The Independent Budget Office (IBO) today released its annual report, New York City's Fiscal Outlook, which shows that continued economic strength will help generate a $1.4 billion budget surplus this year, but that by 2003 the city will face a budget gap of $2.4 billion-6 percent of revenues.
Assuming the city follows its past practice of using the surplus to help balance next year's budget, later this month the mayor's preliminary budget will have to close a fiscal year 2001 budget gap of $899 million, or 2.4 percent of revenues. If the surplus is not used, the gap would be $2.3 billion.
Beyond 2001, the city faces serious fiscal challenges because economic growth is likely to slow to a more moderate rate, eliminating the surpluses the city has used to help balance recent budgets. Also, revenue growth will be insufficient to sustain current spending policies, with 3.1 percent annual spending growth outstripping the 2.2 percent annual growth in revenues.
IBO also found that the city's long-run outlook has deteriorated slightly from last year. Although many factors over the past year have affected our projections, without the state's repeal of the commuter tax the gap estimate would have been virtually unchanged from that we made one year ago.
"The city's fiscal outlook would improve if it used surpluses to fortify its long-term fiscal foundation instead of using them to balance budgets without regard to difficulties down the road," said IBO Director Douglas A. Criscitello. "The city could establish a rainy day fund, repay a portion of its outstanding debt and substitute pay-as-you-go financing for borrowing."
IBO annually prepares its Fiscal Outlook to provide the public with an objective benchmark for consideration of the Mayor's soon-to-be-released budget. It includes a detailed explanation of the economic forecast and independent estimates of revenues and spending assuming that current spending policies and tax laws remain unchanged.
Economic forecast highlights include:
- IBO projects a cooling in the national economy driven by a combination of tighter monetary policy and rising energy prices.
- The city's economic performance will largely mirror the nation's with growth cooling from the rate of the last three years. Growth in personal income and employment will slow, and inflation will accelerate slightly after 2000.
- The majority of risks are on the downside. Because the city's fiscal fortunes remain closely tied to the securities and related industries, a major financial market correction would affect city revenues more than a national recession.
Revenue forecast highlights include:
- Tax revenues grow only 0.2 percent in 2001, primarily as a result of cuts in business and personal income taxes and a decline in corporate taxes from their current extraordinary level.
- Changes in tax policy-including among others the elimination of the commuter tax and the sales tax on clothing priced under $110- reduce annual growth in tax revenues from 3.6 percent to 3.0 percent over the 2000-2003 period.
- Over half of the growth in revenues between 2000 and 2003 is due to property and property-related taxes.
Spending forecast highlights include:
- Over half of the spending growth between 2000 and 2003 is attributable to two items. Spending for the Board of Education is expected to rise $1.2 billion or 11.6 percent over the four years. Debt service is projected to increase 19.9 percent, or $720 million over the same period.
- City funded payroll costs increase $912 million between 2000 and 2003, under the assumption that salary increases equal inflation in new, not-yet-negotiated, collective bargaining agreements. For each percentage point the actual agreements exceed (or fall short of) inflation annually, spending would rise (or fall) nearly $400 million by 2003.
- Adjusting for inter-year prepayments, debt service will increase 7.1 percent annually over the 2000-2003 period, rising from $3.5 billion to $4.3 billion, or from 16.2 percent to 18.3 percent of tax revenues.
IBO will follow this report up in March with an analysis of the Mayor's preliminary budget.
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.