NOVEMBER MODIFICATION

Transcription

1 Staff Report NOVEMBER MODIFICATION FYs December 21, 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 I. Overview... 1 II. Review of the Modification... 6 Revenues... 6 Local Economy Could Lag Behind Brisk National Upturn... 7 Nonproperty Tax Revenues Weaken... 8 Miscellaneous Revenue Expenditures Debt Service Savings III. Glossary of Acronyms i

4 LIST OF TABLES PAGE 1. NOVEMBER MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS JUNE FINANCIAL PLAN COMPARED TO NOVEMBER MODIFICATION RISKS TO THE FINANCIAL PLAN NET DEBT SERVICE SAVINGS ii

5 I. Overview The November Modification to the FYs Financial Plan is a technical modification mostly recognizing events that have occurred since adoption. Most of the changes, other than higher pension investment earnings, concentrate on the current fiscal year. The FY 2018 budget has remained in balance while increasing by $747 million since adoption. In fact, noncity funds increased by $923 million, mostly from continued federal Sandy recovery funds and urban security aid. The city-funded part of the budget actually decreased by $176 million. In the first quarter of FY 2018, the city recognized the continued weakness in nonproperty tax collections, especially in the business taxes, and lowered its projections by $294 million. This decrease was offset by higher miscellaneous revenues and a reduction in property tax reserves. In order to offset lower tax collections, the city implemented a budgetary savings program of $234 million in FY 2018, mostly from debt service savings, and reduced fringe benefit costs due to unfilled vacancies. This savings program will also reduce expenditures by $238 million in FY 2019, growing to $356 million by FY These savings, along with the realization of higher investment earnings on pension assets, have helped reduce the projected outyear deficits to $3.2 billion in FY 2019, $2.3 billion in FY 2020, and $1.6 billion in FY Unlike past years, the November modification does not project a surplus to help balance the next year s budget. However, it does maintain a general reserve of $1.2 billion in FY 2018 and $1 billion in each of the outyears as well as $250 million in a capital stabilization reserve in each year of the plan. As the city prepares its mid-year modification and the preliminary budget for FY 2019 there are many unknowns and concerns that could have significant impacts on its financial plan. Among the unknowns are what will be the impact of federal tax reform and the federal budget on both the city and state budgets. In addition, the state is currently projecting a $4.4 billion budget gap, which could affect state funding for the city. It is impossible to do a credible risk assessment until we see what happens at the other levels of government. We should have a better idea of the potential impacts, on both the city s budget and economy, early in 2018 as Congress acts and the state issues its executive budget. With that in mind, the city must in FY 2018 take actions that will create a surplus similar in scope to the last several years. In the past, the city relied on conservative revenue estimates and took advantage of strong tax collections to make up a large part of the surplus. While overall the city s estimates are still conservative, given the weakness in the business taxes and that the city could be moving to a period of slower economic growth, it cannot expect a large upside in tax revenues to help build the surplus. There may be other revenues in tax audits, miscellaneous revenues, and not needed property tax reserves, which could be utilized, but the city must find other ways to build up the surplus. The city should try to minimize the normal growth in expenditure new needs that occur during the fiscal year. There will be pressure from overtime expenditures, funding for homeless programs, and possible financial weakness at Health + Hospitals.

6 To the extent the city can minimize these increases, the general reserve and capital stabilization reserve could be used to start to build the surplus. In addition to controlling new needs, the city will have to embark on a larger agency savings program in FY As in the past, we expect that a significant portion of the savings program will be found in debt service savings due to refundings. This will be true in FY 2018, but beyond that point there are some concerns. The federal tax reforms being discussed could contain provisions that would affect the attractiveness of taxexempt bonds, and limit some of the options the city has used to achieve savings from refundings. The city, however, has shown a strong ability to manage its financing program cost effectively in a way that meets the market s needs. The other parts of the agency savings program should have actions that, to the extent possible, have recurring value in order to reduce the outyear gaps. In developing the FY 2019 budget, given the concerns and unknowns, the city will have to be creative in building the FY 2018 surplus, and conservative and flexible in order to deal with changes in the economy, and the impacts of the federal and state budgets. 2

