Staff Report

FEBRUARY MODIFICATION FYs 2019-2023

March 26, 2019

NEW YORK STATE FINANCIAL CONTROL BOARD

STAFF OF THE NEW YORK STATE FINANCIAL CONTROL BOARD

ACTING EXECUTIVE DIRECTOR

Jeffrey L. Sommer

SENIOR STAFF

Barbara Marin Jean Schwartz Administration Economic and Revenue Analysis

Steven A. Bollon Michelle McManus Expenditure and Covered Finance and Capital Organization Analysis Analysis

ADMINISTRATIVE AND ANALYTIC STAFF SUPPORT STAFF

Sew-Lian Ang Taina M. Sanchez Iwona Matusiak Saundra L. Truell Edward C. Thurston

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TABLE OF CONTENTS

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l. Overview........................................................................................................................................ 1

II. The FY 2019 Budget .................................................................................................................... 6

Revenue Summary .......................................................................................................... 6

Expenditures .................................................................................................................... 9

III. The FYs 2020-23 Financial Plan ............................................................................................. 12

Revenue Summary ........................................................................................................ 13

Expenditures .................................................................................................................. 16

Analysis of the Capital Strategy and Debt Service Costs ..................................... 20

Capital Strategy ...................................................................................................... 20 Debt Service Profile ............................................................................................... 24

IV. Glossary of Acronyms ............................................................................................................ 26

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LIST OF TABLES

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1. FEBRUARY MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS 2019-2023 ............................................................................................................................ 3

2. CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS 2019-2022 FEBRUARY MODIFICATION COMPARED TO NOVEMBER MODIFICATION ............... 4

3. RISKS TO THE FINANCIAL PLAN ............................................................................................ 5

4. TAX REVENUE SUPPORTS TOTAL REVENUE GROWTH ................................................. 13

5. CHANGES FROM NOVEMBER TO FEBRUARY MODIFICATIONS FYs 2020-2023 ........ 17

6. PEG PROGRAM SAVINGS FOR FEBRUARY FINANCIAL PLAN FYs 2020-23................ 18

7. PROJECTED GROWTH IN CITY-FUNDED EXPENDITURES IN FYs 2019 TO 2023 ....... 19

8. THE PRELIMINARY STRATEGY FOR FYs 2020-29 IS OVER $8 BILLION LARGER THAN THE PRIOR STRATEGY .............................................................................................................. 21

9. THE COMPOSITION OF PRELIMINARY TEN-YEAR CAPITAL STRATEGY REMAINS SIMILAR TO LAST TEN-YEAR CAPITAL STRATEGY ......................................................... 22

l. Overview

The city’s February modification to the FYs 2019-23 Financial Plan shows that, despite volatility in the financial markets and a slowdown, primarily affecting the personal income tax (PIT) and unincorporated business tax (UBT), the city has been able to manage the FY 2019 budget to build a surplus to help balance next year’s budget.

At the start of FY 2019, the city wisely maintained its conservative revenue forecast and assumed that a FY 2018 surge in PIT tax revenue was due to taxpayer reactions to the recently enacted federal tax reform legislation, and the repatriation of overseas hedge fund compensation. Even with this caution, installment payments in December and January were lower than planned, causing the city to reduce its PIT forecast by an additional $177 million. This shortfall in PIT, and another $70 million in UBT, were largely offset by higher collections in the general corporation tax, and property and real estate related taxes. In addition to tax revenues, the city’s revenue forecast is higher primarily due to the one-time sale of property and receipt of prior-year revenues. Overall the city projects that city-funded revenue will be $868 million higher in FY 2019, compared to the November modification.

