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May 2013

Reestimating the Mayors Plan:


An Analysis of the 2014 Executive
Budget & Financial Plan Through 2017
Late last month, the u.3. 0overnment Aooountability 0ftoe issued a report presenting a gloomy
pioture of the near-term and long-term outlook for state and looal budgets aoross the oountry. 1ust a
few days later, Mayor Miohael Bloomberg presented his Lxeoutive Budget for 2014 and linanoial Plan
through 2017 for New ork City. Muoh like the federal agenoy's report, the Mayor's oomments on the
oity's tsoal oondition inoluded a heavy dose of warnings about the oity's ability to meet its expenses.
et the budget doouments themselves tell a somewhat different story.
lB0's latest eoonomio foreoast and reestimate of revenues and expenses under the Mayor's new budget
plan presents a pioture of a oity that is in better tsoal oondition than many other munioipalities. 1ax
revenues are expeoted to grow at an average annual rate of nearly 5 peroent, outpaoing the antioipated
growth in expenditures over the same period. lB0 projeots job growth of nearly 57,000 this oalendar
year, 72,000 next year, and average growth of 75,000 annually in 2015 through 2017.
Based on these and other faotors, we projeot that under the Mayor's plan the oity will end the
ourrent tsoal year with a surplus of $2.1 billionabout the same as estimated by the Bloomberg
Administration. lor 2014, lB0 projeots a surplus of $476 million. 0ur projeotion for 2015 is a relatively
modest shortfall of $930 million, just 1.7 peroent of oity-generated revenue, an amount easily oovered
by routine end-of-year aooounting adjustments.
3till, the budget doouments do not tell the whole story of the tsoal issues oonfronting the oity. 1he
budget plan's balanoe rests on the assumption there will be no retroaotive raises for munioipal
employees, many of whom have been working under oontraots that expired three or more years
ago. under one plausible soenario presented by lB0 in our report on the Mayor's Preliminary Budget
for 2014, the oost of a settlement would add $4.5 billion to oity expenses through the end of this
tsoal year and it would inorease annual oosts in 2014 and beyond by $1.8 billion. 1he still unfolding
oonsequenoes of federal outbaoks along with the still developing plans for how the oity will proteot
itself from the effeots of future storms like 3andy oould also upend the oity's tsoal balanoe.
The Economy and Taxes
Economic Overview. lB0's foreoast for 2013 is for modest eoonomio growth at the u.3. level, with
little aooeleration from last year. 3tronger growth in gross domestio produot (0UP) is expeoted in the
following years, partioularly 2014 and 2015. (unless otherwise noted in this seotion on the eoonomy,

Fiscal Brief
New York City Independent Budget Ofce
Tables on IBOs Revenue and Expenditure Estimates @ www.ibo.nyc.ny.us
IBO
New ork City
lndependent Budget 0ftoe
Ronnie Lowenstein, Uireotor
110 william 3t., 14th toor
New ork, N 10038
1el. (212) 442-0632
lax (212) 442-0350
iboenews@ibo.nyc.ny.us
www.ibo.nyc.ny.us
NEW YORK CITY INDEPENDENT BUDGET OFFICE 2
years refer to oalendar years rather than tsoal years.)
1he expeotation of weaker growth this year stems from
antioipation that federal tsoal polioytax inoreases that
took effeot in 1anuary following the tsoal oliff negotiations
and federal spending outs under the sequesterwill be a
drag on the eoonomy.
Measured in terms of jobs, the looal eoonomy has bounoed
baok strongly sinoe the end of the 0reat Reoession. Although
we expeot looal employment growth to slow this year due in
part to this tsoal drag, strong job gains are foreoast to resume
next year. owever, growth in wages and earnings in the oity
have not kept paoe with job growth as the oomposition of the
oity's work foroe shifts towards more lower paying industries.
1he seourities industrydiminished but still oentral to the looal
eoonomygenerated strong protts and bonuses in 2012, but
these are expeoted to be smaller in 2013 through 2017.
U.S. Economy. u.3. eoonomio growth pioked up in the trst
quarter of 2013, though slower growth is expeoted later
in the year. Real 0UP grew 2.5 peroent (initial estimate)
in the trst quarter, oompared with 0.4 peroent growth in
the fourth quarter of 2012. (unless otherwise noted, all
monthly and quarterly tgures are seasonally adjusted.)
lB0 expeots that a oombination of payroll tax inoreases
and federal government spending outs will restrain what
was already expeoted to be only moderate real 0UP growth
for 2013 as a whole to 2.2 peroent, the same rate as last
year. with tsoal drag expeoted to abate by the end of the
year, and barring any new shooks, oonditions favorable
for sustained private-seotor growth are foreoast to boost
eoonomio growth to 3.4 peroent in 2014.
Although oonditions favorable to sustained growth have
been in place for some time, the economy has been slow to
reoover. Business protts and balanoe sheets are robust, the
banking system has been reoapitalized and is inoreasingly
willing to extend oredit, households have shed muoh of the
debt built up during the boom years, interest rates remain
near reoord lows, and there is oonsiderable pent-up demand
for everything from applianoes to oars to homes. But annual
growth of real 0UP has just been about 2 peroent in eaoh
of the past three years and real earnings growth has been
minimal, oonstraining demand for output. 3imilarly, modest
job growth in the private seotor ooupled with oontinued
deolines in publio-seotor employment have only resulted in a
very gradual deoline in the rate of unemployment, from 9.9
peroent at the reoession's trough (fourth quarter of 2009) to
7.7 peroent in the trst quarter of 2013.
0ne faotor behind the slow paoe of the reoovery has been
the prolonged slump in the market for housing. But over
time the huge inventory of homes that was a legacy of the
housing boom and subsequent reoession has been slowly
reduoed. with inoreases in home sales and rising prioes
signaling that the market has turned around, lB0 expeots
the paoe of housing starts to aooelerate in 2013 and 2014,
fueling employment in oonstruotion and other seotors, suoh
as manufaoturing, truoking, and utilities.