7 TABLE 1 ($ in millions) NOVEMBER MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS FY 2018 FY 2019 FY 2020 FY 2021 Revenues Taxes: General Property $25,732 $27,368 $28,730 $29,850 Other Taxes 29,931 31,337 32,554 33,786 Tax Audit Revenue Sale of Property Tax Liens Miscellaneous Revenues 6,757 6,659 6,877 6,864 Less: Intracity Revenues (2,053) (1,745) (1,745) (1,750) Disallowances (15) (15) (15) (15) Total City Funds $61,282 $64,405 $67,202 $69,536 Other Categorical Grants 1, Interfund Revenues Federal Categorical Grants 8,342 7,087 6,927 6,915 State Categorical Grants 14,667 14,894 15,407 15,789 Total Revenues $85,986 $87,923 $91,000 $93,699 Expenditures Personal Service $46,926 $49,147 $50,740 $52,061 Other Than Personal Service 37,342 35,291 35,316 35,580 General Obligation, Lease & TFA Debt Service 6,501 7,156 7,712 8,174 Budget Stabilization & Prepayments (4,180) Capital Stabilization Reserve General Reserve 1,200 1,000 1,000 1,000 Subtotal $88,039 $92,844 $95,018 $97,065 Less: Intracity Expenditures (2,053) (1,745) (1,745) (1,750) Total Expenditures $85,986 $91,099 $93,273 $95,315 Gap To Be Closed $0 ($3,176) ($2,273) ($1,616) 3

8 CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS JUNE FINANCIAL PLAN COMPARED TO NOVEMBER MODIFICATION TABLE 2 ($ in millions) FY 2018 FY 2019 FY 2020 FY 2021 Revenues Taxes: General Property $0 ($91) ($95) ($98) Other Taxes (207) Tax Audit Revenue Sale of Property Tax Liens Miscellaneous Revenues Less: Intracity Revenues (238) (8) (6) (6) Disallowances Total City Funds ($176) $3 $8 $8 Other Categorical Grants (1) Interfund Revenues Federal Categorical Grants State Categorical Grants Total Revenues $747 $103 $59 $85 Expenditures Personal Service ($7) ($165) ($344) ($514) Other Than Personal Service 1, General Obligation, Lease & TFA Debt Service (27) (69) (149) (157) Budget Stabilization & Prepayments (11) Capital Stabilization Reserve General Reserve Subtotal $985 ($186) ($469) ($623) Less: Intracity Expenditures (238) (8) (6) (6) Total Expenditures $747 ($194) ($475) ($629) Change to the Gap Decrease/(Increase) $0 $297 $534 $714 4

9 TABLE 3 RISKS TO THE FINANCIAL PLAN ($ in millions, positive numbers are offsets to risks) FY 2018 FY 2019 FY 2020 FY 2021 Stated Financial Plan Gap $0 ($3,176) ($2,273) ($1,616) Estimation Nonproperty Taxes (100) Miscellaneous Revenue Uniformed Services Overtime (124) (170) (193) (197) HHC Reimbursements (165) (165) (165) (165) Subtotal (314) (260) (283) (287) Not in City s Control STARC Bond Repayment 0 (150) 0 0 Risk Total ($314) ($410) ($283) ($287) Total FCB Estimated Surplus/(Gap) ($314) ($3,586) ($2,556) ($1,903) 5

10 II. Review of the Modification The November 2017 Modification to the FYs Financial Plan reflects an $86 billion FY 2018 operating budget for the city that has remained in balance while increasing by $747 million since being adopted. The FY 2018 budget is augmented by $923 million of dedicated noncity funds, while projected city funds are lower by $176 million due to slow tax collections at the start of the fiscal year. The nonproperty taxes, which are lower by $294 million, are being held back by disappointing business tax collections. Local economic growth appears to be lagging behind the brisk national upturn and this could slow the recovery of tax collections. However, the improvement of business profits could eventually lift the business taxes. With the plan-to-plan decline in city-funded revenues, the city undertook the task of identifying added FY 2018 budgetary savings that totaled $234 million since June. The majority of the savings are derived from recognizing lower actual fringe benefit and debt service costs. Some of the savings, $47 million, have been applied to supporting higher agency spending and pension costs. The remaining FY 2018 savings served fully to maintain current-year budget balance. The modification includes additional savings for FYs amounting to $238 million, $320 million and $356 million, respectively. These savings, along with the realization of higher investment earnings on pension assets, have helped reduce the projected outyear deficits, which now stand at $3.2 billion in FY 2019, $2.3 billion in FY 2020 and $1.6 billion in FY Our analysis identified net budgetary risks totaling $314 million, $410 million, $283 million and $287 million in FYs , respectively. However, the modification leaves intact general reserves of $1.2 billion in FY 2018 and $1 billion in each of FYs , as well as $250 million of capital stabilization reserves in each of FYs , which could be used for gap-closing or contingency purposes. REVENUES City tax revenues, including audits, improved by $62 million at the close of FY 2017, despite the weakness of the business taxes, which closed $75 million short of plan. Additional collections from the property tax, the property transactions taxes, along with support from the sales and unincorporated business taxes helped plug the budget hole opened up by the downturn of the business corporation tax. Audits provided a $45 million lift at the close of FY For the year as a whole, audits produced a record collection of $1.3 billion, of which $1 billion derived from audits of corporate and bank tax returns. Following the corporate tax slowdown at the end of FY 2017 and disappointing tax receipts at the start of FY 2018, the city reduced its city funds target by $176 million to $61.3 billion. The weak nonproperty taxes were partly offset by changes affecting the property tax and extra miscellaneous revenue. Total revenue, which includes categorical grant programs in addition to city-fund revenue, has increased by $747 million, to $86 billion, due to the revaluation of federal, state and private grants. 6

