C. Thurston ADMINISTRATIVE AND SUPPORT STAFF Taina M. Sanchez Saundra L. Truell

3 TABLE OF CONTENTS PAGE l. Overview... 1 II. The FY 2017 Budget... 6 City-Fund Revenues Climb $771 Million in FY Miscellaneous Revenue Rises in FY Expenditures... 8 III. The FYs Financial Plan Lower Tax Estimates Shrink FY 2018 City Funds by $271 Million The City's Revenue Growth Targets Have Been Set Higher Most Nonproperty Taxes Participate in Revenue Growth Property Values on Tax Rolls Climb for a Seventh Consecutive Year Miscellaneous Revenue Expenditures The Expanding Capital Program is Supported by a Growing Tax Revenue Forecast Profile of the Preliminary Ten-Year Capital Strategy for FYs Sustainable Debt Service Levels in the Ten-Year Strategy IV. Glossary of Acronyms i

4 LIST OF TABLES PAGE 1. JANUARY MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS JANUARY MODIFICATION COMPARED TO NOVEMBER MODIFICATION RISKS TO THE FINANCIAL PLAN CITY FUNDS CLIMB 16.6 PERCENT BY FY CHANGES FROM NOVEMBER TO JANUARY MODIFICATIONS FYs PROJECTED GROWTH IN CITY-FUNDED EXPENDITURES IN FYs 2017 TO WHILE PROJECTED TO GROW OVER THE PLAN YEARS, THE DEBT SERVICE BURDEN REMAINS AFFORDABLE THE EXPANSION IN CAPITAL COMMITMENTS IS FUNDED LARGELY BY CITY TAX- SUPPORTED DEBT COMMITMENTS IN THE PRELIMINARY STRATEGY ARE HEAVILY FRONT LOADED LIST OF CHARTS PAGE 1. FY 2018 MARKET VALUES INCREASE 8.7 PERCENT TO $1.157 TRILLION THE SUSTAINABLE DEBT SERVICE BURDEN IS FACILITATED BY STRONG TAX REVENUE GROWTH PROJECTIONS ii

5 l. Overview On January 24, 2017, the city presented its preliminary budget for FY 2018 and the midyear modification to the financial plan at a time when there is much uncertainty about the economy and the impact of potential federal and state actions. In the January modification, the city boosted its estimate of FY 2017 city-fund revenues by $771 million, due mainly to stronger tax audits and miscellaneous revenue, as well as a release of reserves for disallowances from federal and state audits. Changes in tax revenue estimates, however, did not add substantially to the increase because gains in the real property tax were largely offset by weakness in the nonproperty taxes. This weakness is likely to continue for the rest of the fiscal year. Our review of current tax collections leads us to risk $300 million in FY 2017 due to projected shortfalls in the personal income and the unincorporated business taxes. The city was able to reduce city-fund expenditures in FY 2017 by drawing down reserves and implementing a second savings program, which were offset by a small amount of new agency needs. The general reserve was reduced from $1 billion to $300 million, the $500 million in the capital stabilization reserve was drawn down as it was not needed, and $400 million in savings were achieved due to a reestimate of prior-year payables. The agency savings program is projected to provide $515 million in FY The combination of revenue increases and expenditure reductions allowed the city to increase the projected surplus for FY 2017 by $2.6 billion for a total surplus of $3.1 billion. The surplus will be used to prepay FY 2018 expenses and balance that year s budget. In preparing the FY 2018 preliminary budget, the city recognized the changing local economic conditions. While revenues from the property tax and tax audits were higher by $353 million, they were offset by shortfalls in the nonproperty taxes and miscellaneous revenues totaling $624 million. Nonproperty taxes are down mainly due to the weakening in the business and property transactions taxes. We estimate that the city will likely have to further reduce their nonproperty tax forecast by $250 million due to shortfalls in the personal income and unincorporated business taxes. Over the FYs financial plan, the city projects that city-fund revenues will increase by an average of 3.9 percent annually. To highlight the uncertainty that lies ahead, this plan could be easily achieved in high-growth periods such as FYs , when city funds increased by about seven percent annually. However, the city s plan would not be achieved if the future resembles the more recent slow growth experienced in FY 2016, when city funds increased by an estimated 1.4 percent, and the partiallycompleted FY 2017 in which city funds increase by a projected 1.9 percent. Given these conditions, the city will need to proceed with caution. City-fund expenditures are expected to increase by a net of $1.3 billion over FYs The increase includes new agency spending of $720 million, support for homeless services of $612 million, uniformed overtime needs of $284 million, and new needs in the Department of Education of $188 million. The major sources of city-fund expenditure growth are labor and healthcare costs, with 99.1 percent of labor settlements in place; debt service costs, reflecting an expanding capital program; disbursements for

6 the Department of Education, and support for Health + Hospitals. In each year of the plan, the city also maintains a general reserve of $1 billion, as well as a capital stabilization reserve of $250 million. The city has wisely taken actions to reduce expenditures by implementing an additional program that is expected to achieve $1.5 billion in savings over the life of the financial plan. With a projected balanced budget in FY 2018 and gaps of $3.3 billion in FY 2019, $2.5 billion in FY 2020, and $1.8 billion in FY 2021, the city must be concerned about the impacts of federal and state actions. It is impossible, at this time, to predict the impact of a new administration in Washington, DC. There have been calls to penalize sanctuary cities, make changes to the Affordable Care Act, and institute major tax reform. Without specific proposals, it is unclear what the effect on tax collections, Medicaid, or Health + Hospitals may be. Any of these changes is likely to also have an impact on the state s budget. It cannot be known, at this time, how the state will deal with any reduction in federal support and if any shortfall would be passed on to the city. The city will also have to wait until April for the state legislature to pass a budget and determine what impact, if any, there would be on the city s FY 2018 budget. The state executive budget has some proposals that could be a risk to the city s financial plan. The state education aid increase is less than the city is projecting and there are some changes to charter school funding, as well as some funding shifts that could impact the city s budget, if enacted. The city has been wise to continue its conservative budget management. Unlike past years, higher tax collections are unlikely to occur in FY In order for the city to build up a surplus in FY 2018 to help balance the outyears, and be prepared for federal impacts, it will have to maintain a high level of reserves. The city also must maintain these reserves by finding further agency expenditure savings and limiting the addition of unfunded new needs. The Mayor has already announced that the executive budget will contain an additional savings program valued at $500 million. This process will have to be ongoing and the city should prioritize actions that have recurring benefits. 2

7 TABLE 1 ($ in millions) JANUARY MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Revenues Taxes: General Property $24,116 $25,549 $27,212 $28,538 $29,849 Other Taxes 29,646 30,556 31,712 33,079 34,208 Tax Audit Revenue 1, Sale of Property Tax Liens Miscellaneous Revenues 6,835 6,362 6,602 6,804 6,807 Unrestricted Intergovernmental Aid Less: Intracity Revenues (2,039) (1,786) (1,781) (1,787) (1,787) Disallowances 200 (15) (15) (15) (15) Total City Funds $59,936 $61,596 $64,531 $67,420 $69,863 Other Categorical Grants Interfund Revenues Federal Categorical Grants 8,826 7,012 6,811 6,809 6,781 State Categorical Grants 14,417 14,546 15,008 15,404 15,718 Total Revenues $84,814 $84,668 $87,855 $91,065 $93,788 Expenditures Personal Service $44,848 $47,393 $49,877 $51,706 $53,093 Other Than Personal Service 36,300 34,285 34,521 34,446 34,653 General Obligation, Lease & TFA Debt Service 6,388 6,581 7,301 7,960 8,372 Budget Stabilization & Prepayments (983) (3,055) Capital Stabilization Reserve General Reserve 300 1,000 1,000 1,000 1,000 Subtotal $86,853 $86,454 $92,949 $95,362 $97,368 Less: Intracity Expenditures (2,039) (1,786) (1,781) (1,787) (1,787) Total Expenditures $84,814 $84,668 $91,168 $93,575 $95,581 Gap To Be Closed $0 $0 ($3,313) ($2,510) ($1,793) 3

8 TABLE 2 ($ in millions) CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS JANUARY MODIFICATION COMPARED TO NOVEMBER MODIFICATION FY 2017 FY 2018 FY 2019 FY 2020 Revenues Taxes: General Property $171 $219 $372 $427 Other Taxes (106) (536) (369) (103) Tax Audit Revenue Sale of Property Tax Liens Miscellaneous Revenues 211 (80) (93) 6 Unrestricted Intergovernmental Aid Less: Intracity Revenues (78) (8) (9) (8) Disallowances Total City Funds $770 ($271) ($94) $327 Other Categorical Grants (1) Interfund Revenues Federal Categorical Grants State Categorical Grants Total Revenues $1,357 $99 $290 $556 Expenditures Personal Service ($25) $114 $167 $163 Other Than Personal Service General Obligation, Lease & TFA Debt Service (85) (335) (83) (72) Budget Stabilization & Prepayments 2,616 (2,616) Capital Stabilization Reserve (500) General Reserve (700) Subtotal $1,435 ($2,134) $723 $698 Less: Intracity Expenditures (78) (8) (9) (8) Total Expenditures $1,357 ($2,142) $714 $690 Change to the Gap Decrease/(Increase) $0 $2,241 ($424) ($134) 4

