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. Receive free reports by e-mail laoebook 1witter RSS