11 The FY 2018 revenue changes in the November modification are summarized in the figure. The nonproperty taxes declined by $294 million primarily due to slow business tax collections. A $31 million improvement in miscellaneous revenue along with an $87 million shift in the tax program helped blunt the sharp downturn in tax receipts. City funds are down $176 million. In June, the city proposed a property tax exemption program to expand eligibility for real estate tax exemptions for elderly, disabled and veteran homeowners that was scheduled to cost $87 million in FY 2018, with the cost rising to $98 million by FY With the approval of this program, the tax program budget line, which had been negative, increased by $87 million to zero, while the property tax revenue line should have fallen to reflect the cost of the program. The city found offsets to help finance the new cost by reducing unneeded property tax reserves by $87 million, leaving the FY 2018 property tax revenue target unchanged at $25.8 billion. Categorical aid increased by $922 million to $24 billion. Federal categorical grants are higher by $531 million to $8.3 billion, state grants rise $248 million to $14.7 billion, while private grants are up $143 million to $1 billion. The additional federal aid includes over $270 million in disaster relief linked to Hurricane Sandy, about $100 million in aid related to urban security programs, about $60 million for social services and aid to needy families, and over $50 million related to asset forfeitures. Of the $14.7 billion in state grants, $10.7 billion is dedicated to city education programs. Education aid increased in this budget modification by $13 million. Mass Transit aid improved by $25 million, while assistance to private bus companies increased by about $48 million. The largest increases in state aid were from asset forfeitures, which produced an extra $167 million for the city. Local Economy Could Lag Behind Brisk National Upturn The city s outlook for the national economy reflects improving output growth through CY 2018, after which growth could slow. Real gross domestic product (GDP) accelerates to 2.2 percent in 2017 and 2.4 percent in 2018 from 1.5 percent in Corporate profits increase by about seven percent in both 2017 and 2018, up from zero growth in Employment growth drops from 2.5 million jobs in 2016 to 2.1 million in 2017 and 1.9 million jobs in 2018, while the unemployment rate improves to 4.3 percent by 2018 from 4.9 percent in National wage rates, in the city s forecast, accelerate from increases of 1.1 percent in 2016 to 1.9 percent in 2017 and 3.3 percent in Results for the current year reveal that the national economy is actually growing considerably faster than the city expects. The Bureau of Economic Analysis reported in November that GDP growth firmed up to 3.1 percent in the second quarter and 3.3 percent in the third quarter of 2017 from the weak 1.2 percent increase in the first quarter. 7 FY 2018 Revenue Changes Since June Plan ($ in millions) Real Property Tax $0 Nonproperty Taxes (294) Tax Program 87 Miscellaneous Revenue 31 City Funds ($176) Federal Grants $531 State Grants 248 Private Grants 143 Categorical Aid $922 Interfund Revenue 1 Total Change in Revenues $747