9 TABLE 3 RISKS TO THE FINANCIAL PLAN ($ in millions, positive numbers are offsets to risks) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Stated Financial Plan Gap $0 $0 ($3,313) ($2,510) ($1,793) Estimation Nonproperty Taxes (300) (250) (50) (50) (50) Miscellaneous Revenue Uniformed Services Overtime (135) (145) (195) (193) (193) HHC Reimbursements 0 (165) (165) (165) (165) Subtotal (385) (410) (285) (308) (308) Not in City s Control Potential State Budget Impact 0 (545) (545) (545) (545) STARC Bond Repayment (50) (200) (150) 0 0 Subtotal (50) (745) (695) (545) (545) Risk Total ($435) ($1,155) ($980) ($853) ($853) Total FCB Estimated Surplus/(Gap) ($435) ($1,155) ($4,293) ($3,363) ($2,646) 5

10 II. The FY 2017 Budget The January Modification to the Financial Plan for FYs raises the year-end budget surplus for FY 2017 by $2.6 billion to total $3.1 billion and applies such funds to prepay FY 2018 expenses. The expanded surplus includes additional revenues and numerous actions to lessen expenditures. In applying the surplus to prepay FY 2018 expenses, the January modification eliminates a previously estimated $2.2 billion deficit for FY 2018, and presents balanced budgets of $84.8 billion in FY 2017 and $84.7 billion in FY Total expenditures jump to $91.2 billion in FY 2019, $93.6 billion in FY 2020 and $95.6 billion in FY 2021, exceeding total revenues and resulting in budget deficits of $3.3 billion, $2.5 billion, and $1.8 billion in FYs , respectively. In the January modification, the city boosted its estimate of FY 2017 city funds by $771 million, to $59.9 billion, due mainly to stronger audits and miscellaneous revenue, as well as a release of reserves for disallowances. Changes in tax estimates did not add substantially to the surplus because gains in the real property tax were largely offset by the weakness of the nonproperty taxes. Categorical aid increased by an additional $586 million, augmenting total revenue by $1.4 billion, to $84.8 billion. A net $1.85 billion reduction of city-fund expenditures in FY 2017 is attributed to the drawdown of reserves and a second savings program, partially offset by agency new needs. As a sound financial management practice, the city budgets high reserves to address uncertainties that may arise during the fiscal year, then reduces the reserves incrementally as the fiscal year progresses. The city reduced its $1 billion general reserve by $700 million and took down the $500 million capital stabilization reserve. Another $400 million of savings was generated in FY 2017 when the city reestimated the reserve for prior year s expenses and receivables. Additionally, the January modification includes a proposal for a second multi-year savings program that is expected to reduce city-funded spending in FY 2017 by $515 million. This more than offsets $263 million of agency new needs that the city identified, most of which are attributable to the Departments of Homeless Services and Education. The city continues to maintain a $1 billion general reserve and provided new funding of $250 million for the capital stabilization reserve in each of the outyears of the plan. CITY-FUND REVENUES CLIMB $771 MILLION IN FY 2017 City-funded revenue estimates increased by $771 million, since the November modification, to $59.9 billion, as shown in the figure on page 7. The real property tax estimate improved by $171 million to $24.2 billion, while the nonproperty taxes slipped by $106 million to $29.1 billion. Audits increased by $300 million, to over $1 billion; and this number could continue to grow because of the diligent efforts of the city s recently enlarged auditing staff. Miscellaneous revenue added $134 million. The federal government is paying the city $57 million in unrestricted aid for prior-year Medicaid reimbursements. The city released $200 million from its $1.1 billion reserve for 6

11 disallowances and added these funds to its revenue budget. 1 Categorical aid is up $586 million, with the increases almost evenly divided between gains in federal and state aid. This extra aid, along with the gains to city funds lift total revenue by $1.4 billion to $84.8 billion. Among the nonproperty taxes, the sales tax declined by $91 million and the personal income tax collection target was lowered by $29 million. The property transactions taxes retreated $68 million reflecting concerns about the slowing of the real estate market. The utility tax is down $14 million. The business taxes had virtually no net change, aside from a slight gain of $2 million to the unincorporated business tax. The hotel tax and the commercial rent tax gained $21 million and $8 million, respectively. The minor taxes gained $65 million primarily due to $56 million in extra payments in lieu of taxes (PILOTs), and small collection gains for the commercial motor vehicles tax and penalties and interest for late payment of real property taxes. The FY 2017 City Funds Improve by $771 Million ($ in millions, change since Nov Mod) Property Tax $171 Nonproperty Taxes (106) Audit Revenue 300 Miscellaneous Revenue 134 Unrestricted Aid 57 Disallowances 215 City Funds $771 Federal Categorical Aid 292 State Categorical Aid 287 Other Categorical Aid 8 Total Categorical Aid $586 Total Change in Revenues $1,357 Numbers may not add due to rounding. largest increments to PILOTs are one-time additional payments of $35 million from the Battery Park City Authority, $11 million extra from the Economic Development Corporation, and $9 million extra from the Industrial Development Agency. The Port Authority is scheduled to begin paying an extra $5 million in PILOTs starting in FY 2018, and continues into the outyears of the plan, that are linked to the World Trade Center and the New York Board of Trade. The property tax increased by $171 million in FY 2017, compared with the previous plan, due to a favorable adjustment to contingency reserves. The city lowered its refund reserve from $400 million to $300 million, adding $100 million to current-year property tax revenue. Despite this reserve reduction, the city is cautiously maintaining refund reserves of $400 million in each future year of the plan. The city reduced its cancellation reserve by $50 million to $484 million in FY 2017, while it incrementally raised this reserve from $581 million in FY 2018 to $697 million in FY These cancellation reserves could be needed to protect the city from taxpayer assessment disputes, which could proliferate if the local real estate market slows down. In addition to these reserve changes, the city derived $21 million from the cash overpayments and delinquency reserves. Categorical aid increased by $586 million, since November, to $24.2 billion in FY Federal aid increases by $292 million to $8.8 billion. Federal grant programs added more than $110 million for assistance to support needy families, of which $61 million is a re-estimate of shelter costs; about $20 million is for child care; nearly $60 million is for fringe benefits; and nearly $30 million extra is for Hurricane Sandy recovery efforts. State 1 The figure shows a net change of $215 for disallowances, which is the difference from the current value of $200 million and the negative $15 million appearing in the November modification. 7

12 grants are up $287 million to $14.4 billion. The incremental state aid includes about $90 million extra for child welfare and foster care, more than $60 million for fringe benefits, over $40 million in extra education grants for career and academic improvement, nearly $30 million derived from asset forfeitures and more than $20 million for detention. Private grants increase by $8 million to $980 million. Miscellaneous Revenue Rises in FY 2017 Compared to the prior modification, the FY 2017 miscellaneous revenue estimate increases by $134.2 million to $4.8 billion. Once nonrecurring and other revenues are taken into account, the plan-to-plan variance is $112.8 million and total revenue is $3.2 billion, which reflects a decline of 5.9 percent from FY The $112.8 million plan-toplan variance illustrates broad-based improvement among the categories, especially in licenses, fines, and interest income. Over 50 percent of the variance originates in the license category, at $731.3 million in FY 2017, due to greater demand for constructionrelated permits and taxi licenses to drive for-hire vehicles (as well as a change in the taxi license renewal cycle). The projection for fines increases by $17.7 million to $923.2 million from the November modification largely from higher building and environmental control board fines, despite reductions in other areas. Buoyed by a record level of cash in FY 2017, which supports the city s short-term investments and removes the need for seasonal borrowing, interest income improves by $13.8 million to $75 million, which is slightly less than the interest earned in FY EXPENDITURES In the November modification, the city projected a more than $2.2 billion budget gap in FY 2018 and surplus funds of $439 million in FY In its January modification, the city recognizes additional revenue and takes a number of budget actions in FY 2017 to close the FY 2018 gap. The added revenue and budget actions translate into more than $2.6 billion of additional surplus funds, after addressing higher-than-expected agency spending, which brings the total surplus to about $3.1 billion in FY 2017, as shown in the figure to the right. The buildup of surplus funds comes from higher-than-projected revenue collection of $764 million and lower expenditures of about $1.9 billion. 2 The reduction in city-funded expenditures is attributed to the drawdown of reserves and a second savings program offset by agency new needs and other adjustments of $263 million. The city has been prudently budgeting high reserves to address uncertainties that may arise during the fiscal year. As FY 2017 Nov to Jan Mod Changes City Funds ($ in millions) Nov Mod Surplus $439 Revenue (Dec)/Inc Tax $365 Non-Tax 399 Total Increase $764 Expenditure Dec/(Inc) General Reserve $700 Capital Stabilization 500 Prior-Year Payables 400 Savings Program 515 Agency Spending (263) Total Net Decrease $1,852 Additional Surplus $2,616 Total Jan Surplus $3,055 2 Revenue excludes $7 million of agency savings, which is a component of the city s January modification savings program. 8

