The Independent Budget Office (IBO) today released its Analysis of the Mayor's Preliminary Budget for 2001, which shows that continued economic strength will help generate a record $2.7 billion budget surplus this year and provide sufficient resources to drive a surplus in 2001, assuming the current year surplus is used to prepay 2001 expenses.
Beyond 2001, however, IBO projects significant budget gaps that grow to $3.2 billion in 2003 and to $3.4 billion in 2004, or 8.6 percent of revenues. These gaps arise for two reasons. First, based on the assumption that economic growth slows to a more moderate rate, the city will no longer have surpluses to help balance the budget. Second, spending will grow 3.2 percent annually, outstripping the 1.1 percent annual growth in revenues.
IBO's gap projections exceed the Mayor's forecast by $489 million in 2003 and $925 million in 2004. IBO forecasts higher tax revenues-$427 million in 2004-but these are more than offset by higher estimates of spending, which are primarily due to including four years of employee salary increases instead of the two included by the Mayor and excluding savings attributed to state and federal actions considered unrealistic.
The Mayor has proposed substantial tax cuts, which grow to $2.0 billion in 2004. Absent these, the future budget gaps would much smaller; the 2004 gap would be $1.4 billion instead of $3.4 billion.
"Strategic management of the city's finances is just as important in good times as in bad," said IBO Deputy Director Ronnie Lowenstein. "The challenge in a period of expansion is to take actions that strengthen the city's fiscal future, notwithstanding the fact that there is no immediate pressure to do so."
The 76-page report provides details on each major policy proposal and governmental function. Among the issues highlighted are:
Budget Management:
- Strategy. The preliminary budget relies on a surplus and surging tax revenues, thus relieving the pressure to take significant actions to control long-run spending growth.
- Leveraging Economic Strength. The 2001 budget gap was closed with $1.6 billion of the 2000 surplus and $826 million in higher-than-projected revenues, primarily taxes.
- Using Non-recurring Resources. The preliminary budget relies on $2.1 billion in non-recurring actions, including the planned use of the 2000 surplus. However, as in the last few years, economic growth could exceed expectations, so the surplus may not be needed.
Revenues:
- Tax Revenue Forecast. Primarily as a result of higher estimates of personal income growth, securities industry profits, and growth in the assessed value of property, IBO's estimates of tax revenues are $230 million to $636 million higher than the financial plan. Most of the differences are attributable to higher personal income, business income and property tax revenue.
- Cost of the Proposed Tax Reduction Program. IBO's estimates that the tax reduction program, as presented, will grow four-fold from $476 million in 2001 to $2.0 billion in 2004.
- Impact of the Proposed Tax Cuts on the Gaps and Revenue Growth. Absent the tax cuts, the future budget gaps would by cut by more than half; the 2004 gap would be $1.4 billion instead of $3.4 billion. The cuts reduce the annual growth in tax revenues from 3.3 percent to 1.0 percent.
Expenditures:
- Drivers of Spending Growth. Over half of the $5.2 billion spending growth between 2000 and 2004 is attributable to the Board of Education ($1.8 billion) and debt service ($1.1 billion, adjusted for prepayments).
- Collective Bargaining. Assuming four years of salary increases roughly equal to the rate of inflation, city-funded labor costs will increase $1.5 billion by 2004. For each percentage point the actual agreements exceed (or fall short of) inflation annually, city-funded spending would rise (or fall) over $500 million by 2004.
- Debt Service. Debt service spending grows at an average annual rate of 7 percent from 2000 to 2004. As a percent of tax revenues it grows from 18.5% in 2001 to 20.0% in 2004.
Capital Program and Financing Plan:
- Size of the Program. The budget provides $24.2 billion in capital commitments for 2000-2003, a 44.5 percent increase over 1996-1999.
- Financing. The vast majority of the program is financed by debt (88.3%), with the balance supported by federal and state aid (8.8%), operating budget funds (2.2%) and other sources (0.8%).
- Constitutional Debt Limit. To support all years of the plan, the city needs additional financing capacity, such as a change in its constitutional debt limit or another source of bonding authority.
The IBO is an independent city agency whose mission is to provide non-partisan budgetary, economic and policy analysis for the residents of New York City, and to increase New Yorkers' understanding of and participation in the budget process.