12 Economists at the New York Federal Reserve estimate that fourth-quarter growth could climb as high as four percent. National corporate profits increased by 7.7 percent over the first three quarters of 2017, slightly better than the city s projection of seven percent. The securities industry earned pretax profits of $17.8 billion in the first three quarters of the year, which is the best showing in seven years for the comparable period. The employment report from the Bureau of Labor Statistics (BLS) indicates that national employment growth is solid with 228,000 new jobs in November, which marks an improvement from the average monthly increase of 174,000 new jobs thus far in The unemployment rate has dropped throughout the year from 4.8 percent in January to 4.1 percent by November. For the local economy, the city projects strong output growth in 2017, with weak growth thereafter. Local employment growth continues to move lower, while wages become unsteady following strong gains in Despite the encouraging national economic reports, the local economy could be moving to a period of slower growth. The Federal Reserve Bank of New York tracks the regional and local economies with coincident economic indicators. These indexes for October show economic activity rising at a slow pace in New York City and essentially flat in New York State and New Jersey. Nonproperty Tax Revenues Weaken The nonproperty taxes, which had been flat for the past two years, have been adjusted down by $294 million in FY 2018, as shown in the figure. With this reduction, the nonproperty Changes in the FY 2018 Nonproperty Tax Projections Since June Plan ($ in millions) taxes will yield an estimated $29.7 billion in FY Personal Income $ Despite this setback, the city expects these Sales (60) taxes to grow 4.2 percent in FY Previously, Business Corporation (225) Unincorporated Business (15) nonproperty tax growth sank from 7.5 percent in FY Commercial Rent to 0.1 percent in FY 2016, after which growth Property Transfer 0 turned negative to minus 0.5 percent in FY Mortgage Recording 0 Current collections appear to have turned up from Utility (4) Cigarette 0 the flat trend that was set in the previous two years. Hotel 10 However, the business taxes continue to lag behind Minor Taxes 0 expectations. Nonproperty tax collections in FY Total Nonproperty Tax Changes 2018 have increased by 3.2 percent through October, ($294) which is one percentage point below the city s revenue growth target. This indicates that the city could again adjust nonproperty tax revenues downward as the fiscal year progresses. Among the nonproperty taxes, the business corporation tax had the largest downward revision with a loss of $225 million and the unincorporated business tax declined $15 million, compared with the June plan. The sales tax fell $60 million, while the utility tax is down by a slight $4 million. The hotel tax went against the downward trend by scoring a modest improvement of $10 million. In Table 3 on page 5, we show a downside risk of $100 million to FY 2018 nonproperty taxes, which reflects a negative outlook for the business taxes that is partially mitigated by a positive view of property transactions tax collections. 8

13 Property Transactions Taxes The city did not alter forecast for the property transactions taxes, even though collections on these taxes are better than the plan suggests. The city expects the real property transfer and the mortgage recording taxes to yield an estimated $2.3 billion in FY 2018, down from $2.5 billion in FY 2017, a decline of 9.3 percent. This follows an even bigger decline of 15.8 percent in FY Current collections indicate that these taxes are down 3.9 percent, but this decline is not as severe as the 9.3 percent drop that city has planned for. As the year progresses, these taxes could generate some additional revenue. However, there is a need for caution because looming federal tax reform and rising interest rates could impact property sales. Business Taxes At the close of FY 2017, business tax collections fell $75 million short of the June 2017 plan. This shortfall, however, was not nearly as severe as the $298 million business tax gap that opened up at the close of FY Responding to this history of poor results, the city reduced its goal for the business corporation tax by $225 million and lowered the unincorporated business tax by $15 million. Despite these adjustments, the business taxes increase by 6.2 percent to yield an estimated total of $5.8 billion in FY Collections on these taxes are down by 8.9 percent through October compared with the comparable period of the previous year. For the future, the city expects unsteady growth of 7.6 percent in FY 2019 and 2.4 percent in FY Despite the slow start to FY 2018 collections, it is possible that the business taxes will improve as the fiscal year progresses due to the impressive upturn of business earnings. In the first three quarters of 2017, national pretax corporate profits increased by 7.7 percent, while the locally-based securities industry produced a profit gain of 19 percent. Personal Income Tax The forecasts of total revenue for the personal income tax during FYs did not change from the June financial plan, but there was a realignment among the components. The city s latest economic and tax projections are not adjusted for federal tax reform since the bill was not completed prior to the release of the November modification, but do reflect moderate growth in employment and income at the local and national levels. The FY 2018 estimate of personal income tax revenue is $11.8 billion, which is an increase of seven percent from the prior year. The local economic forecast indicates fewer new jobs each year from 56,000 in 2017 to 30,800 in 2021 after job creation in the range of 90,000 to 100,000 annually during Likewise, compensation in the finance sector and overall wages rise at a slower rate after 2017, at 2.6 percent and 4.1 percent, respectively, on an average annual basis. One of the biggest surprises so far in 2017 is that despite an environment of low volatility, New York Stock Exchange (NYSE) member firms earned $17.8 billion for three 9

