New York City Council holds hearings on fiscal 2025 budget, eyes debt limit

New York City finance officials appeared before the City Council Monday to discuss the mayor’s fiscal 2025 preliminary budget.

Testimony centered around the $109.4 billion preliminary budget that Mayor Eric Adams proposed in January, which is balanced as required by law, and includes a near-record $8.2 billion in reserves, including $1.2 billion in general reserve, $4.8 billion in the Retiree Health Benefits Trust Fund, $250 million in the Capital Stabilization Reserve and $1.96 billion in the rainy-day fund.

Jacques Jiha, director of the Mayor’s Office of Management and Budget, told the Council’s Finance Committee that the city’s economy was performing better than expected.

“The Program to Eliminate the Gap (PEG) generated $3.1 billion in savings over fiscal 2024 and 2025,” Jiha said. “This included $1.7 billion in asylum-seeker cost-reduction savings that was achieved by lowering household per-diem costs and reducing the rate of growth in the asylum-seeker census.”

In total, the November and January PEGs generated $6.6 billion in gap-closing savings in fiscal 2024 and 2025, after restorations — a record level, Jiha said.

“As a result of the PEGs and better-than-anticipated economic performance in late 2023 that drove the OMB’s tax-revenue forecast upward by $1.3 billion in fiscal 2024 and $1.6 billion in fiscal 2025, the city balanced both fiscal 2024 and the fiscal 2025 preliminary budget,” he said.

He said the outyear gaps have been reduced by an average of nearly 20% and that “we are going into fiscal 2025 with near-record reserves of $8.2 billion, which is more than 10% of city revenue.”

The New York City Independent Budget Office is forecasting an almost $6 billion surplus in the current fiscal year, $2.8 billion higher than the administration’s expected surplus of $3.1 billion.

“This higher surplus results from IBO’s forecast of $900 million more in city tax revenues and $1.9 billion less in city-funded spending than presented by the administration,” said Louisa Chafee, IBO’s director, adding it estimates a fiscal 2025 surplus of $3.3 billion.

IBO’s economic forecast predicts moderate but slowing growth for the local economy.

“It has been increasingly clear in recent months that the economy has reached a position, for the time being, where the question is not whether growth will continue, but how great that growth will be,” she said.

IBO noted that more than 77,000 jobs were added in the city in 2023, but while the jobs numbers are back to pre-pandemic levels, the city still lags the national economy.

“IBO estimates the city will add around 90,000 jobs in 2024 before gradually moderating in the future years as the post-pandemic recovery fades,” she said.

Howard Cure, a partner and director of municipal bond research at Evercore Wealth Management LLC, said the city has proven to again have a resilient economy with better-than-budgeted revenues.

“Because of these added revenues the city does not have quite the same urgency to pursue the PEG and has restored some prior proposed service cuts,” Cure told The Bond Buyer.

He said, however, the city had not made a voluntary deposit to the rainy-day fund since fiscal year 2022 and the $2 billion set aside would be insufficient for the next economic contraction.

“It is reassuring to learn the city’s economy has performed so well that actual revenues were well above forecast,” said John Hallacy, founder of John Hallacy Consulting LLC.

“However, cuts remain necessary. Budget reserves remain relatively intact. The key is to continue to match recurring revenues and expenses. There is no expectation that Albany will deliver any surprises in the state’s budget for the city at this time. We still require a better solution to the immigrant crisis for the longer term,” Hallacy told The Bond Buyer.

Cure noted the cost of providing for asylum seekers was also not quite as dire due to state reimbursements.

But, he warned, “this is an area where potential costly problems can easily arise.”

Jiha said since the city stabilized the budget, the administration was able to restore several community and policing programs and the rating agencies have taken note of the city’s financial position.

“Two weeks ago, the four leading credit-rating agencies, namely Moody’s, S&P, Fitch and KBRA, cited our strong management in the face of many challenges as a reason to uphold the city’s high credit ratings and stable outlook,” he said.

“More importantly, they emphasized the success of the measures we took to help close budget gaps in fiscal 2024 and 2025 and praised our strong management of the city’s finances, with Moody’s crediting our ‘robust financial management’ in support of their affirmation,” Jiha said.

The city’s GOs are rated Aa1 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency.

The city is one of the biggest issuers of municipal bonds in the nation. In the second quarter of fiscal 2024, the city had about $39.7 billion of GOs outstanding.

The city’s Transitional Finance Authority has about $47.7 billion of debt outstanding as of the second quarter of fiscal 2024 while the Municipal Water Finance Authority has around $32.3 billion of outstanding debt.

“Because of our successful PEGs and the better-than-expected economy, we have — as promised — reassessed the need for additional savings measures,” Jiha said. “Accordingly, the mayor cancelled the fiscal 2025 executive budget agency PEG.”

Cure noted there has been a recent decline in full-time staffing levels, which helps in balancing the budget.