13 a normal budget practice, it reduces the reserves as the fiscal year winds down. The city reduced its $1 billion general reserve by $700 million and took down the $500 million capital stabilization reserve, as shown in the figure on page 8. The city will continue to maintain a $1 billion general reserve and $250 million capital stabilization reserve in each of the outyears of the plan. Also, the reestimate of the reserve for prior year s expenses and receivables will save $400 million. The city proposes a savings program in the January modification that is expected to reduce city-funded spending in FY 2017 by $515 million, as shown in the figure to the right. The largest of these savings is in the Health and Welfare agencies. The agencies in this budget area account for $176 million of total savings with much of that amount a one-time revenue adjustment. The city considers current-year revenues associated with receivables written off in a prior year as savings. Consequently, the city recognizes $158 million of revenues from the Administration for Children Services and the Department of Social Services as one-time savings in FY Remaining savings in Health and FY 2017 Savings Program City Funds ($ in millions) Agencies Health and Welfare $176 Miscellaneous Expenses 166 Major Organizations 58 Other Mayoral 18 Agency Revenue 7 Uniformed 5 Total Agency $430 Debt Service 85 Total Savings $515 Welfare have recurring value over the life of the plan and are realized from increased state and federal reimbursements, headcount reductions, and improved reimbursements of legal services. Other savings come from reduced miscellaneous expenditures totaling $166 million mainly due to the reestimate of fringe benefits spending. Federally negotiated reimbursement rates, which result in additional revenues, are expected to offset fringe benefit costs in FY 2017 by $119 million and an additional $340 million of savings over FYs In FY 2017, one-time miscellaneous savings of almost $41 million are generated from reduced spending on healthcare, supplemental welfare costs and payroll tax resulting from lower-than-planned headcount. In Major Organizations, the Department of Education (DOE) recognizes $58 million in savings in FY 2017 from changes in state law and aid eligibility. The change in law allows the DOE to pay for its Special Education Itinerant Teacher services based on actual student attendance, which will save $15 million. The change in eligibility allowing claims related to new classes not previously recognized generates almost $43 million of savings. Rounding out the savings program are various cost-reduction measures totaling $18 million in Other Mayoral agencies, $5 million of uniformed agency savings, and $7 million of higher agency revenue. In addition to agency savings, the city will also realize debt service savings of nearly $85 million. For a detailed discussion of debt service savings, see The Expanding Capital Program is Supported by a Growing Tax Revenue Forecast, beginning on page 24. Offsetting budget actions and the savings program are $263 million of agency new needs and other adjustments, most of which are intended for the Departments of Homeless Services (DHS) and Education. In DHS, almost $100 million is used to improve services in the shelter system with $72 million covering higher-than-expected 9

14 expenditures and $20 million used to maintain shelter security. The DOE is allocated around $41 million to cover a number of different items such as upgrading data centers, broadband and operational technology systems. III. The FYs Financial Plan The January modification contains the city s preliminary FY 2018 budget and FYs Financial Plan. The January modification presents a balanced budget for FY 2018 enabled by the application of the $2.6 billion of additional budget surplus from FY 2017 to eliminate a previously identified deficit of $2.2 billion and to cover forecasted revenue reductions and net higher spending. However, budget deficits grow in FYs to $3.3 billion, $2.5 billion, and $1.8 billion, respectively. The weaker FY 2018 city-fund revenue estimates in the January plan are due to reduced estimates for nonproperty taxes and miscellaneous revenue. Over the four years of the plan, total revenues increase by $9 billion, for growth of 10.6 percent, led by rising city-funded revenues of $9.9 billion, or 16.6 percent. These growth targets are higher than those contained in the January 2016 preliminary budget, which projected four-year growth of 9.9 percent for total revenue and 15.3 percent for city funds. This revised revenue plan comes at a time when the previously-rapid local economic growth has become subdued. Total expenditures, meanwhile, increase over the four years of the plan by $10.8 billion, for growth of 12.7 percent, driven by a surge in city-funded expenditures of $10.7 billion, or 17.6 percent. At these levels, expenditure growth is forecasted to outstrip revenue growth, resulting in the outyear budget gaps. The major sources of city-funded expenditure growth are labor and healthcare costs, debt service costs, disbursements for the Department of Education, and support for Health + Hospitals. The growth in debt service reflects the costs of funding the city s expanding capital program, as presented in the preliminary ten-year capital strategy. The growth in expenditures has been trimmed somewhat as a result of a newly implemented agency program that saves $1.5 billion from FYs 2018 to The January modification left intact general reserve funds of $1 billion in each of FYs and provided fresh funding for the capital stabilization reserve fund of $250 million in each of FYs However, our analysis identified net budgetary risks ranging from $853 million to $1.2 billion over FYs

15 LOWER TAX ESTIMATES SHRINK FY 2018 CITY FUNDS BY $271 MILLION Compared with the November modification, city funds are down $271 million in FY The new plan projects that weak nonproperty tax collections and miscellaneous City Funds Decrease by $271 Million in FY 2018 revenues will overwhelm the upturns in real ($ in millions, change since Nov Mod) property tax and audit collections, as shown in the Property Tax $219 figure to the right. The property tax improved by Nonproperty Taxes (536) Audits 134 $219 million, reflecting a positive tentative Miscellaneous Revenue (88) assessment report. Nonproperty taxes are down by City Funds ($271) $536 million due to concerns about weakening Federal Categorical Aid 213 business and property transactions tax collections. State Categorical Aid 156 Newly hired audit staff are expected to help raise Total Categorical Aid $369 audit collections by $134 million. Miscellaneous Interfund Revenues 1 revenue is down by $88 million. Total Change in Revenues $99 FY 2018 total revenue is up $99 million since November, lifted by stronger federal and state categorical aid. The city s estimates of federal grants increased by $213 million. Temporary assistance for needy families increased by about $130 million, including an ongoing component of $117 million for shelter. Fringe benefits are up by about $40 million, while security programs increased by about $25 million. The city is expecting state aid to increase by $156 million in FY 2018, including an increase to occupational education grants by $43 million in each year of the plan. Fringe benefits increased by about $44 million, asset forfeitures gained over $25 million, and shelter grants improved by $15 million. The city reduced its nonproperty tax collection plan for FY 2018 by $536 million, as shown in the figure to the right. The personal income tax is lower by $60 million. The business corporation tax is down $304 million due to a collections slowdown that was recognized at the close of the previous fiscal year. The property transactions taxes decline by a combined $199 million, while the utility tax dropped by $17 million. Among the increasing taxes, the sales tax is up $7 million and the unincorporated business tax climbed $5 million. The commercial rent tax is up $8 million, lifted by a tighter office market and rising local employment. The hotel tax and the minor taxes are both higher by $12 million. FY 2018 Nonproperty Taxes Are Down $536 Million since Nov ($ in millions) Nonproperty Taxes ($536) Personal Income (60) Sales 7 Business Corporation (304) Unincorporated Business 5 Property Transfer (118) Mortgage Recording (81) Commercial Rent Tax 8 Utility (17) Hotel 12 Cigarette 0 Other Taxes 12 THE CITY S REVENUE GROWTH TARGETS HAVE BEEN SET HIGHER Total revenue increases by $9 billion, in the city s plan, to $93.8 billion in FY 2021 from $84.8 billion in FY 2017, for growth of 10.6 percent over the plan, as shown in Table 4 on page 12. City-funded revenue grows by $9.9 billion, or 16.6 percent, over the plan. These growth targets are somewhat higher than those contained in the January