On the expenditure side, the city was able to minimize agency new needs, adding only $161 million. The city determined that the high level of reserves in the FY 2019 budget would no longer be needed. The general reserve of $1.125 billion was reduced by $825 million, the capital stabilization reserve was reduced by $250 million, and prior-year payables were reduced by $400 million. These funds were transferred to the Budget Stabilization Account (BSA). In addition, the city adopted an agency savings program, including both expenditure reductions and revenue increases, totaling $770 million, most of which is nonrecurring. The combination of these actions allowed the city to increase the $520 million in the BSA by an additional $2.65 billion, for a total of almost $3.2 billion. The entire amount will be used to prepay FY 2020 expenses and balance that year’s budget. The city should continue to manage the FY 2019 budget in a way that will increase the surplus. To the extent there could be additional revenues and the $300 million remaining in the general reserve is not needed, the city should increase the BSA and make a contribution to the Retiree Health Benefits Trust.

Over the four years of the financial plan, the city projects a balanced budget in FY 2020, and manageable gaps in FYs 2021-23 of $3.5 billion, $2.9 billion, and $3.3 billion, respectively. The city, given the uncertainties regarding the Federal Reserve’s interest rate policy, trade frictions, economic slowdowns in Europe and China, higher federal deficits and borrowing, and a possible pullback in domestic consumer spending, has maintained a conservative revenue and economic forecast. Over the plan period, city-funded revenue growth in the property and nonproperty taxes, excluding audits, is projected to increase 2.7 percent on an average annual basis.

City-funded expenditures, net of prepaid expenses, are expected to grow at a faster average annual rate of 3.8 percent, causing the outyear gaps. The main areas of growth continue to be debt service, wages and salaries, and healthcare costs. Debt service continues to increase driven by the substantial size of the capital program. To manage this

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expense, the city continues to structure the capital program so that the annual debt service costs remain under 15 percent of tax revenues, the level deemed affordable. On the other main drivers of expenditures, the city has reached collective bargaining agreements with 62 percent of its workforce for the 2017-21 round of collective bargaining. Agreements with DC 37 and the United Federation of Teachers have set a pattern, which is fully funded in the financial plan. In addition, the city reached an agreement with the Municipal Labor Committee for another round of healthcare savings to partially offset the cost of the new agreements.

For FY 2020 and beyond, in addition to concerns over the economy, the city needs to be wary of actions that may be taken by the state and federal governments. As we have expressed in prior reports, actions taken by the state in adopting its budget could have an impact on the city’s budget concerning some funding shifts, education aid, and funding for the MTA, and Health and Hospitals. In addition, actions in Washington could also impact support for Health and Hospitals. The city has also entered into a consent decree concerning the New York City Housing Authority and agreed to increase its capital commitment to the Authority over the next 10 years. This funding is included in the current ten-year capital strategy. A monitor has been appointed, and it is unknown if any further actions will be required by the city to support the Authority.

Given these uncertainties, the city has been wise to maintain its conservative revenue forecasts and maintain its high level of reserves. The general reserve contains $1 billion in each year of the plan, and the capital stabilization reserve is funded at $250 million in each year of the plan. In addition, the city has already announced that it will create a $750 million program to eliminate the gap (PEG) to be included in the FY 2020 Executive Budget. We urge the city to develop actions with recurring savings in the PEG. If this is done, the city will be able to continue to manage its finances, with the least service disruption, even if unforeseen events occur.

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FEBRUARY MODIFICATION: THE CITY'S OPERATING PROJECTIONS FOR

FISCAL YEARS 2019-2023 TABLE 1 ($ in millions)

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

Revenues Taxes: General Property $27,815 $29,419 $30,829 $32,070 $33,030 Other Taxes 31,759 32,389 33,138 34,059 35,064 Tax Audit Revenue 1,057 998 721 721 721 Sale of Property Tax Liens 50 110 80 80 80 Miscellaneous Revenues 7,633 6,799 6,772 6,747 6,735 Unrestricted Intergovernmental Aid 151 -- -- -- -- Less: Intracity Revenues (2,154) (1,794) (1,796) (1,794) (1,792) Disallowances 91 (15) (15) (15) (15) Total City Funds $66,402 $67,906 $69,729 $71,868 $73,823 Other Categorical Grants 1,198 926 868 862 862 Interfund Revenues 690 661 662 661 661 Federal Categorical Grants 8,471 7,327 7,205 7,133 7,120 State Categorical Grants 15,258 15,390 15,837 16,305 16,353 Total Revenues $92,019 $92,210 $94,301 $96,829 $98,819