14 quarters of 2017, which is $2.8 billion more than the same time last year. If business continues at this pace, securities industry profits will exceed $20 billion in 2017, which hasn t happened since 2012 when $23.9 billion in profits were recorded. While the third quarter was another tough time for traders, several banks benefitted from increased lending, and year-over-year growth in asset management and investment banking. Given the profitability of NYSE member firms and the records set in the three market indexes, bonus compensation in the finance and tech industries might be higher than expected at the beginning of While city residents will probably be more negatively impacted than first thought by federal tax reform, it remains to be seen which amendments, deductions, and tax rates will be signed into law. Sales Tax In the November modification, the FY 2018 sales tax estimate is lowered by $60 million to $7.3 billion, and represents 3.5 percent year-to-year growth, which is in line with recent collection history. Sales tax revenue on an adjusted basis increased 3.05 percent in the June 2017 quarter, and 3.19 percent in the September 2017 quarter, from the prior year. The projections for FYs are unchanged from the June financial plan. We are holding $150 million at risk in FY 2019 since the latest forecast does not reflect the reimbursement to the state for the prior-year refunding of Sales Tax Asset Receivable Corporation (STARC) bonds, as shown in Table 3 on page 5. Excluding the STARC repayment, and prior to the release of the final version of federal tax reform, there are several factors in place that can support taxable spending and propel sales tax growth. Recent economic reports indicate that consumers are going into the holiday season with confidence and are benefitting from modest wage growth with slower but still positive local job gains. Households are more willing to drawdown savings to support spending and taking on debt, possibly due to the wealth factor from higher stock prices and home values. NYC & Company reports that tourism hit a record in 2016 at 60.5 million, with 47.8 million domestic and 12.7 million international visitors, who collectively spent $43 billion in the city before the multiplier effect on different industries. The estimate for 2017 is a 2.1 percent increase in total visitors to 61.8 million, but with 100,000 fewer higherspending international tourists due to federal rules and a perception of inhospitality. According to newly released federal data, the number of international visitors arriving in the United States declined nearly 4 percent in the first six months of this year compared with the same period in 2016, and that the overall drop was even higher in June alone than for the six-month period, with a 6.7 percent decline in June 2017 compared with June Over the rest of FY 2018, it will become clearer if there was a further drop-off in 1 The three stock market indexes are the Dow Jones Industrial Average, the Nasdaq Composite, and the Standard and Poor s Federal tourism data is from the U.S. Department of Commerce National Travel and Tourism Office, which was reported by the Associated Press in the New York Times online on November 29,

15 international visitors to the city in 2017, and if there is a need to risk sales tax revenue during the plan period. Miscellaneous Revenue In the November modification, miscellaneous revenue advances by $31 million to $4.7 billion in FY 2018, but declines 7.1 percent from the prior year. 3 In terms of recurring growth, the forecasts for the core categories in miscellaneous revenue improve by $20 million to $3.2 billion in FY The positive variance results from more license revenue, as higher collections in the miscellaneous category are offset by a reduction in charges for services. The projections for the remaining core categories of interest, fines, and rent were unchanged from budget adoption last June. 4 Most of the higher license revenue, at $694.3 million for the year, reflects a $15.4 million increase in the demand for licenses to operate for-hire vehicles or black cars. Charges for services is down 4.9 percent on a year-to-year basis to $982.4 million as eliminating school lunch fees and collecting less city register fees outweighs more revenue from Section 421-A housing and other fees. Based on current collections and the likelihood of new programs added during the plan period, the city s miscellaneous revenue forecast could be higher by $75 million in each year of FYs , as shown in Table 3 on page 5. EXPENDITURES The November modification assumes a balanced budget in FY 2018 despite weakness in several taxes that continue to lower revenue projections. As shown in the figure to the right, the city expects city-funded revenue to fall by a net $187 million with tax collections decreasing by $207 million, offset by a small increase in nontax collections of $20 million. 5 In city-funded expenditures, savings programs, in addition to other actions, have been used to offset falling revenues. In the current modification, a newly implemented program is expected to save $234 million. The savings program keeps FY 2018 in balance after a FY 18 Changes Since Adopted City Funds ($ in millions) Revenue Tax ($207) NonTax 20 Total Net Decrease ($187) Expenditure Savings Program ($234) Agency Spending 31 Pensions 16 Total Net Decrease ($187) Estimates of the number of tourists visiting New York City, and their economic impact, are from NYC & Company. 3 There were minor changes to the miscellaneous revenue forecasts in FYs Although not specially mentioned in the November modification, the cost to the city in foregone revenue and refunds that resulted from errors printed on more than half a million parking tickets is already reflected in the estimate of parking fine revenue of $525.2 million in FY Revenue excludes about $11 million of agency savings, which are a component of the city s FY 2018 November modification s savings program. 11