16 preliminary budget, which projected four-year growth of 9.9 percent for total revenue and 15.3 percent for city funds. TABLE 4 (percent change, $ in millions) CITY FUNDS CLIMB 16.6 PERCENT BY FY 2021 FY 18 FY 19 FY 20 FY 21 FY 17 FY 21 FYs Property Tax 5.9% 6.5% 4.9% 4.6% $24,196 $29, % Nonproperty Taxes ,090 33, Audits (18.3) (15.2) , (30.7) STAR Aid (3.8) (0.4) (0.4) (0.4) (4.9) Miscellaneous (4.6) ,796 5, Unrestricted Aid (100.0) (100.0) Disallowance Reserve (107.5) (15) (107.5) Total City Funds 2.8% 4.8% 4.5% 3.6% $59,936 $69, % Federal Categorical Aid (20.6%) (2.9%) 0.0% (0.4%) $8,826 $6,781 (23.2%) State Categorical Aid ,417 15, Other Categorical Aid (12.7) (1.1) (1.0) (0.5) (15.0) Total Categorical Aid (7.5%) 1.1% 1.7% 1.2% $24,223 $23,332 (3.7%) Interfund Revenue 0.6% 0.0% (9.5%) (0.3%) $655 $594 (9.3%) Total Funds (0.2%) 3.8% 3.7% 3.0% $84,814 $93, % Numbers may not add due to rounding. The current plan projects that city funds will increase by an average of 3.9 percent annually. This plan could be easily achieved in high-growth periods such as FYs , when city funds increased by about seven percent annually. However, the city s plan would not be achievable if the future resembles the more recent slow growth experienced in FY 2016, when city funds increased by an estimated 1.4 percent, and the partiallycompleted FY 2017 in which city funds increase by a projected 1.9 percent. The city plan treads between these extremes of high-growth and low-growth periods by assuming that growth at the start of the plan will edge up to 2.8 percent in FY 2018 from the slow growth of the most recent two-year period. Plan growth quickly accelerates to a high of 4.8 percent in FY 2019, before dropping back to 4.5 percent in FY 2020 and 3.6 percent in FY Most of the growth in the plan is attributable to the fast-growing real property tax, which expands by $5.7 billion, or 23.7 percent, from $24.2 billion in FY 2017 to $29.9 billion in FY Property tax growth jumps from 5.9 percent in FY 2018 to a peak of 6.5 percent in FY 2019, after which growth drops below five percent in FYs The current fouryear growth plan of 23.7 percent is slightly more optimistic than last year s preliminary budget estimate of 22.9 percent for property tax growth. The nonproperty taxes grow much more slowly than the property tax. Nonproperty tax growth starts off with slow growth of 3.2 percent in FY Growth climbs to 3.9 percent in FY 2019 and to 4.4 percent in FY 2020, after which growth slows to 3.5 percent in FY Over the plan period, the nonproperty taxes grow by $4.6 billion, or 15.8 percent, from $29.1 billion in FY 2017 to $33.7 billion in FY Here too the current four-year growth plan is more expansive than that of last year at this time, when nonproperty growth was 13.3 percent rather than the current estimate of 15.8 percent. The most robust growth is projected for the sales, the unincorporated business, the property transfer, the commercial rent, and the personal income taxes, each of which increase by more than 16 percent over the plan. 12

17 Audits decline by 31 percent over the plan from $1.041 billion in FY 2017 to $721 million in FY This decline of audits reflects conservative budgeting for a volatile revenue source, which has varied from $743 million in FY 2012 to as much as $1.2 billion in FY Two uncommon items related to grant programs have added $257 million to FY 2017 revenue but these are not scheduled to reappear in the plan. These are $57 million in unrestricted aid for prior year Medicaid reimbursement, and the city released $200 million from its reserve for grant disallowances and added these funds to its revenue budget. Total categorical aid to the city declines by 3.7 percent from $24.2 billion in FY 2017 to $23.3 billion in FY Strong growth in state aid is more than offset by the scheduled declines in federal aid and private grants, leading to a net decline of $891 million in categorical aid in the outyears of the plan. State grants, the largest source of categorical aid, climbs nine percent, a gain of $1.3 billion, from $14.4 billion in FY 2017 to $15.7 billion in FY Nearly all of the growth in state aid is targeted at educational programs. Federal grants are scheduled to decline by 23 percent, or $2 billion, from $8.8 billion in FY 2017 to $6.8 billion in FY 2021, largely reflecting front-loaded Sandy aid that drops off in the outyears. Private grants decline by 15 percent, or $147 million, from $980 million in FY 2017 to $833 million in FY Regarding state aid for FY 2018, the city will need to be mindful of the results of the state budget adoption process. The proposed state executive budget, issued on January 17, 2017, contains some measures that could negatively impact the city s financial plan. The state proposes to increase education aid to the city by $295 million in FY 2018, about $245 million less than projected in the city s financial plan. In addition, the city could be required to increase per-pupil aid to charter schools, which could add just under $200 million to its budget. There are also a few cost shifts in the social services area that could increase the city s expenses by about $100 million. At this time, we are placing at risk $545 million in each of FYs , as shown on Table 3 on page 5. Final aid amounts, as well as net impacts on the city s financial plan, if any, will be known once the state enacts its budget. Most Nonproperty Taxes Participate in Revenue Growth Since the November modification, the city reduced its estimate for the FY 2018 nonproperty taxes by $536 million. Including this decrease, these taxes grow by 3.2 percent in FY 2018 to yield $30 billion. Previously, the nonproperty taxes increased by six percent in FY 2014 and growth climbed to 7.5 percent in FY 2015 before dropping to 0.1 percent in FY Most of the major nonproperty taxes contribute to the city s growth plan. Over the next four years, growth of 20 percent or more is projected for the sales, and the unincorporated business taxes. The city expects somewhat less robust growth from the property transfer, the commercial rent, and the personal income taxes, each of which increase by percent over the plan. Taxes on hotels, utilities, and mortgages each yield about nine percent growth; while the business corporation tax lags with growth of about six percent. The cigarette tax and the minor taxes fall by more than eight percent. 13

18 Business Taxes The city reduced its plan for business tax collections by $299 million in FY 2018 due to concerns about a collections slowdown at the close of FY Lesser reductions of about $200 million continue into FYs These taxes include the recently reformed and renamed business corporation tax, and the unincorporated business tax. As a group, the business taxes climb by $658 million, or 11.1 percent, from $5.9 billion in FY 2017 to $6.6 billion in FY 2021, for an average annual growth rate of 2.7 percent. Most of the projected growth in the plan is due to the unincorporated business tax which grows at an average growth rate of 4.7 percent; while the larger business corporation tax lags with average growth of just 1.5 percent. These taxes, which have a long history of extreme volatility, have been growing very slowly in recent years. Following a solid recovery at the end of the Great Recession with gains of 18 percent in FY 2011 and 9.2 percent in FY 2013, business tax growth flattened out. FY 2014 saw an increase of just 0.3 percent, and FY 2015 gained 2.9 percent. Growth turned negative in FY 2016 as collections fell 6.4 percent. The city estimates that growth is rebounding to 4.9 percent in the partially completed FY 2017, after which growth wavers from a low of 1.8 percent in FY 2018 to a high of 3.3 percent in FY In our comments on earlier plans, we had expressed concerns about the ability of the business taxes to achieve plan targets. The city responded by reducing its four-year growth plan to 11.1 percent from the 14 percent growth that the city had projected in its January 2016 business tax plan. We were also encouraged when collections, which had been slow at the start of FY 2017, strengthened and are now on track to achieve currentyear plan targets. We remain concerned about the downshifting of local economic growth and this concern is confirmed in reports produced by economists linked to the New York Federal Reserve Bank and the New York City Comptroller. In our December 2016 report, we quoted the Fed s regional coincident indicators report which noted that local economic activity was growing at a subdued pace. The latest version of this report shows that local subdued growth has persisted for four consecutive months, from September through December A look at the index data reveals that the Fed s local economic indicators have been in a steep and persistent slide from a peak of 8.1 percent in mid-2014 to 1.1 percent in December The City Comptroller, in his report on the preliminary budget that was released on February 15 th, praised the current expansion of local private jobs as: the most robust in recent history. But he also warned that national policies will slow [local] economic growth. The Comptroller s office issued an economic update on February 8 th, which is titled: New York City Economy Slows in Last Quarter, where the data indicate that the growth slowdown may already be under way. These discouraging economic reports indicate that great vigilance will be needed over the course of the financial plan. The city s conservative projection of flat growth for the business corporation tax is an important safeguard, which anticipates the possibility 14