Expenditures Personal Service $49,509 $51,727 $53,704 $54,684 $56,097 Other Than Personal Service 39,034 36,851 37,001 37,291 37,474 General Obligation, Lease & TFA Debt Service 6,737 7,345 7,658 8,337 9,086 Budget Stabilization & Prepayments (1,407) (3,169) -- -- -- Capital Stabilization Reserve -- 250 250 250 250 General Reserve 300 1,000 1,000 1,000 1,000 Subtotal $94,173 $94,004 $99,613 $101,562 $103,907 Less: Intracity Expenditures (2,154) (1,794) (1,796) (1,794) (1,792) Total Expenditures $92,019 $92,210 $97,817 $99,768 $102,115

Gap To Be Closed $0 $0 ($3,516) ($2,939) ($3,296)

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CHANGES TO THE CITY'S OPERATING PROJECTIONS FOR FISCAL YEARS 2019-2022

FEBRUARY MODIFICATION COMPARED TO NOVEMBER MODIFICATION TABLE 2 ($ in millions)

FY 2019 FY 2020 FY 2021 FY 2022

Revenues Taxes: General Property $106 $204 $198 $448 Other Taxes 151 56 (192) (13) Tax Audit Revenue 1 277 0 0 Sale of Property Tax Liens (30) 30 0 0 Miscellaneous Revenues 524 13 (1) (2) Unrestricted Intergovernmental Aid 90 -- -- -- Less: Intracity Revenues (80) 10 9 9 Disallowances 106 0 0 0 Total City Funds $868 $590 $14 $442 Other Categorical Grants 216 51 1 1 Interfund Revenues 0 6 8 6 Federal Categorical Grants 256 62 56 8 State Categorical Grants 122 54 47 46 Total Revenues $1,462 $763 $126 $503

Expenditures Personal Service $2 ($12) ($45) ($66) Other Than Personal Service 48 245 165 187 General Obligation, Lease & TFA Debt Service (82) (10) (22) (49) Budget Stabilization & Prepayments 2,649 (2,649) -- -- Capital Stabilization Reserve (250) 0 0 0 General Reserve (825) 0 0 0 Subtotal $1,542 ($2,426) $98 $72 Less: Intracity Expenditures (80) 10 9 9 Total Expenditures $1,462 ($2,416) $107 $81

Change to the Gap Decrease/(Increase) $0 $3,179 $19 $422

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RISKS TO THE FINANCIAL PLAN TABLE 3 ($ in millions, positive numbers are offsets to risks)

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

Stated Financial Plan Gap $0 $0 ($3,516) ($2,939) ($3,296)

Estimation Nonproperty Taxes 150 150 0 0 0 Miscellaneous Revenue 40 100 100 100 100 Fair Fares Program 0 0 (212) (212) (212) Uniformed Services Overtime (29) (54) (72) (72) (72) Risk Total $161 $196 ($184) ($184) ($184)

Total FCB Estimated Surplus/(Gap) $161 $196 ($3,700) ($3,123) ($3,480)

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II. The FY 2019 Budget

Compared to the November modification, the current estimate of total-funded revenue in FY 2019 is a $1.5 billion broad-based increase to $92 billion from higher taxes, miscellaneous revenue, and both unrestricted and categorical aid. City-funded revenue climbs by $868 million to $66.4 billion, augmented by one-time resources such as asset sales and prior-year payments in miscellaneous revenue and intergovernmental aid. Nonproperty taxes are benefitting from continued moderate job and wage growth, and higher securities industry profits than expected in 2018, but are impacted by taxpayer reactions to federal tax reform. Revenue from the property and real estate-related taxes reflects higher market values along with new activity from more construction.