16 modest combined increase in agency spending and pension costs of $47 million. In past November modifications, it was typical for the city to have started to build a surplus to reduce the budget gap in the next fiscal year. In the current modification, the city has not identified surplus funds. The FY 2018 budget, however, maintains $1.2 billion in the general reserve and $250 million in the capital stabilization reserve. The November modification assumes a $3.176 billion gap in FY 2019, which could grow larger if revenues weaken further, or if the city does not control new expenditure needs. Given the unlikelihood that there will be a large upside in revenues, the city will have to continue to develop and implement savings programs during FY 2018 and, as it has done previously, use its reserves to address the gap. However, uncertainties in federal and state aid, passage of federal tax reform and continued economic growth, are concerns. Expenditure Savings In the adopted budget, cumulative savings programs for FY 2018 were nearly $1.4 billion. The value of the savings over the life of the financial plan is expected to be more than $4.8 billion. The current modification adds $234 million in savings to FY 2018, as shown in the figure to the right. Including FYs , the savings are valued at about $1.2 billion. A significant portion of savings in the November modification for FY 2018 is attributed to the adjustment of actual fiscal year spending in fringe benefits. The city compares actual spending to planned spending to determine if savings can be taken, or higher spending is required. The city has found actual spending to be lower FY 18 November Mod Savings City Funds ($ in millions) Agency Category Miscellaneous ($93) Debt Service (56) Other Mayoral (37) Uniformed Services (26) Education (11) Health and Welfare (11) Total Savings ($234) than initially estimated. The lower actual spending reduces miscellaneous expenditures by $93 million, as shown in the figure to the right. Another major contributor to the savings program is the reestimate of debt service costs, which are expected to save $56 million. For a further discussion on debt service savings, see Debt Service Savings beginning on page 14. After accounting for savings in miscellaneous spending and debt service, the remainder of savings in FY 2018, $85 million, is spread over four other budget areas. Mayoral Agencies, which encompass a vast number of small agencies, are expected to generate cumulative savings of $37 million, much of which are associated with hiring delays, headcount vacancies, lower operational and consulting costs, and funding switches. In Uniformed Services, much of the $26 million in savings is produced in the Police Department due to lower-than-projected civilian headcount. A delay in hiring civilian personnel will yield almost $19.6 million in departmental savings. The headcount savings in Mayoral Agencies and Uniformed Services, and in other agencies, stem from a citywide directive released in May 2017 to slow down hiring as part of a partial headcount freeze. Lastly, the Department of Education (DOE) and agencies in Health and Welfare, are projected to save a combined $22 million. The DOE anticipates $11 million from increased state revenue for its special education services and the Department of Social Services in Health and Welfare saves $5 million due to lower caseloads for substance abuse treatment. 12

17 Expenditure Increases The November modification assumes additional spending of $47 million in FY Much of the added spending, $31 million, is to cover agency new needs. The increase is mostly technical, which is to adjust agency budgets for operational, administrative and collective bargaining costs. Agency spending beyond FY 2018 contains projected increases of $59 million in FY 2019, $47 million in FY 2020, and $43 million in FY Pension costs are expected to increase by $16 million due to reestimated fringe benefit costs. However, asset gains in FY 2017 are projected to reduce pension costs by $140 million in FY 2019, growing to $280 million in FY 2020 and $420 million in FY The city s pension system s assets grew by more than $17 billion in FY 2017 to about $182 billion experiencing an aggregate return of 13 percent. The required rate of return for the system is set at seven percent, which gives the system an actuarial gain of six percent. The performance of assets in FY 2017 was significantly higher than in FY In that fiscal year, the aggregate system return was a disappointing 1.5 percent. The improved performance in FY 2017 increases total asset funding to 71.2 percent, which is 5.6 percentage points higher than in FY Expenditure Budget Risks As shown on Table 3 on page 5, Uniformed Services (Police, Fire, Correction, and Sanitation) are expected to spend $124 million more in overtime expenditures (uniformed personnel) than budgeted based on current spending levels of $394 million through October The city puts total spending for uniformed personnel in FY 2018 at $1.057 billion. We estimate a higher amount of $1.181 billion. Much of the spending risk resides in the Police Department. We project that the Department is likely to exceed its planned budget by about $64 million. In Fire and Correction, the risk assessment is somewhat lower at about $37 million for each department. Alternatively, we believe that the Department of Sanitation will generate a surplus of around $15 million in FY In the outyears of the plan, the risk for the four agencies grows higher to $170 million in FY 2019, $193 million in FY 2020, and $197 million in FY In recent years, Health + Hospitals has experienced 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. The confluence of these events has put the system under severe financial stress that has required additional financial support from the city. In FY 2016, the city had provided a $160 million subsidy and waived miscellaneous revenue 6 Pension fund gains and losses are phased in over a six-year period starting two years after the gain or loss is incurred. 13