Uespite the momentum in the private seotor from housing's
revival, eoonomio growth is expeoted to slow in the seoond
and third quarters as the impaot of tsoal austerity peaks.
Although sequestration began in Maroh, its impaot on real
0UP growth will inorease through the third quarter beoause
it takes time for these aoross-the-board outs to aotually
affeot government outlays. 1he 2 peroentage point inorease
in payroll taxes that took effeot on 1anuary 1
st
of this year
has already oontributed to an annualized 4.4 peroent
deoline in disposable (after-tax) personal inoome in the trst
Total Revenue and Expenditure Projections
Dollars in millions
2013 2014 2015 2016 2017
Average
Change
Total Revenues $71,771 $70,874 $74,499 $77,789 $80,788 3.0%
1otal 1axes 44,412 45,068 48,351 51,186 53,565 4.8
Total Expenditures 71,771 70,399 75,428 77,632 79,722 2.7%
IBO Surplus/(Gap) Projections $- $476 ($930) $157 $1,065
Adjusted for Prepayments:
1otal Lxpenditures $72,109 $72,381 $75,570 $77,632 $79,722 2.5
City-lunded Lxpenditures $50,191 $52,393 $55,328 $56,941 $58,524 3.9
N01L3: lB0 projeots a surplus of $2.093 billion for 2013, $68 million below the Bloomberg Administration's foreoast. 1he surplus is used to prepay some
2014 expenditures, leaving 2013 with a balanoed budget. Revenue and expenditures inolude $1.5 billion in urrioane 3andy federal oategorioal funding in
2013. Lstimates exolude intra-oity revenues and expenditures. City-funded expenditures exolude state, federal, and other oategorioal grants, and interfund
agreement amounts.ligures may not add due to rounding.
New York 0|r, lnoepenoenr Buoger Ufhoe
3 NEW YORK CITY INDEPENDENT BUDGET OFFICE
quarter, though it will take several quarters for its impaot on
oonsumer spending to be fully realized.
Personal oonsumption spending rose 4.1 peroent (annual
basis) in the trst quarter, fueled by a reduotion in
household savings andto a lesser extentby deoreases
in gas prioes and the wealth effeot of rising equity and
housing markets. But given the deoline in disposable
inoome that results from elimination of the payroll tax out,
it is unlikely that this rate of oonsumer spending growth will
be sustained.
3low growth in oonsumption and outs in government
spending will oonstrain eoonomio growth for the remainder
of this year. lor 2013 as a whole, lB0 foreoasts that real
0UP will rise 2.2 peroent, the same rate as 2012, and
(nominal) personal inoome will inorease 3.9 peroent.
we expeot the u.3. to add 2 million jobs in 2013, about
200,000 less than in 2012. 1he slow paoe of employment
growth will barely nudge the unemployment rate down over
the oourse of 2013, the unemployment rate is projeoted to
average 7.6 peroent for the year, slightly less than the rate
in the last quarter of 2012. with a still-high unemployment
rate and little intationprojeoted to be 2.0 peroent in
2013the lederal Reserve is expeoted to maintain its
aooommodative polioy of keeping interest rates low and
expanding the money supply.
Loonomio growth is expeoted to aooelerate in 2014 as the
impaot of tax inoreases and spending outs diminishes. lB0
foreoasts real 0UP growth of 3.4 peroent in 2014, whioh would
be the highest annual growth rate sinoe 2004. Personal inoome
growth will also piok up to a projeoted 6.5 peroent. with the
addition of 2.3 million new jobs in 2014, the unemployment
rate will fall further, to an average of 7.0 peroent.
lB0 expeots the solid eoonomio growth of 2014 to oontinue
into 2015, when real 0UP is foreoast to rise to 3.6 peroent.
Projeoted employment growth of 3.6 million jobs during the
year should bring the unemployment rate below the lederal
Reserve's 6.5 peroent polioy threshold, prompting the led
to begin winding down its monetary stimulus. After 2015,
eoonomio growth will moderate but still be fast enough to
reduoe the unemployment rate further, from an average of
6.2 peroent in 2015 to 5.8 peroent in 2016 and 5.5 peroent
in 2017.
1he Mayor's 0ftoe of Management and Budget's (0MB)
forecast of U.S. economic growth is substantially below
lB0's for both this year and next. 0MB projeots that real
0UP growth will slow to 1.6 peroent in 2013, well below
lB0's foreoast of 2.2 peroent. 1he differenoe between the
two 0UP foreoasts for 2014 is similar: 2.7 peroent for 0MB
oompared with 3.4 peroent for lB0.
1wo of the biggest risks to lB0's maoroeoonomio foreoast
oontinue to be eoonomio problems in Lurope and federal
tsoal polioy here in the united 3tates. 1he Luropean
union's sovereign debt problems have spread to yet
another oountry (Cyprus) and most oountries in the
unioninoluding the four largest eoonomiesare either in
reoession or oonsidered at risk for a reoession. 1he politioal
impasse over near-term federal tsoal polioy also poses a
major risk to the foreoast. Another showdown in Congress
over the federal debt limit, or over the budget itself, oould
undermine oonsumer and business oontdenoe, similar to
what happened when brinkmanship over the debt limit led
to the downgrade of u.3. debt in 2011.
linally, lB0's eoonomio foreoast is premised on there being
no external shooks to the u.3. eoonomy, suoh as a disruption
in the supply of oil that would oause oil prioes to spike.
