As economic uncertainty looms, NYC’s budget, outyear gaps grow

The revised $106.7 billion fiscal 2024 budget proposed by Mayor Eric Adams is the largest spending plan ever for New York City and while it contains near-record reserves, it also projects growing budget gaps in future years.

“Our fiscal year 2024 budget is balanced at $106.7 billion. That is $4 billion more than it was in January,” Adams said, adding, outyear gaps are estimated now at $4.2 billion, $6 billion, and $7 billion in fiscal 2025 to 2027.

Up from the $102.7 billion preliminary budget proposed in January, the mayor’s revised executive budget released on Wednesday contains both additional spending and savings from implementing the Program to Eliminate the Gap (PEG) cuts.

Howard Cure, director of municipal bond research at Evercore Wealth Management, expressed concern about the city’s PEG and how associated labor issues will impact the city’s ability to provide adequate services to residents.

“The city seems to be avoiding some hard decisions concerning staffing levels,” he told The Bond Buyer. “The PEG is comprised mainly of taking vacant jobs off the rolls and [adding] controls around overtime pay that has proven difficult to manage in the past.”

The city, he said, will need to determine if it is “feasible” to transfer employees to fill about 23,000 vacant positions.

Also, the city needs to assess the quality of services provided based on staffing shortages, he said.

“There is particular stress on social service agencies. Can these services be delivered more efficiently and economically through improved technology and what is the impact on staffing levels and, ultimately, the budget?” he asked.

Citizens Budget Commission President Andrew Rein said the city faces a stark and possibly dark fiscal reality in the years ahead.

“With budget gaps widening despite billions of dollars of additional revenues, the city should immediately start to prioritize essential programs, increase its operational efficiency, speed up critical hiring, and shrink lower-impact programs,” Rein said. “Absent these actions, the likely alternative is to substantially cut services in the next year or two.”

Some problems, he warned, could be even larger.

“Adding the costs of under-budgeted programs and continuing programs funded with one-time federal COVID and city money — the fiscal cliffs — reveals the future shortfalls are extremely large — $6.8 billion in fiscal year 2025 and $10 billion by fiscal year 2027.”

John Hallacy, founder of John Hallacy Consulting LLC, said future budget gaps look likely to increase.

“The stated outyear gaps are fairly large, topping out at $7 billion,” Hallacy told The Bond Buyer. “Those gaps will grow appreciably as the economy slows.”

Staffing and rising costs, he said, would be a challenge.

“Labor costs are always a focus for control,” Hallacy said. “Every new or expanded program always includes additional personnel. Are there other ways to approach these challenges?”

City Comptroller Brad Lander agreed there were big challenges ahead for the city, as federal emergency funding runs out and the budget gaps grow significantly in the outyears.

“In the short term, our preliminary assessment is that budget gaps are manageable, but more sustained attention to achieving long-term savings is necessary,” he said. “Rather than force agencies to make up savings with just a few days’ notice, the administration would do better to work with agencies on long-term savings strategies over the four-year financial plan that will help keep costs in check without adverse impacts on services.”

Cure noted besides concerns over Medicaid issues and state requirements, the city’s Health and Hospitals Corp. is under financial pressure. H+H serves an indigent population and, Cure said, it faces the same pressures that all hospitals are facing after the COVID pandemic, including labor force issues created by competition for skilled employees and burnout.

State Comptroller Thomas DiNapoli noted the cost of asylum seekers is expected to reach $2.9 billion in fiscal 2024, which is larger than the Fire Department’s operating budget.

The city says more than 57,000 asylum seekers have arrived in the past year and more than 35,000 remain in the city’s care.

“We expect this population will more than double and hit over 70,000 by June 2024,” Adams said. “We expect to spend $1.4 billion this fiscal year on the asylum seeker crisis and $2.9 billion in the next. That is $4.3 billion by July 2024, just 15 months from now.”

Based on his latest discussions with Albany, Adams said, the city is optimistic that the state budget will include as much as $1 billion in aid. The city also hopes to get as much as $600 million in assistance from the federal government.

“The city budgets $1 billion for migrants in fiscal 2025 and zero thereafter, creating some uncertainty and highlighting the difficulty with accounting for this cost,” DiNapoli said. “The city assumes the state will provide nearly a third of the funding support needed, but federal funds are not there and greater clarity from the federal government is needed to manage the situation.”

While the city spends significant resources to provide shelter for asylum seekers, Lander said, it is a short-sighted policy.

“The mayor is right that we must continue to aggressively press Washington and Albany to provide their share of meeting what are federal and state obligations,” he said. “But this budget fails to take steps within the city’s capacity to help both new arrivals and long-time shelter stayers move out of shelter into permanent housing — something that would help those families and control shelter costs.”

His office estimates that more than 99% of spending on asylum-seekers is going to emergency shelter and less than 1% toward services to help new arrivals file the paperwork to let them to work legally.

The city is one of the biggest issuers of municipal bonds in the nation. Its general obligation bonds are rated Aa2 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency.

In the second quarter of fiscal 2023, it had about $39.3 billion of GO bonds outstanding. That doesn’t include various agency debt, such as the city’s Transitional Finance Authority or Municipal Water Finance Authority, which have $45.1 billion and $32.3 billion outstanding, respectively.

The city is not planning any new money bond sales until after July 1, the Mayor’s Office of Management and Budget told The Bond Buyer.

The 51-member New York City Council held hearings in April on the preliminary plan that Adams released in January. The next step will be for the Council to hold a second round of hearings in May. After that, they will negotiate adjustments with the mayor and the OMB. By law, the council must vote on a balanced budget by July 1.

“The mayor still has to negotiate with a City Council that has traditionally been less conservative when it comes to revenue estimates and seems willing to assert itself to expand certain programs and maintain funding levels for others,” Cure said.

While the Council applauded much in the mayor’s budget, it criticized PEG cuts.

“The executive budget recognizes that the Council’s projection of an additional $5.2 billion in the budget was far from ‘overly optimistic,’ but rather quite accurate, and the city has significantly prepared for uncertainty with historic reserves of approximately $8 billion,” Speaker Adrienne Adams and Council Finance Chair Justin Brannan said in a joint statement.

However, they said, despite PEG adjustments, the budget still includes PEGs totaling $1.6 billion and maintains all other previously enacted and proposed PEGs, totaling over $4 billion in fiscal 2023 and 2024.

“The executive budget still leaves our libraries facing significant service cuts, agencies that deliver essential services harmed and programs that deliver solutions to the city’s most pressing challenges without the investments needed,” they said.

“Ultimately, New York City needs a responsible budget that effectively and efficiently prepares us for success by meeting the needs of New Yorkers and protecting against future risks,” they said.

Cure noted there were also contentious negotiations in Washington around the debt ceiling and the federal budget.

“I would not expect any additional aid for cities and states coming from Washington and there is the potential for cuts in funding for urban programs going forward,” Cure said. “This is significant as NYC has spent the bulk of its COVID-related federal allocation.”

Hallacy said some options to keep future budgets balanced could be painful.

“Calling for any more taxes is very difficult when facing the prospects of a recession,” he said. “Hopefully, we will not have to go down that route.”