The February modification projects city-funded spending in FY 2019 of $66.4 billion, an increase of $868 million from the November modification. Much of the increase are funds allocated to the Budget Stabilization Account (BSA), which is partially offset by an agency savings program and the drawdown of budget reserves. The additional BSA funding increases the surplus in FY 2019 to about $3.2 billion, which has been assigned to prepay FY 2020 expenses. With conflicting signals from the national economy and consumer spending, slower growth overseas, and new state and federal budgets, it would be prudent for the city to use any revenue above forecast to increase the BSA or make a contribution to the Retiree Health Benefits Trust.

REVENUE SUMMARY

Since the release of the November modification, the estimate of total revenue in FY 2019 rises by $1.5 billion to $92.0 billion from almost every category of taxes, miscellaneous receipts, and both unrestricted and categorical aid, as seen in the figure to the right.1 Focusing on changes to the FY 2019 projections for taxes, miscellaneous revenue and unrestricted aid, city-funded revenue improves by $868 million to $66.4 billion. Compared to the prior modification, city-funded revenues advance by $590 million in FY 2020, $14 million in FY 2021, and $442 million in FY 2022.

In the February modification, property tax revenue increases by a net $76 million to $27.9 billion from higher third and fourth quarter payments less reductions in the second quarter payment. Also, $30 million of lien sale proceeds is shifted from FY 2019 to FY 2020, where the projected yields are $50 million and $110 million, respectively. Estimates for the nonproperty taxes in FY 2019 collectively improve by $152 million to

1 The estimate of interfund revenues remains at $690 million in FY 2019 in the November and February modifications.

Changes in FY 2019 Revenues Since Nov. Mod.

($ in millions)

Property Tax $76 Nonproperty Taxes 152 Audits 1 Total Taxes $228 Intergov’t Aid 196 Miscellaneous 444

City Funds $868 Categorical Aid 594 Interfund 0 Total Revenue $1,462 Numbers may not add due to rounding.

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$31.8 billion largely based on year-to-date collections, and reflect moderate gains in local employment and wages with the possibility of higher Wall Street compensation.2

The $196 million net change in intergovernmental aid consists of a prior-year Medicaid reimbursement of $90 million and a $106 million adjustment to the disallowance reserve against federal and state categorical grants. Other federal and state aid related to reimbursements for past expenditures total $151 million in the February modification, while the disallowance reserve has risen to $91 million in FY 2019 only.

The $444 million increase in FY 2019 miscellaneous revenue projection to $5.5 billion is driven by one-time actions, and smaller adjustments to the categories based on year-to-date collections. In the February modification, nonrecurring resources include asset sales of 101 Barclay Street for $117.3 million and mortgages for $100 million, restitution of $77.6 million from Societe Generale, and a $152.3 million prior-year payment from Health + Hospitals. Aside from these one-time actions, there is a $68 million plan-to-plan variance from activities that sponsor recurring growth from the charges for services, licenses, fines, and other miscellaneous categories.

Nonproperty Taxes

Even though the FY 2019 nonproperty tax estimate increases by a modest $152 million on a $31.8 billion base in the February modification, there are different trends among the taxes in FY 2019 that may continue through the plan period. This would include Wall Street profitability, stock market volatility, compensation in the private sector, relative weakness of residential versus commercial real estate transactions in part from higher interest rates, consumer sentiment and spending, and ongoing reactions by taxpayers to tax programs at the federal, state, and city level.

As seen in the figure to the right, the personal income tax (PIT) projection slipped the most among the nonproperty taxes at $177 million to yield $12.4 billion in FY 2019. There are downward adjustments to installments and final returns, which is mitigated by the expectation of higher extension and offset payments. While gains in local employment and wages support the base or nonbonus withholding, taxpayers continue to adjust the amount and timing of their remittances due to federal tax reform that was passed in December 2017 and estimations of nonwage income. As an illustration, the December 2018 installment payment was $47.2 million as opposed to

2 The city’s forecast of job gains of 54,800 in 2019 and over 40,000 in each year of 2020-23 is representative of where the local economy is in the business cycle as compared with over 85,000 jobs that were created annually during 2011-16 at the start of the expansion.