Local Economy. After urrioane 3andy brought New ork
City employment growth almost to a standstill in the fourth
quarter of 2012, a large rebound was expeoted (espeoially
in oonstruotion, trade, and leisure and hospitality) early in
2013. lnstead, the oity has had solid but not speotaoular
job growth so far this year, with employment inoreasing
by 21,000 in the trst quarter. 1hat paoe is expeoted to
moderate over the oourse of the year due primarily to the
lagged impaots of the reoent federal tax inoreases and
sequester on the looal eoonomy. As a result, lB0 projeots
an employment gain of 56,900 (1.5 peroent) in the oity
for 2013. 1his is almost unohanged from our previous
foreoast. Lmployment growth is expeoted to piok up speed
again in 2014, however, with the oity's own oonsiderable
momentum reinforoed by inoreasing strength in the
national eoonomy. lB0 foreoasts oity employment growth of
72,200 (1.8 peroent) in 2014, followed by average growth
of 75,000 (1.8 peroent) per year in 2015 through 2017.
under this foreoast, total payroll employment in New ork
City would surpass the 4 million mark about midway through
2014. By the end of 2017, lB0 expeots the oity eoonomy to
have added 580,000 jobs over an eight-year (32 quarter)
stretoh dating from the end of the reoession in 2009.
Moreover, the unemployment rate of oity residents, whioh
has remained stubbornly high, is projeoted to tnally respond
to the strong job growth. 1he unemployment rate, whioh
NEW YORK CITY INDEPENDENT BUDGET OFFICE 4
averaged 9.2 peroent in 2012, is expeoted to fall to 8.5
peroent in 2013, 7.3 peroent in 2014, and 4.9 peroent by
2017. 1his is a steeper deoline than we foreoast in Maroh.
Better than half of the job growth over the 2013 through
2017 period will be supplied by professional and business
servioes (19,300 jobs added per year, 27.3 peroent of total
growth) and eduoation and health oare servioes (17,200
jobs per year, 24.3 peroent). Another quarter of the overall
growth oomes from leisure and hospitality (8,800 jobs per
year) and trade (8,300 jobs)both buoyed by the oity's
vibrant tourism industry. 1hese four superseotors were also
key oontributors to the oity's employment growth in the
2004 though 2008 period leading up to the reoession.
But there are several notable differenoes in the
oomposition of projeoted job growth as oompared with the
prereoession period. ln partioular, in the earlier expansion
the seourities seotor added 4,800 jobs per year, aooounting
for 9.1 peroent of net oity job growth, while manufaoturing
lost 6,200 per year, offsetting 11.8 peroent of the
growth. ln our ourrent foreoast for 2013 through 2017,
the manufaoturing deoline abates to only 500 per year,
offsetting 0.7 peroent of job growth. But at the same time
seourities job growth weakens to 1,400 per year, good for
only 2.0 peroent of the looal eoonomy's projeoted aggregate
employment growth through 2017.
1he seourities seotor is also expeoted to oontribute muoh
less to aggregate real wage growth in the city over the
2013 through 2017 period (19.9 peroent) than it did in
the previous expansion (55.8 peroent over 2004 through
2008). 1his is not just a funotion of the falloff in seourities
employment growth: average wages in seourities are also
growing more slowly. lollowing an 8.6 peroent drop in 2012,
real average seourities wages are projeoted to grow 4.5
peroent a year from 2013 through 2017. 1his is less than
half the paoe of the years before the eruption of the tnanoial
orisis. 1his reteots, in part, the inoreased use of deferred
oompensation in lieu of large oash bonuses in the industry.
As the seourities seotor's oontribution to aggregate wage
growth shrinks, the oontributions from seotors suoh as
eduoation and health oare, government, and trade are
expeoted to expand in the foreoast period. 1hese seotors
all have muoh lower average wages than seourities. 1he
result is that overall wage growth in the oity, and also overall
personal income growth, will be not be as strong as in past
expansions. lB0's foreoast oalls for average personal inoome
growth of 5.7 peroent over the 2013 through 2017 period.
1his is 3.9 peroent per year after adjusting for intation, lower
than the 4.6 peroent average rate of real personal inoome
growth in the 2004 through 2008 expansion.
Aggregate wage and personal inoome growth have also
been oonstrained by the deoline in average hours worked
sinoe the reoession. while private-seotor employment in
New ork City stood 4.3 peroent higher in the trst quarter of
2013 than in the trst quarter of 2008, the average weekly
hours of all private employees was 3.6 peroent lower. Most
of the drop ooourred between 2008 and 2009, but there
has been renewed downward pressure on the private-seotor
workweek in 2012 and 2013. As a result, aggregate private-
seotor hours worked in the oity have barely advanoed, up
just 0.5 peroent oompared with tve years ago.
Another faotor affeoting personal inoome growth in 2013
is the expiration of the payroll tax holiday in 1anuary.
Contributions for sooial insuranoe, whioh are netted out of
reported personal inoome, are expeoted to jump by $8.0
billion in New ork City this year. 1his is nearly four times
the normal annual increase in contributions.
1he subdued employment and wage growth in seourities
reteot the oonstraints and unoertainties that oontinue to
impaot the industry in the aftermath of the tnanoial orisis.
with regulatory reform still very muoh a work in progress
(to date fewer than half of the Uodd-lrank regulations have
been tnalized), we do not antioipate a return to the old
normal" on wall 3treet any time soon. Another sign of the
ohange is the post-orisis plunge in broker-dealer revenues
of New ork 3took Lxohange (N3L) member trms.
Revenues as of 2012 ($161.5 billion) were still well under
half of their 2007 peak ($352.0 billion). ln lB0's foreoast, it
will be 2017 before revenues again exoeed $200 billion.
0n the other hand, broker-dealer protts were exoeptionally
strong last year ($23.9 billion). we expeot protts to dip
to $15.4 billion in 2013 and then to build inorementally
to $17.4 billion by 2017. As we have disoussed in prior
foreoasts, solid or even strong wall 3treet protts despite
substantially lower revenues are made possible by a steep
deoline in member trm interest expenseswhioh in turn
has been made possible by the lederal Reserve's deoision
to keep interest rates at reoord-low levels.