“However, many city services are experiencing demand at or near pre-pandemic levels so declines in staff levels requires monitoring of the impact on agency performance,” Cure said. “There is also overtime costs, which is a perpetual problem, particularly with uniformed employees, such as police, fire and corrections.”

Cure added, many city services are provided by non-profit community-based organizations for areas such as early childhood education, individuals involved in the justice system and older adult centers.

“The city often alleviates some of its cash flow problems on the backs of these organizations through late payments. There could also be potential reimbursement problems due to the end of COVID-era fiscal supports,” Cure said.

The mayor will release his revised executive budget by the end of April; the Council will issue its response and then hold a second round of hearings in May, after which they will negotiate adjustments with the mayor and the Office of Management and Budget.

By law, the Council must vote on a balanced budget by July 1.

On Sunday, the Council released its February 2024 economic and tax revenue forecast, ahead of Monday’s hearings. It estimates the city will collect $3.3 billion more in tax revenues for fiscal 2024 and 2025 than projected by the OMB.

The Council forecasts $13.6 billion in higher tax revenues than the OMB — $2.73 billion in fiscal 2026, $3.02 billion in fiscal 2027 and $4.56 billion in fiscal 2028. The higher projections are driven by improvements in the national and city economic outlook, even as overall growth is expected to be slower than in the past decade.

The forecast projects these revenues would give the city a budget surplus of $1.32 billion in fiscal 2024 and $3.53 billion in fiscal 2025 and smaller outyear gaps of $970 million in fiscal 2026, $646 million in fiscal 2027 and $35 million in fiscal 2028.

“This means we can and should be making some different budget decisions, protecting the priorities of New Yorkers,” Council Speaker Adrienne Adams and Finance Chair Justin Brannan said in a joint statement. “From 3K to CUNY, libraries, and our cultural sector, stronger-than-expected tax revenues allow us to restore the blunt cuts that weren’t necessary in the first place.”

John McCarten/NYC Council Media Unit

In his testimony, New York City Comptroller Brad Lander noted that Gov. Kathy Hochul made some provision in her fiscal 2025 budget proposal to allow the city to raise its debt limit.

“The governor’s proposal in the state fiscal 2025 executive budget to increase the city’s debt-incurring capacity by $12 billion over two years is reasonable,” he said. “It should be accompanied by a city policy that ensures debt service remains below the long-standing threshold of 15% of tax revenues. We will be releasing a detailed analysis of these issues soon.”

He said short-term decisions must not short-change the city’s future.

“Sound management and strategic investments are required to face the city’s fiscal challenges, confront the affordability crisis, and ensure strong economic growth in the years ahead,” he said.

Cure noted some of the threats the city faces in the future.

“There is still a risk from declining commercial building valuation as office vacancy rates remain high. Therefore, property tax revenues could slow and/or an additional burden can be put on residential property taxes,” he said.

“There are a number of semi-autonomous entities that could pose a budgetary challenge for the city,” he said. “This would include the MTA and the need for continued state and federal support as well as implementation of congestion pricing; Health and Hospitals Corp. and the general stress that the healthcare industry faces post-pandemic as it relates to doctor and nursing payroll, and NYCHA with lower rent collection rates and significant capital needs.”

On a more positive note, he said, “most labor contracts have been settled, offering some reduction in the risk of budgeting for employee costs. Also, current pension returns have exceeded assumptions, providing additional relief.”

However, he noted, high interest rates have caused capital borrowing to be more of a financial burden.

An analysis done by the Citizens Budget Commission found the budgets are balanced for fiscal 2024 and 2025; however, proposed spending in fiscal 2025 is $3.6 billion short of what’s needed to continue the current level of services.

“Furthermore, spending in fiscal years 2026 through 2028 — assuming ongoing programs will be fully funded — is similarly understated. Adding this, we project the future budget gaps are between $8.8 billion to $9.7 billion, even without expanding city FHEPS [Family Homelessness and Eviction Prevention Supplement] or complying with the state class-size reduction law, and assuming the administration’s revenue estimates hold,” said Ana Champeny, CBC’s vice president for research.

“That is why CBC believes it was ill advised to cancel the April PEG,” she said. “Even if higher revenue projections prove accurate, which would be good news, the city may abruptly face funding shortfalls that require significant, sudden spending cuts that can harm programs more than restraining spending to affordable levels over time.”

Cure noted the city’s budget is dependent on local, state and federal legislatures to insure sufficient funding and discipline.

“For example, the City Council will want to restore certain program cuts and staffing levels to certain agencies. The state might require more city shared program costs in areas such as transportation (MTA) or healthcare (Medicaid reimbursement) or legislate unfunded mandates such as lower teacher/student classroom ratios,” he said.

“Also, the upcoming federal election with control of Congress and the executive office at stake, could also have an impact on the city’s budget with many social welfare and capital projects dependent upon federal funding,” Cure said.