19 of protracted local economic weakness. The city s strong growth projection for the unincorporated business tax is at risk for $50 million in each of FYs Sales Tax In the January modification, the FY 2017 sales tax estimate was lowered by $91 million to $7 billion to reflect year-to-date collections and economic trends that are likely to continue in the forecast period as collections reach $8.6 billion in FY Sales tax revenue exhibits average annual growth of 5.1 percent during FYs While recent surveys of consumer sentiment show households with a positive outlook and willingness to spend moderately, other factors that influence sales tax collections show a mixed picture. The city expects further job gains but at a decelerating pace in the forecast period. The number of new jobs created slows from 88,800 in 2016, to 55,500 in 2017, and averages 33,400 from 2018 to Current GDP and employment reports show modest improvements in average hourly earnings, in part from legislated minimum wage increases. The city projects that local wages will rise by 4.5 percent in 2017 after a 3.1 percent gain in 2016, and that wage growth will exceed four percent annually in While tourist-based consumption is also important to the sales tax base, collections are not getting as much of a boost as in the past despite a record number of visitors to the city in It appears that tourists are not spending as much while here, probably due to the strength of the dollar. According to NYC & Company, 2016 was the seventh year in a row to show an increase in the number of visitors to the city at 60.7 million. Their forecast is for continued improvement as the number of tourists grows to 61.7 million in 2017, but with more domestic than international visitors. The city s sales tax forecast is reasonable and in line with historical collections, but revenue growth in FY 2016 exhibited a downward trend that ended with a gain of 2.5 percent from the prior year. After considering January collections, there is minimal yearto-year growth. Thus, we are placing at risk sales tax revenue associated with the STARC refunding--$50 million in FY 2017, $200 million in FY 2018, and $150 million in FY until further information shows the need for an additional risk to sales tax collections in the plan period.3 Personal Income Tax Since the November modification, there are comparatively small changes in the personal income tax forecast as collections increase from $11.2 billion in FY 2017 to $13 billion in FY 2021, for an average annual growth rate of 3.9 percent. The projections reflect a slowdown in the rate of job creation after 2016, but an upward trend in wages and 3 In the January financial plan, the sales tax forecast only includes repayment to the state for the prior-year refinancing of STARC bonds of $50 million in FY 2016 and $150 million in FY 2017, although the repayment schedule continues to FY For a detailed discussion of the STARC bond repayment, see Sales Tax on page 16 in the FCB July 2016 Staff Report. 15

20 private sector bonus payouts during the forecast period. In the plan, the city expects private sector job gains of 56,000 in 2017 and 37,000 in 2018, which include the financial activities, and professional and business services industries. Nonwage income, such as capital gains realizations, is expected to rebound in the outyears, helped by commercial real estate sales. On a continuing base, total revenue is projected to grow modestly in each year of the financial plan, starting with 2.1 percent in FY 2017, 2.7 percent in FY 2018, 3.3 percent in FY 2019, 4.8 percent in FY 2020, and ending with 3.9 percent in FY One factor that will eventually influence the forecast is federal tax reform, from defining taxable income, and setting new tax rates and rules for deductions. The outlook for the securities industry improved in the second half of 2016 as Wall Street firms continued to cut expenses and generate profits led by trading revenue, but these efforts were not enough to make up for lackluster revenue growth in the first half of The city expects NYSE member firm profits to total $18 billion in 2016, and remain in the $14 billion to $15 billion range during For 2016, NYSE member firms earned $17.3 billion in profits. After expecting essentially no growth in finance sector earnings in 2016 from the prior year, compensation is projected at historically modest levels of under three percent annually thereafter, and reaches $106.4 billion in In the rest of the local economy, wages rise by 5.2 percent to $281.8 billion in 2017 and improve by about five percent each year through The city has a conservative forecast but may face shortfalls of $250 million in FY 2017 and $200 million in FY 2018 primarily from less withholding and installment revenues. In terms of FY 2017, in the December through March bonus period, minimal year-to-year growth in February withholding may be related to cost cutting efforts on Wall Street that include compensation. The year-to-year fall in installment payments through January 2017 for tax year 2016 indicates less individual liability in terms of nonwage income that encompasses capital gains realizations. These trends may continue into FY 2018, but could be mitigated if the run-up in the stock market that started at the end of 2016 and continued into 2017 caused individuals employed in the finance and tech industries to exercise options that were due to expire or cash out performance-based stock grants. These events would trigger capital gains and higher withholding tax receipts. If this theory is true, the evidence might also be found in the April 2018 final settlement, rather than in FY Property Transactions Taxes Compared to the November modification, the city decreased its FY 2017 estimate for the property transactions taxes by a combined $68 million, while reducing its FY 2018 target by $199 million to $2.5 billion. As a result of these lower current collections targets, revenues decline by 17 percent in FY 2017 and by another percentage point in FY The revenue trend turns positive, with growth of about seven percent in each of FYs 2019 and 2020 and slower growth of about two percent in FY Previously, growth had plummeted from 36 percent in FY 2014 to 17 percent in FY 2015 to about three percent in 16

21 FY Following this swift deceleration, the city s plan prudently expects that revenues are likely to fall before the trend starts to improve. Collections for the property transfer and mortgage taxes were weak in the early months of FY 2017 and the city responded with a plan reduction of $70 million in November and another reduction of $68 million in the January plan. Recent collections appear to have gained strength so it is not yet clear which way these taxes might be headed. The city s cautious approach appears to be warranted both by the long-term trend of weakening growth and by the uncertain direction of current collections. Property Values on Tax Rolls Climb for a Seventh Consecutive Year Seven consecutive years of rising market values have enabled the city to project that property taxes will grow by 5.9 percent, to yield $25.6 billion in FY Previously, the property tax increased an estimated 5.3 percent in FY 2017, which is down from 7.8 percent recorded in FY Beyond FY 2018, the city revenue plan sees property tax growth accelerating to 6.5 percent in FY 2019 and then dropping below five percent in FYs 2020 and The acceleration of revenues in FY 2019 is partly due to the expectation that assessments will remain strong and partly due to shifts in the contingency reserves that are scheduled to be set aside for that year. Property market values increased by 8.7 percent to $1.157 trillion on the city s FY 2018 tentative tax roll, as shown on Chart 1 on page 18. One year ago, the previous tentative roll had initially recorded an increase of 10.6 percent, but actual growth slipped to 9.8 percent with the release of the final FY 2017 tax roll last June. A similar correction is likely for the FY 2018 tax roll as well. Market values started accelerating in FY 2015 by climbing 5.6 percent from the tepid below-three percent growth rate of the preceding three-year period spanning FYs On the FY 2018 tentative tax roll, all property classes grew strongly except for utility properties, which increased by 0.4 percent to $32 billion. Private home values improved by 8.6 percent to $539 billion. Residential apartment buildings grew by 10.4 percent to $283 billion, with large rental buildings climbing 10.8 percent, and small rental buildings up by 12.7 percent. Large cooperative and condominium buildings increased by 6.3 percent and 8.7 percent, respectively. Commercial property values increased by 8.6 percent to $303 billion, with most major sectors participating in this growth. Offices gained seven percent, store buildings added 10.1 percent, and condominium stores soared 14.3 percent. Hotels lagged with an increase of just 3.2 percent. These increasing sectors will continue to lift tax collections for the next five years because market value increases for commercial buildings and large apartment buildings are phased in over five years. 17

22 CHART 1 ($ in billions) FY 2018 MARKET VALUES INCREASE 8.7 PERCENT TO $1.157 TRILLION $1300 $1200 MARKET VALUES BY PROPERTY CLASS 1,157 Property Class $1100 $1000 $900 $800 $700 $600 $ , Four Three Two $400 $300 $ One $100 $ Fiscal Year Tentative Class one is private homes; class two includes apartment bldgs.; class three is utility property; and class four is commercial property. Contingency reserves for the property tax waver uncertainly in the property tax plan. These reserves shield revenues from hard-to-predict positive and negative collection trends such as prior-year collections, delinquencies and refunds. Total reserves vary from an actual rate of negative 5.2 percent of the levy in FY 2016 to an estimated negative 6.1 percent in FY 2017, to a peak of negative 6.9 percent in FY 2018 and then back to negative 6.3 percent in FY Shifts in the reserve percentage can result in large revenue swings. For example, the 0.6 point shift in FY 2019 adds about $175 million to the revenue projection for that year and bumps up the revenue growth rate by 0.7 percent. The tentative roll has billable assessment rising by 8.5 percent, but the city estimates that revisions will reduce the FY 2018 billable growth to 6.7 percent in the June final roll, which is down slightly from the previous year s billable growth rate of 6.8 percent. The city s estimated tentative-to-final reduction of 1.8 percentage points appears to be somewhat cautious leaving open the possibility of extra revenue to be recognized when final assessment data becomes available in June. We also note that the city s contingency reserve plan appears to be uneven, with reserves bumping up and down in FYs These reserve shifts open up the possibility that unused reserves could be released to augment property tax revenue as each fiscal year progresses. Miscellaneous Revenue In the January modification, miscellaneous revenue increases 4.7 percent or $223.1 million to $5.02 billion from FY 2017 to FY 2021, primarily from asset sales in the outyears, particularly taxicab medallions. After the initial sales in FY 2014, further sales of taxicab 18