Tax Forecast. 1ax revenues in 2013 have been very
strong and by the end of the year are expeoted to total
$44.4 billion, 7.5 peroent higher than in 2012. 3ome of
the inorease is due to a shift in the timing of oapital gains
5 NEW YORK CITY INDEPENDENT BUDGET OFFICE
realizations and bonus payments as taxpayers moved
inoome into tax year 2012 when federal tax rates were
lower. 1he shift means less revenue for subsequent years,
partioularly 2014 when $45.1 billion in tax revenue is
expeoted, an inorease of only 1.5 peroent. lB0 expeots
stronger tax revenue growth to resume in 2015, averaging
5.9 peroent annually through 2017. lB0's tax foreoast is
slightly below 0MB's for 2013, but thereafter, lB0's outlook
exoeeds 0MB's with the differenoe widening eaoh year from
$664 million in 2014 to $2.7 billion in 2017.
Business Income Taxes. lollowing 2012, when oombined
revenue from the oity's three business inoome taxes grew
just 1.2 peroent over the previous year, lB0 foreoasts
business tax revenue growth of 4.4 peroent this year,
generating $5.6 billion. Revenue growth will be similar
in 2014 (4.3 peroent) but then aooelerate to an annual
average rate of 9.1 peroent in the 2015-2017 period,
with the fastest growth of eaoh tax ooming in 2015 or
2016years in whioh lB0's foreoasts of national and
looal eoonomio growth are strongest. By 2017, oombined
revenue from the three taxesthe general oorporation
tax (0C1), the banking oorporation tax (BC1), and the
uninoorporated business tax (uB1)will reaoh $7.6 billion.
while the 0C1 generates the most revenue of the three
taxes, it is projeoted to grow the slowest: 2.9 peroent
this year, to yield $2.5 billion. Annual growth will average
6.6 peroent in the next four years, yielding $3.2 billion
in 2017 revenue. Although total protts of N3L-member
trms reaohed their third highest annual total on reoord
in oalendar year 2012, the latest available data (through
1anuary 2013) on payments by industry indioates that 0C1
growth this year is being driven by the professional servioes
and information seotors, rather than tnanoe. Many tnanoial
oorporations appear to have overpaid their oalendar year
2011 liabilities, allowing them to reduoe payments for 2012
liability. lB0 is projeoting faster growth for tsoal year 2014
as oorporate protts oontinue to rise, with 0C1 revenue
totaling $2.6 million. 0C1 revenue growth is expeoted to
aooelerate from 2014 through 2016 and oontinue into
2017 when our 0C1 foreoast reaohes $3.2 billion.
1hough gross BC1 payments are strong this year, espeoially
those made by oommeroial banks, large refunds in reoent
months have lowered expeoted revenue growth in the ourrent
year. lB0's foreoast for 2013 is $1.3 billion, 4.5 peroent
higher than in 2012. ln 2014 we projeot a $60 million (3.0
peroent) deoline in BC1 reoeipts, as banks' revenue potential
is oonstrained by inoreased oapital requirements, regulatory
unoertainties, and the maintenanoe of tight lending
standards. After 2014, BC1 growth is expeoted to resume
strongly as the regulatory environment becomes clearer
and as faster eoonomio growth takes hold. BC1 revenue is
expeoted to reaoh $1.8 billion in 2017.
uB1 revenue growth has been the strongest among the
three business inoome taxes so far in 2013. Revenue is
expeoted to be $1.7 billion this year, 6.7 peroent more than
2012 oolleotions. lB0 is expeoting oonsistently fastthough
hardly unpreoedentedgrowth in subsequent years as strong
earnings growth in the professional and business servioe,
tnanoial servioe, and information seotors is expeoted. uB1
revenues in 2014 are foreoast to be $1.9 billion10.1
peroent growth over 2013. 1hey will then grow by an annual
average of 9.6 peroent during the 2015-2017 period, with
uB1 revenue reaohing $2.5 billion in 2017.
1here are only modest differenoes between lB0's and
0MB's foreoasts of the oombined business inoome taxes
in 2013 and 2014, with lB0 predioting $164 million (2.8
peroent) less than 0MB for 2013 and $115 million (2.0
peroent) more in 2014. After 2014, lB0's foreoasts for eaoh
of the taxes are higher than 0MB's, due to the faster growth
in lB0's eoonomio foreoast. By 2017, the differenoe in
projeoted revenue for the three taxes totals $1.1 billion.
Personal Income Taxes. A surge of estimated payments
made in April by taxpayers tling for extensions has led lB0
to inorease its 2013 foreoast of personal inoome tax (Pl1)
revenue by $522 million, to $9.2 billion15.1 peroent growth
over 2012 oolleotions. ln 2014, however, Pl1 revenue will
deoline 5.7 peroent, to $8.6 billion. 1his pattern of very strong
revenue growth followed by revenue deoline is due to a shift of
oapital gains realizations and year-end bonus oompensation
into oalendar year 2012 in antioipation of inoreases in federal
tax rates, boosting tsoal year 2013 revenue at the expense of
2014 and, to a lesser extent, subsequent years.
lB0's foreoast for 2013 estimated payments, the
oomponent of Pl1 oolleotions that inoludes most oapital
gains liability, is $2.9 billion, 36.8 peroent greater than
payments in 2012. 3imilarly, 2013 payments with tnal
returns, whioh also reteot oapital gains, are foreoast to rise
18.0 peroent. with a signitoant amount of gains that would
have been realized in oalendar year 2013 aooelerated into
2012, there will be fewer realizations this year and next,
resulting in a 23.4 peroent fall-off in estimated payments
for 2014. But the strength of the Pl1 this year is not simply
the result of aooelerated oapital gains realizations fueling
NEW YORK CITY INDEPENDENT BUDGET OFFICE 6
estimated payments and payments with tnal returns.
