NYC budget books to balance
In the last 20 years, New York City has had to recover from a terrorist attack, a recession fueled by a stock market collapse, a superstorm and now a global pandemic. Looking forward, the only certainty is that the city will face uncertainty in the months and years to come.
Predicting the city’s fiscal future is problematic. We still don’t know the shape of the economic recovery and what it holds for the city’s quality of life, economic competitiveness and real estate markets over the long term. Other economic concerns surround the stock market’s resilience amid questions over lingering inflation. COVID-19 variants still plague the globe and vaccination rates have slowed, risking a resurgence of the virus. Our climate is changing, wreaking havoc on our infrastructure and way of life. These are only a few of the potential challenges we know.
City leaders can hope for the best but must prepare for the worst. A year ago, the city took emergency steps to cut costs and maintain cash levels so it could deliver basic services, leveraging nearly $4 billion in reserves to maintain budget balance at the beginning of Fiscal Year 2021. The city even reasoned that it might need to borrow to maintain basic services, a fiscal last resort and a contributor to the fiscal crisis of the 1970s.
Yes, an immediate fiscal crisis has been avoided thanks to unprecedented economic stimulus and more than $20 billion in direct federal aid to the city since March 2020. However, the city’s recently adopted budget for Fiscal Year 2022 suggests an incomplete recognition of the fundamental challenges of the last year, and the many lessons of years past, in an economic and physical environment that remains deeply uncertain.
City-funded spending has returned to its pre-pandemic trajectory within a year, and is well over pre-pandemic projections when state and federal assistance are included. Budget gaps facing the city beginning in FY 2023 are larger than the gaps prior to the pandemic despite extraordinary federal aid not just to New York City, but to the state, the MTA and the businesses and individuals making up the tax base.
These planned budget gaps, averaging $4 billion annually, exist despite healthy FY 2021 year-end operating results. While the city has increased the size of its newly established rainy-day fund by $500 million, city revenues beat projections from April 2021 by nearly $2.1 billion. The opportunity to use these unanticipated revenues to set aside additional reserves was missed.
Reserves are occasionally viewed as a luxury; excess funds find their way to new programming instead. But recent events show they are a necessity in an uncertain world. Even with FEMA aid, recovering from Ida’s flooding will require a matching portion to be paid for by the city. Some cities create emergency capital reserves for this exact purpose. Proper reserve buildup can also fund proactive mitigation efforts. Our neighbors in Connecticut enabled municipalities to create climate change and coastal resilience reserves in preparation for worsening inclement weather events.
The city has less in reserves today to deal with, and prepare for, the unexpected than it did during the period of stable revenues prior to the pandemic ($5.1 billion now, including funds in the retiree health benefits trust, compared to $6.1 billion then). The city should recommit to building deeper reserves now, when operating results are stronger than anticipated, to stay prepared for when revenues drop or cash is needed suddenly in response to the next unexpected event.
New York should also recommit to identifying programs to eliminate future budget gaps that focus on operations. Emerging from the fiscal crisis of the 1970s, the city engaged in the regular review of services to modernize delivery and generate efficiencies to manage costs and enhance revenue. This practice has become less focused on the goal of closing out-year budget gaps through an assessment of operational demand over time, relying more on financial decisions, such as debt service savings. New York City is a dynamic enterprise and its needs and strengths are constantly shifting. Its budgetary practices and menu of services should reflect this.
Prior to the fiscal crisis of the 1970s, the lack of resources and foresight in managing the delivery of services eventually led to broad cuts to both basic services and the labor force, exacerbating concerns over the city’s desirability and leading to population losses that took decades to turn around. The extraordinary federal relief and economic stimulus of the past year has allowed the city a chance to avoid repeating this fate.
What happens next, however, will require the same budgetary discipline to build reserves and operational measures to close budget gaps that have led us out of crisis before. The result would be consistent fiscal balance, improvements to quality of life, the return of the city’s competitiveness, and preparedness for the next unexpected event.