23 medallions were shifted to later years, where the anticipated proceeds were more than made up for by stronger-than-expected tax revenue growth. After years of stagnation, the for-hire vehicle industry is transitioning from monopoly pricing for taxicab medallions to a more competitive market with new entrants and technological change. The city expects to resume medallion sales and earn $107 million in FY 2019, $257 million in FY 2020, and $367 million in FY 2021, although sales may be delayed again due to market demand. After removing nonrecurring and other resources from the city s forecast, miscellaneous revenue falls 0.4 percent or $12.8 million from FY 2017 to FY 2021, and remains at about $3.2 billion annually. During this time, revenues in licenses, charges for services, fines, rent, and miscellaneous decrease, and collectively exceed projected gains in interest income. For the most part, the projected declines in the categories do not reflect weakness, but a forecasting technique of not assuming that growth in first year of the plan, from new initiatives or fee and fine increases, will occur annually through FY Interest income advances from $75 million in FY 2017 to $246 million in FY 2021 as collections reflect gradual increases in the federal funds rate and a different pattern for cash balances that assumes no seasonal borrowing will take place in each year of the financial plan. 4 Based on historical collection trends, miscellaneous revenue could be higher than the city s projections by $50 million in FY 2017, $150 million in FY 2018, $125 million in FY 2019, and $100 million in both FYs 2020 and EXPENDITURES In Table 5 on page 20, changes to the city s four-year financial plan are presented. The plan assumes a balanced budget for FY 2018, however, over the life of the plan, uneven revenue collection and higher spending are expected. For FY 2018, the November modification showed a gap of $2.2 billion and for FYs gaps were $2.9 billion, $2.4 billion, and $2.1 billion, respectively. In the January modification, the FY 2018 budget is balanced after using surplus funds of $2.6 billion from FY 2017 to close the gap; however, the gaps in FYs 2019 and 2020 grow to $3.3 billion and $2.5 billion, respectively, while the gap in FY 2021 decreases to $1.8 billion. In expenditures, city-funded spending is expected to increase by a net $1.3 billion over FYs The increase includes new agency spending and budget adjustments of $720 million, support of homeless services of $612 million, uniformed overtime needs of $284 million, and new needs in the Department of Education (DOE) of $188 million. Also included is an allocation to the capital stabilization reserve totaling $1 billion. Offsetting the higher spending is a savings program valued at more than $1.5 billion over FYs Global Insight projects that the federal funds rate will average 0.58 percent in FY 2017 before rising to 3.00 percent in FY

24 TABLE 5 CHANGES FROM NOVEMBER TO JANUARY MODIFICATIONS FYs City Funds ($ in millions) FY 2018 FY 2019 FY 2020 FY 2021 Total Gap to be Closed (Nov Mod) ($2,241) ($2,889) ($2,376) ($2,104) -- Revenue (Dec)/Inc Tax ($183) $8 $329 $425 $579 Non-Tax (96) (110) (10) Revenue Change ($279) ($102) $319 $699 $637 Expenditure Dec/(Inc) Agency Spending and Adjustments ($148) ($160) ($254) ($158) ($720) Homeless Services (153) (153) (153) (153) (612) Uniformed Overtime (74) (45) (77) (88) (284) Department of Education (52) (45) (45) (46) (188) Capital Stabilization Reserve (250) (250) (250) (250) (1,000) Savings Program ,545 Expenditure Change ($96) ($322) ($453) ($388) ($1,259) FY 2017 Prepayment in FY 2018 $2, Gap to be Closed (Jan Mod) $0 ($3,313) ($2,510) ($1,793) -- As shown in Table 5, increases in city-funded agency spending and adjustments are expected to drive up costs in total by $720 million over FYs Of this amount, the Police Department receives $52 million primarily to cover new needs related to added school crossing guards and training for peace officers and the Department of Sanitation is allotted $93 million to cover mainly the added costs of waste export. In the Health and Welfare area, the Departments of Social Services (DSS) and Youth and Community Development receive funding of $75 million and $84 million, respectively, to expand services and program funding in DSS and to expand and support youth services, employment, and the School s Out NYC summer program in Youth and Community Development. Mayoral agencies, which include many agencies with the largest being the Departments of Finance, Transportation, Parks and Recreation, Citywide Services, Environmental Protection, Information Technology, and Law, are projected to collectively receive $160 million to support various programs and operations. As shown in Table 5, the city allocates a large portion of funds to homeless services, uniformed overtime and education in each of FYs The Department of Homeless Services (DHS) receives $612 million, in total, to support the expansion and improvement of shelter services. In each of FYs , DHS is allocated $153 million of extra funding to compensate mainly for the reestimate of shelter costs and to provide added shelter security. In Uniformed Services, the Departments of Correction and Fire use added funding of $74 million to cover higher overtime spending in FY In the outyears of the plan, the total allotment for these Departments is $45 million in FY 2019, $77 million in FY 2020, and $88 million in FY The DOE plans to upgrade systems and expand services at a total cost of $188 million with $52 million spent in FY 2018 and about $45 million in each of FYs The city will allocate $250 million in each of FYs to the capital stabilization reserve. The city had created the reserve in FY 2015 with an initial balance of $500 million. The reserve was meant to cushion an increase in debt service burden that could be worsened by a reduction in tax revenue. In previous fiscal years, the city transferred the 20

25 reserve in its entirety to the next fiscal year. However, the reserve is drawn down in FY 2017 and expanded to cover FYs , which essentially increases the reserve by $500 million over the plan period to $1 billion. As shown in Table 5 on page 20, the financial plan also presents a new savings program, which is expected to yield $581 million in FY 2018, $331 million in FY 2019, $326 million in FY 2020, and $307 million in FY 2021, for total savings of more than $1.5 billion. Including FY 2017, the program is anticipated to aggregately save nearly $2.1 billion, which is on top of $1.7 billion of savings already realized in the November modification. Further, the city has directed agencies to find an additional $500 million of savings to be included in the executive budget. We review the savings program as two parts consisting of reductions in citywide agency spending and debt service savings. Agency savings are of mostly recurring value ranging from $246 million in FY 2018 to $254 million in FY In each of FYs , miscellaneous expenditures are reduced by almost $91 million mainly due to the reestimate of fringe benefits spending. The DOE has identified savings of $62 million in FY 2018, $63 million in FY 2019, and $65 million in each of FYs 2020 and The savings are recognized in part due to a change in state law allowing the DOE to pay for Special Education Itinerant Teacher services based on actual student attendance and allowing for claims related to new classes not previously recognized as eligible for state aid. Health and Welfare agencies find about $40 million of savings in each of FYs based on a number of initiatives spread across its agencies. In addition, citywide initiatives, such as reduced civilian and skilled trades overtime and improved space management, save about $19 million in FY 2018, $26 million in FY 2019, and $31 million in each of FYs 2020 and Lastly, debt service savings will total $334 million in FY 2018, $83 million in FY 2019, $72 million in FY 2020, and $53 million in FY Growth in City-Funded Expenditures The January modification estimates total city-funded expenditures will grow by 17.6 percent, or $10.7 billion, between FYs 2017 and 2021, increasing from $60.9 billion to $71.7 billion, as shown in Table 6 on page 22. City-funded spending is organized into Service and Expense categories, and Other Adjustments. Service categories, which cover agency spending, are expected to have modest growth over FYs of four percent. The growth in agency spending is stemming from three service areas: Uniformed and Health and Welfare services, each growing at 2.8 percent, and Major Organizations with growth of 12.9 percent. In contrast, the plan assumes that Mayoral agencies and Elected Officials will fall by ten percent and 1.6 percent, correspondingly. In Expense categories, the growth in miscellaneous spending, debt service, and pension is projected rise by 34.7 percent. Most of the growth is due to miscellaneous spending rising by 70.6 percent and debt service increasing by 32.8 percent. For a detailed discussion of debt service growth, see The Expanding Capital Program is Supported by a Growing Tax Revenue Forecast, beginning on page

26 TABLE 6 PROJECTED GROWTH IN CITY-FUNDED EXPENDITURES IN FYs 2017 TO 2021 City Funds (yr/yr percent change, $ in millions) FYs FYs FYs FYs FYs Level in FY 2017 Level in FY 2021 Service Categories 0.9% 1.5% 1.0% 0.6% 4.0% $38,442 $39,995 Uniformed 1.3% 0.8% 0.6% 0.1% 2.8% 9,620 9,891 Health and Welfare 1.4% 0.9% 0.5% 0.0% 2.8% 9,718 9,989 Mayoral (8.3%) (1.6%) (0.2%) 0.0% (10.0%) 5,930 5,338 Major Organizations 4.6% 3.9% 2.2% 1.7% 12.9% 12,547 14,159 Elected Officials (1.2%) 0.3% (0.6%) 0.0% (1.6%) Expense Categories 9.0% 10.6% 6.3% 5.1% 34.7% $22,577 $30,410 Miscellaneous 20.0% 18.6% 9.6% 9.4% 70.6% 7,186 12,256 Debt Service 3.2% 11.5% 9.4% 5.4% 32.8% 6,123 8,128 Pension 4.4% 2.9% 0.5% 0.2% 8.2% 9,269 10,026 Subtotal 3.9% 5.0% 3.1% 2.5% 15.4% $61,019 $70,405 Other Adjustments ($100) $1,250 Prior-Year Payables (400) -- General Reserve ,000 Capital Stabilization Total City Funds 6.1% 4.9% 3.1% 2.5% 17.6% $60,919 $71,655 Net Surplus Roll (983) -- Total Net of Prepayment 2.8% 10.1% 3.1% 2.5% 19.6% $59,936 $71,655 Note: Includes interfund and intracity expenditures. Miscellaneous includes energy, lease and inflator adjustments. Debt service is net of prepayment. Net surplus roll includes $400 million of prepaid expenses in Health + Hospitals. Numbers may not add due to rounding. As shown in Table 6, Major Organizations, which includes the DOE, the City University of New York (CUNY) and Health + Hospitals, are anticipated to exhibit the highest projected growth in Service categories over FYs growing by 12.9 percent, or $1.6 billion. The DOE and CUNY are expected to experience growth of 13.4 percent and 4.3 percent, respectively, in FYs In Health + Hospitals, projected growth in the city s contribution to the system is 14.4 percent, increasing from $691 million in FY 2017 to $791 million in FY Health + Hospitals has been experiencing structural imbalance over several years, which has prompted the city to increase its financial support. The financial stress has escalated in recent years due to falling revenue and higher spending that is related to increased competition among city hospitals for Medicaid patients, underutilization of hospital beds, the declining use of hospital services, and reduced safety-net funding. In FY 2016, Health + Hospitals reported that cash disbursements exceeded cash receipts by $212 million. In an effort to support the system in FY 2016, the city had provided a $160 million subsidy and waived $337 million of 5 FY 2017 expenses in Health + Hospitals is net of prepayments. The city had prepaid $400 million of FY 2017 expenses in Health + Hospitals with FY 2016 surplus funds. As shown in Table 6, we include this prepayment in the net surplus roll of $983 million. 22