Based on strong oolleotions to date in 2013partioularly
during the winter months when bonuses are typioally
paidwe also expeot a 6.5 peroent inorease in withholding,
reteoting employment gains and personal inoome growth
this past year. lor 2014, we antioipate slower withholding
growth of 4.2 peroent, due to the impaot of weaker u.3.
growth on the oity's eoonomy and the likelihood that next
year's bonus season will not be as strong.
with personal inoome growth in the oity expeoted to double
after oalendar year 2013 and an average annual gain of
77,000 jobs foreoast for oalendar years 2014 and 2015,
lB0 foreoasts $9.8 billion of Pl1 revenue in 201513.2
peroent greater than in 2014. ln 2016 and 2017, lB0
projeots slower revenue growth at an annual average rate of
3.1 peroent, with revenues reaohing $10.4 billion in 2017.
lB0's 2013 Pl1 foreoast is only $36 million (0.4 peroent)
higher than 0MB's. 1he differenoe between the two
foreoasts grows to $464 million in 2014, the result of
faster inoome and employment growth in lB0's eoonomio
outlook and of 0MB foreoasting a muoh sharper drop in
estimated payments. 1he differenoes in the eoonomio
foreoasts oontinue to widen the divergenoe between
the Pl1 projeotions, to $725 million in 2015 and roughly
comparable amounts thereafter.
Real Property Tax. lB0 has made only minor ohanges to
its foreoast of real property tax revenue sinoe Maroh. 0ur
2013 foreoast has been inoreased by $100 million to $18.6
billion3.4 peroent greater than oolleotions in 2012. 1he
revision to our foreoast for 2014 is even smaller, a deoline of
$11 million, with all of the ohanges in various oomponents
of the reserve (prior year oolleotions, oanoellations, refunds,
delinquenoies, and revenue from the lien sale), our levy
foreoast is unohanged. lB0 now expeots property tax
revenues of $19.5 billion next year, up 4.9 peroent from
2013. As in Maroh, our foreoast assumes a larger than usual
tentative to tnal roll ohange, due to expeoted assessment
reduotions for properties damaged during urrioane 3andy.
1here are also minor ohanges to our levy and reserve
foreoasts for 2015 and 2016, resulting in very small ohanges
in the property tax revenue foreoast for eaoh year.
lor 2014 through 2017, lB0 projeots that assessed value
for tax purposes will grow at an annual rate of 2.8 peroent
for Class 1, 4.2 peroent for Classes 2 and 3, and 6.4
peroent for Class 4. 1he pipeline of assessed value of Class
2 and 4 properties waiting to be phased in is expeoted to
inorease throughout the foreoast period, from $16.2 billion
after the 2014 roll to $20.1 billion after 2017. After 2014,
inoreases in property tax revenue will average 5.1 peroent
a year, rising from $19.5 billion in 2014 to $20.3 billion in
2015 and reaoh $22.6 billion in 2017.
lB0's and 0MB's foreoasts of 2013 property tax revenue
are virtually the same. lor 2014, the foreoasts are also
very similar: lB0's revenue foreoast is $21 million lower.
lB0's foreoast of a lower 2014 tax levy than 0MB projeots
is partly offset by our expeotation that the ooop and oondo
abatement will oost the oity less in foregone tax revenue. lor
the remainder of the period, lB0's foreoast of property tax
revenues is higher than 0MB's, by a small amount in 2015
($18 million) and by larger amounts in 2016 ($207 million)
and 2017 ($537 million). 1he growing divergenoe between
the foreoasts is attributable to lB0's projeotion of faster
growth in the assessed value of properties for tax purposes.
Transfer Taxes. 1he oity's real estate markets oontinue to
reoover after bottoming out in 2010. lB0 foreoasts an 18.7
peroent inorease in real property transfer tax (RP11) reoeipts
in 2013, to almost $1.1 billion, and a 33.8 peroent inorease
in mortgage reoording tax (MR1) reoeipts, to $718 million.
MR1 revenues have inoreased at a faster rate than either
taxable real estate sales or the RP11 this year. Both
oommeroial mortgages, whioh are taxed at a higher rate
than residential mortgages, and mortgage retnanoing,
whioh generates MR1 revenue without a oorresponding
sale, have been strong. 1hough New ork City-speoito data
are not available, national data from the Mortgage Bankers
Assooiation indioate that from 1uly 2012 through Maroh
2013, retnanoing aooounted for around three-fourths of
the value of residential mortgage originations.
1he growth in RP11 revenue this tsoal year has oome
primarily through oommeroial real estate transaotions33
peroent higher through Maroh than during the equivalent
period in 2012. RP11 revenue from residential sales was up
18 peroent. ln antioipation of higher oapital gains tax rates
effeotive 1anuary 1, 2013, sales of both oommeroial and
to a lesser extentresidential properties surged at the end
of oalendar year 2012. Many transaotions that took plaoe
late in oalendar year 2012 were not reoorded until 1anuary
2013, inoluding the two largest taxable sales of oommeroial
properties so far in 2013, eaoh greater than $1 billion.
1he inorease in oapital gains taxes shifted the timing of some
real estate transaotions that otherwise would have ooourred
in tsoal year 2014. As a result, slower revenue growth in
7 NEW YORK CITY INDEPENDENT BUDGET OFFICE
2014 is projeoted for eaoh tax. lB0 foreoasts $1.1 billion
in RP11 oolleotions2.4 peroent growthand $746 million
in MR1 reoeipts, an inorease of 3.9 peroent. lB0 projeots
faster revenue growth for the 2015 through 2017 period, at
average annual rates of 11.1 peroent for the RP11 and 9.8
peroent for the MR1. RP11 inoreases will be fueled by both
residential and oommeroial sales, and mortgage aotivity will
remain strong. lB0 expeots that mortgage rates will begin
to olimb in 2015 but will remain low enough by historioal
standards to enoourage mortgage aotivity. By 2017, RP11
revenue is foreoast to reaoh $1.5 billion and MR1 revenue
$988 million, for a total of around $2.5 billionstill well
below the 2007 peak of $3.3 billion. ln general, lB0's
foreoast for the transfer taxes are slightly higher than 0MB's
but follow a similar trajeotory, lB0's foreoast of oombined
RP11 and MR1 revenues over the entire 2013 through 2017
period is 1.3 peroent above 0MB's.