18 reimbursements totaling $337 million. 7 In addition to those actions, the city absorbed wage increases for covered employees in the latest round of collective bargaining. In FY 2017, the city permanently waived debt service reimbursement and collected payments for fringe benefits, and judgments and claims of $165 million. 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, in each of FYs , as shown on Table 3 on page 5. 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. Debt Service Savings The savings program in the city s November 2017 modification includes net reductions in projected debt service costs of $56 million in FY 2018, $86 million in FY 2019, $167 million in FY 2020 and $174 million in FY 2021, as displayed in Table 4. Debt service costs for the city and the New York City Transitional Finance Authority (NYCTFA) were updated in the modification to capture the terms of actual refunding, reoffering and new money bond transactions; more current information related to outstanding variable rate debt; shifts in the assumed timing of bond financings; and adjustments in the use of excess state building aid as an offset. Decreased costs in some debt service components outweighed certain increases to yield net savings. Furthermore, there is a strong possibility that additional debt service savings will be achieved over the course of the fiscal year that could be used to help balance the FY 2019 budget. TABLE 4 NET DEBT SERVICE SAVINGS ($ in millions) Changes from June 2017 Plan FY 2018 FY 2019 FY 2020 FY 2021 GO & BARBs Refunding Savings ($50) ($98) ($98) ($96) GO & NYCTFA Variable Rate Savings (108) (19) (19) (19) GO & NYCTFA Debt Service (60) (69) Adjusted Building Aid Excess Retention City Savings Program Subtotal ($56) ($86) ($167) ($174) Lease Purchase Debt Total Debt Service Savings ($38) ($69) ($150) ($156) Numbers may not add due to rounding. The November modification revised the annual capital borrowing amounts from the levels in the June 2017 plan to reflect the acceleration from FY 2018 into FY 2017 of a $1.1 billion bond sale, and an overall $200 million decrease by FY 2021 in the need for financing. The November modification also included the terms for bond sales and reofferings that transpired, which collectively were more favorable than had been projected. The combination of the rescheduling of annual bond issuances, bond 7 Miscellaneous revenues include $172 million in debt service, $140 million in judgment and claims, and $25 million in fringe benefits. 14

19 reofferings that converted outstanding variable rate debt to fixed rate debt, and more favorable terms than forecasted on actual transactions served to increase debt service costs for the city and the NYCTFA by $65 million in FY 2018 and $27 million in FY 2019, but decrease such costs by $60 million in FY 2020 and $69 million in FY Additionally, the NYCTFA s use of excess state building aid to pay its tax-supported debt service costs was adjusted by $37 million in FY 2018, $5 million in FY 2019, and $10 million in each of FYs 2020 and 2021, as a partial offset to the refunding gains discussed below. The reduced FY 2018 debt service costs in the November modification were derived from interest savings on variable rate bonds and refunding savings. The modification lowered conservative interest rates applied to projecting the FY 2018 variable rate expenses for both the city and the NYCTFA, and also took into account a net $430 million reduction in the amounts of outstanding variable rate debt, capturing $108 million of savings. The variable rate costs were also reduced in each of the outyears by $19 million, attributable to less of this debt being outstanding. The conservative interest rates used in calculating variable rate costs for the outyears were not lowered, leaving the potential for future debt service savings. The sale of refinancing bonds by the city and the NYCTFA continues to provide sizeable budgetary savings. The actual refundings of outstanding bonds generated $50 million of the debt service savings in FY 2018, $98 million in each of FYs 2019 and 2020 and $96 million in FY In July, the city undertook an $899 million general obligation (g.o.) refunding bond sale that produced savings of $5 million in FY 2018, $52 million in each of FYs 2019 and 2020, and $50 million in FY Also in July, the NYCTFA issued $1 billion of Building Aid Revenue Bonds (BARBs) to refinance outstanding bonds, which produced $45 million of savings in FY 2018 as well as $46 million in each of FYs The two sales involved a combination of current and advanced refundings that extracted interest rate savings and adjusted the maturity structure of the outstanding debt. Since the release of the November modification, the city has embarked on a combination current and advance refunding g.o. bond sale totaling $944 million. We expect the savings from this sale, totaling $178 million over the life of the bonds, will be reflected in the city s next financial plan modification. Going forward, the city will be limited in achieving annual refunding savings, as a current tax bill in Congress includes the provision to eliminate tax-exempt advance refundings. Generally, advance refundings produce budgetary savings by allowing for low interest rates to be locked in more than 90 days prior to the call dates of the refunded bonds and postponing debt repayment in early years. Indeed, the city and the NYCTFA have taken advantage of this debt restructuring option to maximize savings in the financial plan years, but have been steadfast in ensuring no dissavings occur over the life of the refunding bonds. While the termination of tax-exempt advance refunding sales may reduce issuers ability to maximize savings and lock up the savings prior to the call date of the bonds being refunded, the city and the NYCTFA would still be able to undertake current taxexempt refundings, as well as taxable refundings. Moreover, with their present practice of selling multi-modal bonds initially in the fixed rate mode, the city and the NYCTFA 15