27 miscellaneous revenue reimbursements. 6 In addition, the city absorbed wage increases for covered employees in the latest round of collective bargaining. The likelihood that the city will need to continue financial support is highly probable. The city has permanently relieved Health + Hospitals of its debt service reimbursement, but the financial plan contains no other subsidy or relief beyond that action. In FY 2017, while there are still concerns surrounding revenue losses, the city and state have worked together to reduce the backlog of payments dating back to FY This nonrecurring revenue will likely allow the city to receive the expected payments of $165 million for fringe benefits, and judgments and claims in FY However, given the uncertainties facing Health + Hospitals, including changes to the Affordable Care Act, the reimbursements related to fringe benefits, and judgments and claims are at risk, as shown on Table 3 on page 5, in each of FYs Further, the possibility of reduced collection in state and federal aid may force the city to increase its financial support by way of additional subsidies. As shown in Table 6 on page 22, Uniformed Services is expected to grow by 2.8 percent between FYs , from $9.6 billion to almost $9.9 billion. One area of concern is overtime expenditures for the four unformed agencies (Police, Fire, Correction and Sanitation Departments). In recent years, the Fire and Correction Departments have experienced higher-than-average overtime expenditures due to staffing problems and restructuring. We believe that overtime expenditures will level off now that the Departments are once again able to be sufficiently staffed. The city has projected total overtime spending of about $415 million in FY 2017 for Fire and Correction, dropping to $401 million in FY 2018 and $356 million in each of FYs Based on actual expenditures of $258 million through December 2016, we believe spending through FY 2017 will likely be around $517 million. Based on this figure, FY 2017 overtime spending for Fire and Correction will likely be higher by $102 million. Extended out, the budget is likely to be exceeded by $115 million in FY 2018 and by $160 million in each of FYs In contrast, the Sanitation Department is expected to have a substantial surplus in its overtime budget of $40 million in FY 2017, due to a mild winter. Our overall uniformed overtime risk assessment (excluding civilians) for all four agencies, as shown in Table 3 on page 5, is $135 million in FY 2017, $145 million in FY 2018, $195 million in FY 2019, and $193 million in each of FYs 2020 and In Expense categories, the plan assumes overall growth of 34.7 percent between FYs driven by miscellaneous spending and debt service, as shown in Table 6 on page 22. Miscellaneous spending, which is expected to increase by 70.6 percent, is primarily due to increased funding of the labor reserve and higher spending for fringe benefits.7 The increase in labor reflects funding to cover the cost of the latest round of Report. 6 For a more detailed discussion, see Miscellaneous Revenue in our December 11, 2015 FCB Staff 7 Miscellaneous spending encapsulates funding for the labor, general and capital stabilization reserves, fringe benefits, Transit Authority and private bus services, judgment and claims, state building aid, 23

28 collective bargaining. The city has reached agreements with 99.1 percent of its workforce, which includes an agreement with the Patrolmen s Benevolent Association (PBA) that covers 23,810 patrol officers. With the PBA announcement, the city has secured deals with each of its uniformed unions through the round of bargaining. The agreement with the PBA, which was ratified on February 27, 2017, is consistent with the established uniformed pattern. Retroactive pay increases dated back to August 1, 2012 through August 1, 2016 are one percent in each of the first two years, 1.5 percent in the third year, 2.5 percent in the fourth year, and three percent in the fifth year, which brings the cumulative compounded increase to percent over seven years when combined with the previous two-year arbitration reached in FY The agreement also provides PBA members a neighborhood policing differential of 2.25 percent of base salary effective March 15, The differential increase is funded by a reduction in the salary schedule for new hires. New police officers will be paid for the first 1.5 years $42,500 increasing to $85,292 after 5.5 years on the job. However, it is likely that the city will need to allocate some upfront funding to the labor reserve in FY 2017 to cover the retroactive payments and 2.25 percent wage differential. In addition, the city and PBA have agreed to all patrol officers being outfitted with body cameras by the end of 2019 and to jointly support state legislation, which would provide three-quarter salary in the event of disability (consistent with the other uniformed unions) that includes a one percent employee contribution. Further, the PBA has agreed to fully participate in achieving the healthcare savings agreed to between the city and the Municipal Labor Committee (MLC). The agreement called for the release of $1 billion from a health stabilization account, jointly run by the city and the MLC, and annual targeted savings starting in FY The targeted savings of $400 million in FY 2015 and $700 million in FY 2016 have been realized. An additional $1 billion is projected to be achieved in FY Annual savings of $1.3 billion are expected to be reached in FY 2018 and beyond. Another significant source of growth in miscellaneous spending is the cost of providing fringe benefits to city workers, which is projected to rise by 33.3 percent between FYs Fringe benefits, supplemental to salaries and pensions, include coverage of healthcare and unemployment insurance, workers compensation, Supplemental Welfare Benefits, and the city s share of payroll taxes. The largest expense in fringe benefits is healthcare insurance, increasing by 34.7 percent over the plan period. The cost increase reflects higher premium payments. THE EXPANDING CAPITAL PROGRAM IS SUPPORTED BY A GROWING TAX REVENUE FORECAST The January modification presents a profile of debt service as a sustainable operating expense. Combined debt service costs for the city and the New York City contractual services, water and sewer, and Other Than Personal Service budget areas (includes some state and federal funding). 24

29 Transitional Finance Authority (NYCTFA) are reduced in the modification in FYs by $85 million, $334 million, $83 million, $72 million and $53 million, respectively, compared to the November modification. Moreover, the debt service costs are at levels considered to be affordable relative to the primary payment source, tax revenues, with tax collection forecasts having been increased in four of the five fiscal years of the plan. As presented in Table 7, the city and the NYCTFA captured a net $85 million of debt service savings in FY 2017 stemming from realized interest rates being lower than projections. Additionally, for each of FYs , the city removed $75 million of shortterm interest costs from its debt service projections, based on the fact that it is unlikely it would be required to borrow funds to meet cash flow needs given repeated years of having high unrestricted cash balances. Indeed, for the past 13 years, the city was not required to undertake any short-term financings, and month-end unrestricted daily cash balances for FY 2016 hovered around $11 billion. The city had already removed such costs from its financial plan for FY For FY 2018, the NYCTFA offset its debt service costs by applying $249 million of state building aid, which had been retained in prior years for future use. The lower debt service costs are offset marginally in the outyears of the plan by higher costs resulting from an expanding capital program. TABLE 7 ($ in millions) WHILE PROJECTED TO GROW OVER THE PLAN YEARS, THE DEBT SERVICE BURDEN REMAINS AFFORDABLE Average Annual FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Growth Rate Debt Service November Modification $6,473 $6,915 $7,384 $8,032 $8, % Realized (Savings)/Costs (85) (10) (9) (5) (4) Short-Term Interest 0 (75) (75) (75) (75) Building Aid 0 (249) Increase in Borrowing Total Savings (85) (334) (83) (72) (53) Debt Service January Modification $6,388 $6,581 $7,301 $7,960 $8, % Tax Revenue $54,883 $57,035 $59,725 $62,418 $64, % Debt Service as Percentage of Tax Revenue 11.6% 11.5% 12.2% 12.8% 12.9% The plan projects debt service costs growing from $6.4 billion in FY 2017 to $8.4 billion in FY 2021, for an average annual rate of seven percent. Meanwhile, tax revenue estimates increased at an average annual rate of 4.3 percent, growing from $54.9 billion in FY 2017 to $64.9 billion in FY With the plan-to-plan improvements in debt service and tax revenue forecasts, the debt service burden is now calculated to be 11.6 percent in FY 2017, dip to 11.5 percent in FY 2018, then climb incrementally to 12.9 percent in FY At under 13 percent, the debt service burden is well below the 15 percent threshold that is widely used as an indicator of affordability. Beyond the plan years, the debt service burden grows to as high as 13.2 percent, reflecting the impact of an escalating ten-year capital strategy that was released along with the financial plan. 25