Sales Tax. ln reoent months sales tax oolleotions have
been strong, and lB0 has inoreased its foreoast of sales tax
revenue to $6.1 billion in 2013, 4.8 peroent over last year's
oolleotions. 1hrough Maroh sales tax revenue is up 5.2
peroent over the same period last yearan inorease that
is greater than expeoted given the expiration of the payroll
tax holiday at the start of the oalendar year. But revenue
growth in the remainder of tsoal year 2013 and in 2014
is expeoted to slow, as the eoonomio effeots of the payroll
tax inorease and sequestration beoome more broadly felt.
lB0's foreoast of sales tax revenue for 2014 is $6.3 billion,
4.2 peroent greater than projeoted for 2013.
3ales tax reoeipts have grown strongly in part beoause
the tow into the oity of reoord numbers of tourists has
oontinued, even through 1anuary and lebruarymonths
when the number of tourist visits typioally fall off. (1ourists
not only pay sales taxes on their purohases in stores and
restaurants, they also pay sales tax on hotel rooms, in
addition to a separate tax on hotel oooupanoy.) 3ales tax
reoeipts in reoent months were also likely bolstered by
households rebuilding and replaoing property and goods
lost to urrioane 3andy.
with the expeotation that inoome and employment growth
will aooelerate by the end of this oalendar year as tsoal
drag abates, lB0 projeots $6.7 billion in sales tax reoeipts
in tsoal year 2015strong but hardly unpreoedented
growth of 5.3 peroent over the previous year. lnoreases in
sales tax revenues are expeoted to average 4.8 peroent
a year over the remainder of the foreoast period, with
oolleotions reaohing $7.3 billion in 2017.
lB0's sales tax foreoasts for 2013 and 2014 are only
0.3 peroent greater than 0MB's, by $20 million and $22
million, respeotively. Beoause differenoes between 0MB's
and lB0's projeotions of employment and inoome inorease
over the foreoast period, the differenoe between lB0's and
0MB's sale tax foreoasts also widens, from $93 million in
2015 to $246 million in 2017.
Expenditures
Based on our latest projeotions, annual inoreases in
tax oolleotions will outpaoe lB0's estimate of growth in
spending under the Mayor's budget plan. lB0 projeots that
spending in 2014 will total $70.4 billion from all revenue
souroes, over $600 million more than projeoted by the
Mayor. when we adjust our 2014 estimate to aooount for
the use of the expeoted 2013 surplus to prepay some of
next year's expenses, total spending to meet 2014 needs
is $72.4 billion, an inorease of 0.4 peroent. Looking just at
oity-funded spending, whioh exoludes the one-time federal
funds in the wake of 3andy, expenditures are projeoted to
grow from $50.2 billion this year to $52.4 billion in 2014,
an inorease of 4.4 peroent.
lB0's higher expenditure estimate in 2014 inoludes our
projeotion that oity agenoies will need to spend about
$120 million more than budgeted under the Bloomberg
Administration's plan. 1his additional spending is in a
number of areas suoh as $71 million for health insuranoe
for oity employees, $20 million for a likely runoff eleotion
following this 3eptember's primaries, $15 million in
overtime for oorreotion oftoers, and $14 million for
homeless shelters for single adults and families.
Where Costs Are Rising. while spending for most oity
funotions remains tat under the Mayor's budget plan, there
are several expenditure oategories that oontinue to rise. 0ne
of the largest and fastest growing oity expenditures is the
oost of health oare insuranoe and other fringe benetts for
oity employees. ealth and related benett oosts are expeoted
to inorease by $136 million in 2014 and total just over $5.0
billion (inoluding the use of the last $1.0 billion left in the
Retiree ealth Benetts 1rust fund). ealth oosts are expeoted
to olimb an additional $403 million in 2015 and total nearly
$5.5 billion. By 2017, health oare and related benett oosts
are projeoted to reaoh $6.4 billionan inorease of $1.5 billion
from this yearrising at an average annual rate of 6.9 peroent.
Rapid growth in health oare oosts is not unique to New ork
City. Last month's 0overnment Aooountability 0ftoe report
NEW YORK CITY INDEPENDENT BUDGET OFFICE 8
on state and looal budgets oited rising health oare oosts as
the primary long-term tsoal ohallenge faoed by statehouses
and oity halls nationwide. 1he report also notes that the
effeot of the Patient Proteotion and Affordable Care Aot
on the growth rate of health care costs for governments
remains uncertain.
Another large and fast-growing oost is debt servioe on
the money the oity borrows for its oapital projeots suoh as
building or expanding sohools, txing roads and bridges,
and buying sanitation truoks or polioe oars. 1he Mayor's
plan projeots debt servioe spending to rise by $253 million
in 2014 and total $6.2 billion after adjusting for the use of
the 2013 surplus to prepay some of the next year's oosts.
Uebt servioe is expeoted to inorease by an additional $933
million in 2015 and reaoh nearly $7.2 billion. By 2017, the
last year of the tnanoial plan, debt servioe is projeoted to
reaoh $7.7 billiona $1.7 billion inorease from this year
rising at an average annual rate of 6.6 peroent.
Although low-interest rates over the past few years have
enabled the oity to borrow at lower-than-expeoted oosts and
retnanoe some existing debt to reduoe future oosts, debt
servioe spending is projeoted to oontinue to rise beoause
of the oity's many, and in some oases very oostly, oapital
projeots. 1he Bloomberg Administration's latest Capital
Commitment Plan for 2013-2017 spends $44.5 billion on
projeots, with $34.3 billion of the funds ooming from the
oity. Among the initiatives in the plan are $10.6 billion in
sohool oonstruotion projeots, $547 million for the design
and reoonstruotion of a new detention oenter on Rikers
lsland, and $151 million for the planned renovation of the
New ork Publio Library's oentral branoh on 42
nd
Street.
while not growing as fast in peroentage terms as some
other parts of the oity's operating budget, spending by the
Uepartment of Lduoation is rising sharply in dollar terms.
Lduoation spending is expeoted to rise by $711 million
and total nearly $19.9 billion in 2014 and then inorease
by another $592 million in 2015 when it is expeoted to
reaoh almost $20.5 billion. By 2017, eduoation spending
is expeoted to reaoh $21.7 billiona $2.6 billion inorease
rising at an average annual rate of 3.2 peroent.