20 have the ability to take advantage of lower interest rates that occur in the future, without having to refund the bonds. The debt profile for the city and the NYCTFA is continually evolving to reflect current market opportunities. Since FY 2014, the city and the NYCTFA have embarked on selling multi-modal bonds initially set in the fixed rate mode with the option of converting the rates to lower fixed rates or to alternate interest rate modes. These are a variation of the multi-modal bonds that the city and the NYCTFA had been issuing previously, which were initially set in an adjustable rate mode and now in some cases are being converted to fixed rate bonds. The multi-modal bonds issued in a fixed rate mode could be reoffered to obtain lower prevailing interest rates, upon meeting certain date and pricing requirements along with adhering to restrictions on lengthening the maturity structure. It should be noted that the debt service improvements reflected in the city s savings program exclude $17 million of offsetting Hudson Yards tax equivalency expenses in each of FYs As illustrated in Table 4 on page 14, with these added costs, total debt service in the November modification is reduced by the smaller amounts of $38 million in FY 2018, $69 million in FY 2019, $150 million in FY 2020, and $156 million in FY The modification projected total debt service costs growing annually by an average 7.9 percent over the financial plan years, steadily from $6.501 billion in FY 2018 to $8.174 billion in FY As depicted in City and NYCTFA Debt Service as the figure to the right, when taken as a Percentage of Tax Revenues percentage of the tax revenues from which ($ in millions) Debt Service it is paid, debt service costs climb from 11.5 Debt Tax as Percent of percent in FY 2018 to 12 percent in FY 2019, FY Service Revenues Tax Revenues 12.4 percent in FY 2020 and 12.7 percent in 2018 $6,501 $56, % FY 2021, as tax revenues in the plan are ,156 59, % projected to rise less aggressively, at an ,712 62, % ,174 64, % average annual rate of 4.4 percent. At these Average levels, the forecasted debt service burden, Annual Growth 7.9% 4.4% while higher than the 11.1 percent recorded for FY 2017, remains below the affordability threshold utilized by the city of 15 percent. On one hand, we believe that debt service costs are estimated conservatively and that there is the likelihood actual costs will improve in each year of the financial plan, assuming borrowing for the city s capital program is controlled in size. On the other hand, we acknowledge that this is a period of uncertainty, given the expected passage of federal tax legislation that could directly increase municipal debt service costs. Municipal bond issuers had feared the elimination of the sale of tax-exempt bonds. In a bill that has been negotiated between the House and Senate and is expected to be enacted, the municipal bond tax-exemption has been left intact. However, the previously mentioned cessation of tax-exempt advance refundings would limit the ability to maximize refunding savings. Additionally, the bill reduces income tax rates, which would hurt the attractiveness of taxexempt bonds relative to taxable alternatives. Municipalities would have to offer higher yields on tax-exempt financings to maintain their competitiveness. 16

21 The legislation also contains other proposals that could impact the city s budget and economy. However, debt service, being conservatively estimated in the financial plan, has a cushion that could provide some time to make borrowing adjustments in response to tax law changes that cause a sudden spike in financing costs. Moreover, it is encouraging that the city has demonstrated over many years the ability to manage its debt program in a cost-effective manner by utilizing available instruments responsibly. 17

22 III. Glossary of Acronyms BARBs BLS CY DJIA DOE FCB FTS FY GDP G.O. Bonds HHC NYCTFA NYSE STARC Building Aid Revenue Bonds Bureau of Labor Statistics Calendar Year Dow Jones Industrial Average Department of Education Financial Control Board Future Tax Secured Fiscal Year Gross Domestic Product General Obligation Bonds Health + Hospitals New York City Transitional Finance Authority New York Stock Exchange Sales Tax Asset Receivable Corporation 18

23 Additional copies of this report may be obtained from: New York State Financial Control Board 123 William Street 23 rd Floor New York, NY or through the Financial Control Board s website: Please notify the Financial Control Board at (212) if you wish to have your name removed from our mailing list or if your address has changed. 19