30 26

31 Profile of the Preliminary Ten-Year Capital Strategy for FYs Debt service cost is the component of the city s operating budget dedicated to the repayment of financing costs associated with the portion of the capital program that is supported with bond issuances backed by city tax revenues. The operating budget is projected to grow over the financial plan years due in part to the city s program for addressing the massive capital needs. In January, the city released its Preliminary Ten- Year Capital Strategy for FYs , which includes commitments (or capital contracts) totaling $89.6 billion. 8 As itemized in the figure to the right, funding for the commitments consists of $65.8 billion from tax-supported debt to be undertaken by the city and the NYCTFA, $17.5 billion from bonds backed by user fees to be issued by the New York City Municipal Water Finance Authority (NYW), and a combined $6.3 billion from noncity sources. FYs Preliminary Capital Strategy by Funding Source ($ in billions) Capital Commitments Percent of Total Tax Supported $ % NYW Supported $ % Noncity Supported $6.3 7% Total $ % The city acknowledges that the capital investments outlined in the strategy are funded heavily by tax-supported debt, and reasons that the strategy aims to address legal mandates, enhance the capacity and quality of the assets, and foster long-term economic growth and quality of life improvements through asset maintenance, while being fiscally responsible. A review of the preliminary strategy shows the major allocations of commitments continue to be education, environmental protection, transportation, housing, and energy efficiency and citywide equipment, with tax-supported funding increasing sizably and for some functional areas offsetting reductions in noncity funding. The total-funded commitments in the preliminary strategy top the prior Ten-Year Capital Strategy for FYs by a net $5.8 billion, making this the largest strategy ever. Table 8 on page 27 shows that of the net $5.8 billion expansion in commitments, $4.7 billion are financed by tax-supported debt to be undertaken by the city and the NYCTFA that more than offset the $2 billion reduction in noncity funding; and, $3.1 billion are projects financed by the Water Authority for the maintenance, mandated work and upgrades to the water and sewer system. Tax-supported commitments increased substantially for highways and bridges, with a $2.562 billion uptick more than offsetting a $378 million decline in noncity-funded commitments, as the broad-scale restoration and maintenance of roads and bridges have been accorded high priority. Similarly, taxsupported commitments increased for housing, and for health and hospital projects by a combined $1.597 billion, which exceeds a combined $804 million decline in corresponding noncity-funded commitments. Some cutbacks in noncity commitments reflect the phasedown of federal funding to address damages caused by Hurricane Sandy, such as reconstruction and mitigation work to health and hospital facilities. Noticeably, commitments for education projects decreased by a combined $2.624 billion, after being 8 The city is required by its charter to produce a ten-year capital strategy biennially. A preliminary version is released with the January modification and a final version is issued along with the executive budget. 27

32 TABLE 8 ($ in millions) augmented in the prior strategy by $3.4 billion and still receiving the largest funding amount at $20.4 billion. THE EXPANSION IN CAPITAL COMMITMENTS IS FUNDED LARGELY BY CITY TAX-SUPPORTED DEBT Total-Funded FYs Preliminary Strategy Total Change from FYs Strategy Change in Tax- Supported Funds Change in Water Authority Funds Change in Noncity Funds TOTAL $89,556 $5,778 $4,690 $3,073 ($1,985) Department of Education 20,405 (2,624) (2,112) -- (513) DEP a 17,651 2, ,073 (110) Water Pollution Control 6,609 1, ,133 (113) Water Mains 4, Sewers 4, Water Supply 2,358 1, ,178 0 Equipment 405 (121) -- (121) 0 Department of Transportation 15,306 1,884 2, (591) Bridges 8, (340) Highways 5,418 1,752 1, (38) Transit Authority 655 (182) (178) -- (4) Traffic 628 (13) (57) Ferries and Transportation Equipment 408 (105) (153) Housing 9, , (257) Energy Efficiency & Citywide Equipment 5, Parks 3, Small Business Services 2,946 (434) (495) Sanitation 2, Health and Hospitals Corporation 2,322 (81) (547) All Others b 10,544 1,083 1, (89) a These categories are funded mainly by Water Authority revenue bonds. b All Others include Correction, Public Buildings, Police, Fire, Courts, Cultural Affairs, Health, Human Resources Administration, Children s Services, Libraries, Homeless Services, CUNY, Real Estate, and Aging. Numbers may not add due to rounding. In addition to expanding, commitments in the preliminary strategy compared to the prior strategy rose in the first five years by $6.5 billion for projects financed by city tax-supported debt, resulting in a more front-loaded annual distribution that accelerates the required financing and the resulting debt service costs. As presented in Table 9 on page 28, the preliminary strategy schedules 68 percent of total commitments in the first five years, driven substantially by city tax-supported commitments at 49 percent. At this proportion, first-half tax-supported commitments average $8.8 billion annually, double the $4.4 billion average slated for the second five-year period. 28

33 TABLE 9 COMMITMENTS IN THE PRELIMINARY STRATEGY ARE HEAVILY FRONT LOADED ($ in billions) First Half 5-Year Percent 5-Year FY Sub-total of Total Average Tax-Supported Funds $12.9 $9.7 $9.3 $6.3 $5.6 $ % $8.8 Water Authority Funds Noncity Funds Total $17.9 $13.4 $12.7 $9.0 $8.3 $ % $12.3 Second Half 5-Year Percent 5-Year FY Sub-total of Total Average Tax-Supported Funds $5.3 $4.4 $3.9 $4.1 $4.1 $ % $4.4 Water Authority Funds Noncity Funds Total $6.6 $6.4 $5.1 $5.1 $5.2 $ % $5.6 Note: Numbers may not add due to rounding. Typically, there is a lag between the entering of a capital contract and full financing of the project. The tax-supported borrowing by the city and the NYCTFA for ongoing capital projects as well as commitments in the preliminary strategy is estimated to average $8 billion annually in FYs , then decline to $6.1 billion annually in FYs , for a ten-year average of $7 billion annually. This amount of tax-supported borrowing for the capital program would be considerably higher than the annual average of $4.7 billion for the prior ten-year period covering FYs and will drive up the associated outstanding debt from $70 billion at the end of FY 2017 to $100 billion by FY Sustainable Debt Service Levels in the Ten-Year Strategy The expansion of the preliminary ten-year capital strategy contributes to debt service costs growing annually from $6.4 billion in FY 2017 to $8.4 billion in FY 2021, hitting $10 billion in FY 2026 and continuing to climb to $10.2 billion in FY 2027, for an average annual rate of 4.8 percent. Depicted in Chart 2 on page 29, the projected annual debt service growth rates start out being steep and fluctuating widely in FYs , reflecting the application of conservative assumptions relative to the actual terms, and one-time recognized savings such as the previously mentioned $249 million of excess building aid in FY The overall diminishing annual debt service growth rates beyond FY 2022 is predicated on the assumption that capital investments will stabilize in the second half of the ten-year strategy. 29

34 CHART 2 THE SUSTAINABLE DEBT SERVICE BURDEN IS FACILITATED BY STRONG TAX REVENUE GROWTH PROJECTIONS 15% 12% Debt Service Growth 9% Tax Revenue Growth Debt Service as % of Tax Revenue 6% 3% 0% 12a 13a 14a 15a 16a Fiscal Year a=actual Chart 2 also shows the forecasted annual growth rates for debt service costs mostly exceeding those for tax revenues through FY 2023, driving up the debt service burden to a high of 13.2 percent, a little above the 12.8 percent experienced in FY Tax revenues are projected to grow within a narrower band than debt service, ranging from 2.4 percent in FY 2017 to a high of 4.7 percent in FY 2019, then stabilizing later at rates of between 4.4 percent and 4.6 percent in FYs With tax revenue growth rates exceeding those for debt service costs annually from FY 2024, the debt service burden declines incrementally from the 13.2 percent in FY 2023 to 12.1 percent in FY The projections for debt service and tax revenues are consistent with historical norms. The resulting debt service burden for the ten-years covered by the strategy remains well under 15 percent, which the city believes is sustainable and fiscally responsible. In essence, the projected growth in tax revenues is facilitating the expansion of the capital program. The city recognizes that tax revenue collections can be volatile and on occasion have even shrunk year-over-year. As a precaution, citing fiscal uncertainties, the city has set aside $250 million in each of FYs in a capital stabilization reserve fund that could be used to defease debt in the case of a sudden economic downturn that weakens tax collection. 30