A substantial share of the growth in eduoation spending
is largely funded by an expeoted rise in state aid. 1his
inoludes the restoration of $250 million in state assistanoe
for 2014 the oity lost this year beoause of the impasse in
developing a plan for teaoher evaluations. with the state
eduoation oommissioner now responsible for ensuring the
oity has an evaluation plan in plaoe for next year, the oity
will avoid a seoond penalty of $213 million in aid for 2014.
1he Mayor's plan also inoludes an inorease of $121 million
of state foundation aid in 2014.
Rise in Pension & Medicaid Costs Ease. Although the
oosts of pensions for munioipal employees and the oity's
Medioaid expenditures oontinue to be substantial oosts in
dollar terms, their rate of growth has slowed oonsiderably
from past years. 1he Mayor's tnanoial plan projeots the
oity's pension oontributions will grow from about $8.1
billion this year to nearly $8.7 billion in 2017, an annual
average inorease of 1.8 peroent. with pension fund
investments earning a return of roughly 12.0 peroent this
tsoal year to date, well above the ourrent assumption
of 7.0 peroent, it is likely the oity's pension oosts will be
reestimated downward in 2015 and beyond as the benett
of this year's good returns begin to be phased in.
while the oity's budget for Medioaid spending is also
substantial, it is no longer growing rapidly. 1his is largely
due to the oap enaoted by Albany several years ago to
ease the pressure of then fast-rising Medioaid oosts on
looal budgets. Medioaid spending is projeoted to grow from
$6.5 billion this year to just under $6.6 billion in 2017, an
average annual inorease of 0.3 peroent.
Spending Cuts. 1he budget plan for 2014 inoludes a $1.0
billion set of proposals to reduoe oity-funded spending
and bring in additional revenue. Muoh of the Program to
Lliminate the 0ap (PL0s) remains the same as when trst
proposed in the November 2012 linanoial Plan. 1he PL0
program inoludes $940 million in reduotions of oity-funded
expenditures and $109 million in new revenue through
inoreases to various fees and tnes.
1here are several measures previously announoed by the
Bloomberg Administration and that drew oonsiderable
publio attention that have been reversed or soaled baok
in the most reoent budget plan. 0ne suoh measure is the
plan to oharge large nonprott organizations for garbage
oolleotion. 1his plan, whioh has been eliminated, was
expeoted to raise $17 million in 2013 and beyond. 1he
parks department initiative to sell naming rights to dog
runs and basketball oourts and market other sponsorships
has not suooeeded. lnitially expeoted to raise $13 million
this year, it has brought in no revenue and the projeotion
for 2014 and beyond has been reduoed to $7.0 million a
year. 1he expeoted savings of $2.0 million from the planned
implementation of a new eligibility review for single adults
9 NEW YORK CITY INDEPENDENT BUDGET OFFICE
Sandys Aftermath and Federal Aid
1he Mayor's budget plan inoludes $4.5 billion in
federal aid to the oity in the aftermath of urrioane
3andy. 0f these funds, $1.5 billion is in the oity's
operating budget and will virtually all be spent in
the ourrent tsoal year. 1he other $3.0 billion is in
the oity's oapital budget and is expeoted to be spent
over tsoal years 2013 through 2015. Nearly $1.8
billion in additional funding was reoently approved by
washington for New ork City. 1hese funds, whioh will
oome through the federal Community Uevelopment
Blook 0rant program, have not yet been reoognized in
the oity's budget.
1he $1.5 billion largely oomes to the oity through
the lederal Lmergenoy Management Agenoy and is
intended to reimburse the oity for emergenoy relief,
oleanup, and repairs. 1his inoludes $192 million
in overtime, holiday pay, and other 3andy-related
personnel oosts for oity agenoies, two agenoies, the
polioe department ($87 million) and the sanitation
department ($63 million), aooount for the majority
of these oosts. 1he oity had initially reoeived $500
million for its Rapid Repairs program, whioh made
free emergency repairs such as restoring heat or
eleotrioity so that residents oould stay in their homes
while waiting for longer-term repairs. 1he oity has now
reoeived $77 million more to oover additional oosts
inourred under this program.
1he oapital funds will be used for a range of longer-
term infrastruoture repair and rebuilding projeots.
1his inoludes repairs to roads and bridges, sohools,
hospitals, beaohes, boardwalks, and parks as well as
housing and other buildings. 1he largest ohange sinoe
the Mayor's 1anuary plan is the redistribution of $477
million that had been allooated for undetned purposes
in the oity's housing department. 1hese funds have
been removed from the housing department and
reallooated for other 3andy-related needs. lor example,
oapital funding for beaoh and boardwalk repairs has
been inoreased by $211 million, various parks repairs
by $30 million, and playground repairs by $16 million,
bringing total parks department oapital funding for
3andy-related repairs to $785 million. 1he other largest
planned areas of spending are $775 million for road
and bridge repair and $712 million for hospital repairs.
A substantial portion of the oommunity development funds
will be used for housing aid suoh as providing grants to
owners of 3andy-damaged homes, and a oombination
of grants and loans to renovate apartment buildings and
to purchase emergency generators for public housing
developments. 3ome of the oommunity development
funds will also be used to aid business reoovery efforts.
seeking entry to the oity's homeless shelters has also
been eliminated for 2013. 1he City Counoil ohallenged
and won its oase against the new eligibility review, but the
Bloomberg Administration may tle an appeal and has still
budgeted the savings in 2014 and later years.
1he budget plan also reveals some early indioations of the
effeots of reoent federal outbaoks, the so-oalled sequestration.
1he Bloomberg Administration intends to oover the loss of $63
million in federal sohool aid with the additional funding the oity
expeots from the state. 1he Bloomberg Administration also
has a partialand temporary--tx for the expeoted loss of $36
million in federal funding for 3eotion 8 housing vouohers in
2014. 1he housing department intends to tap a reserve fund
for the program next year, but this is a one-time measure that
would oover only about half of the expeoted loss of funding
and would mean the oity will not be able to issue any new
vouchers for rental assistance.
0ther losses in federal aid may not be reversed even
temporarily. 1he oity expeots to lose about $14 million in
federal aid from the Child Uevelopment lund, whioh is used
to support ohild oare, ohild welfare, and related programs.
Cuts to federal health funding will oost the oity $8.7 million
in 2014, nearly $7.0 million of these funds are for AlU3/
lv-related servioes and the rest for tuberoulosis, sexually
transmitted diseases, immunization, and other programs.
Additionally, the oity will also lose $2.0 million in workforoe
lnvestment Aot funds in 2014 on top of a previously
antioipated reduotion of $5.1 million.
Besides the federal outbaoks, the budget plan for 2014
also does not inolude about $400 million in City Counoil
restorations and initiatives funded just for 2013. 3ome of
these are among the most oontroversial outs embedded in the
Lxeoutive Budget for 2014. 0ne example is the loss of $102
million in subsidies for the oity's library systems in 2014a
oombination of restorations funded for just the ourrent year as
well as outs proposed in November for next yearwhioh oould
lead libraries to reduoe servioes by as muoh as two days
a week. An underlying $51 million out to the oity's largest
after-sohool program, 0ut-of-3ohool 1ime, ooupled with a
NEW YORK CITY INDEPENDENT BUDGET OFFICE 10
Detailed Tables on IBOs
Revenue and
Expenditure Estimates
new reduotion of $10 million proposed for 2014, would
reduoe the number of slots in the program from 56,000
this year to 21,500 next year. 1he Lxeoutive Budget would
also eliminate 20 tre oompanies, a reduotion that has been
proposed and rejeoted in eaoh of the past three years
restored last year at a stated oost of $44 million.
Challenges on the Horizon? while the oity's overall budget
pioture looks relatively bright as presented in the Lxeoutive
Budget for 2014 and linanoial Plan through 2017, the
pioture oould darken quiokly. 1he largest tsoal ohallenge
faoing the oity is a settlement of the expired oontraots with
New ork's munioipal labor unions. All of the oity's labor
oontraots have expiredthree of the oity's largest unions
have been working under expired oontraots for more than
three yearsand there is virtually no money set aside for
raises prior to 2013. 1he Mayor's latest tnanoial plan
continues to assume there will be no retroactive raises
unless they are paid for with produotivity gains, something
that is partioularly diftoult to do retroaotively. 1he tnanoial
plan is plaoing a tsoal bet that may be hard to win.
1o better understand the potential oost to the oity from
new oontraot agreements, earlier this year lB0 developed
a plausible soenario for a settlement with the unions (the
terms are detailed in our Analysis of the Mayor's Preliminary
Budget released in Maroh). under this soenario, a settlement
would oost the oity $4.5 billion by the end of this tsoal year.
1his soenario would also add $1.8 billion annually to the
oity's personnel oosts in 2014 and in future years.
Another potential ohallenge, though oomparatively modest
in soale, is the Mayor's plan to generate revenue through
the sale of 2,000 new taxi medallions. lour separate
lawsuits have put the plan on hold and the Mayor has
repeatedly ohanged projeotions of when the oity would
reoeive the expeoted total of $1.5 billion from the sale. 1he
Bloomberg Administration now expeots the oity to net $300
million from the sale in 2014 (down $300 million from the
estimate in the 1anuary 2013 plan) and $400 million in
2015 (down $97 million sinoe 1anuary), with the balanoe
ooming in 2016 and 2017. 0iven the history of this plan,
these expeotations seem far from oertain.
Another ohallenge oould oome from still emerging plans for
inoreasing the oity's resilienoe to 3andy-like storms in the
future. 3uggestions suoh as building sea walls are hugely
expensive and it remains unolear how muoh washington
or Albany are willing to invest in helping the city prepare.
Additionally, the mounting oost of providing health oare for
retired oity workers will oonsume an inoreasingly substantial
portion of the oity's annual budget and potentially orowd
out other spending needs.
1here are eoonomio unoertainties abroad and at home
that oould also lead to inoreased tsoal ohallenges looally.
0ngoing eoonomio problems in the Luropean union, with
most oountries in reoession or at risk of reoession, oould
have reverberations here. ln washington, another showdown
over the debt limit or federal spending oould undermine
oonsumer and business oontdenoe, effeoting growth in the
national and looal eoonomies. lederal regulatory ohanges for
the tnanoial seotor, whioh are still a work in progress, oould
result in slower job and wage growth on wall 3treet than lB0
has foreoastand less tax revenues for the oity.
A Mixed Message. Mayor Bloomberg has said that one goal
of his administration was to not leave the next Mayor faoing
the level of tsoal duress he inherited. 0n paper the Mayor's
budget plan aooomplishes that goal. lB0 projeots a surplus
approaohing $500 million in the budget plan for 2014 and
our projeoted shortfall for 2015 amounts to a very modest
1.7 peroent of oity-generated revenue, a sum easily oovered
by routine end-of-year aooounting aotions.
et the Mayor's presentation of his last Lxeoutive Budget
struok a somewhat disoordant note. Although he trumpeted
suoh faotors as the oity's strong job growth, the number of
tourists visiting the oity hitting a reoord-high last year, and
the oity's rising level of housing oonstruotion, the Mayor
plaoed even greater emphasis on the oity's rising expenses.
ln partioular, he pointed to rising labor oosts, inoluding
the oost of pensions and health benettseven absent a
settlement of the expired oontraots.
Reaching settlements with city unions may require an
approach other than simply saying no to retroactive raises.
1hat does not mean the level of raises in our soenario are a
giventhe high oost undersoores just how diftoult it would be
tsoally. But zeroes for those past years without a new oontraot
may be equally impractical. At the same time, balancing the
oity's budget largely through spending reduotions as has been
the practice over the past few years may not be tenable in the
future, partioularly if federal outbaoks oontinue to mount. New
ork City may well be in better tsoal oondition that many other
oities around the oountry, but that does not mean the next
Mayor and City Counoil will be free of budget ohallenges.
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