Changes in FY 2019 Nonproperty Taxes Since Nov. Mod.

($ in millions)

Personal Income ($177) General Corporation 174 Unincorporated Business (70) Banking Corporation 0 Sales 23 Commercial Rent (35) Real Property Transfer 40 Mortgage Recording 122 Utility 1 Cigarette 0 Hotel Occupancy 4 Minor 73 STAR Aid (4) Total Change $152 Numbers may not add due to rounding.

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over $200 million for that monthly payment in the previous years of FYs 2015 through 2017.

In FY 2018, PIT revenue was boosted by income moved into 2017 before new federal rules that limited state and local deductions took effect in January 2018, the repatriation of nonqualified deferred compensation held overseas by hedge funds, and one-time payments of higher dividends and bonuses spurred by federal tax reform. Currently, withholding revenue in December 2018 through February 2019 has approached or exceeded last year’s inflated levels, and is up 7.8 percent year-to-year in February to $989.5 million. It is possible that some of the growth in withholding collections, above job gains and higher minimum wages, arises from larger bonuses due to Wall Street profitability that reached $27.3 billion in 2018, which is $2.8 billion higher than in the prior year.

There was also a reduction in the estimate for the unincorporated business tax of $70 million to $2.2 billion, in part due to lower returns than expected in the hedge fund industry. Also, results in FY 2018 were boosted from rule changes concerning the deferment of incentive or management fees earned before January 1, 2009 and taxpayer behavior related to federal tax reform. For FY 2019, the general corporation tax projection increased by $174 million to $3.9 billion since the November modification as both the finance and nonfinance parts of the tax base excel. There are reports of healthy national corporate profits, which were aided by recent federal rule changes that included changes to depreciation and a lower tax rate, and that New York Stock Exchange member firms earned $6.7 billion in the fourth quarter of 2018 for a total of $27.3 billion. The last time the securities industry earned over $27 billion was in 2010.

The FY 2019 estimates for the real property transfer and mortgage recording taxes increase by $40 million to $1.5 billion and $122 million to $1.1 billion, respectively, due to strength in the commercial sector despite softening in the high-end residential market. The estimate for the commercial rent tax is decreased by $35 million to $876 million in FY 2019, primarily from the start of a new small business tax program that became effective on July 1, 2018, which offers credits based on the annual rent and income of businesses located south of 96th Street in Manhattan.

Based on moderate growth in local jobs and income, combined with large numbers of visitors to the city that collectively support taxable consumption, the FY 2019 estimate of the sales tax advances by $23 million to $7.8 billion. These factors also contribute to a $4 million improvement in the hotel occupancy tax to $621 million, along with an increase in hotel room rates in the third quarter of 2018 due to slower inventory growth. The 2018 forecast from NYC & Company represents another record year where the total amount of domestic and international visitation rises 3.7 percent to 65.1 million, with the accompanying impact of direct visitor spending.

While initial expectations for the 2018 holiday season were for robust consumer spending, recent data point to a slowing of momentum in consumer spending in 2019, though not as severe as occurred in December 2018. The National Retail Federation states that holiday sales during November and December 2018 “grew a lower-than-expected 2.9 percent over the same period in 2017” … as opposed to the “forecast last fall that holiday

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sales from November 1 through December 31 would grow between 4.3 percent and 4.8 percent.”3 In the retail sales report for January, December 2018 retail sales were revised lower to a 1.6 percent year-to-year decline, but January 2019 results are up 0.2 percent and appear healthier if total retail sales are adjusted for purchases at gas stations and car dealers. It will also be important to spending and revenue collections in 2019 if there is the usual boost in the spring from income tax refunds.

EXPENDITURES

The February modification for FY 2019 assumes city-funded expenditures increase between the November and February modifications by $868 million from $65.534 billion to $66.402 billion. As shown in the figure to the right, expenditures are expected to increase by $2.85 billion, most of which is included in the Budget Stabilization Account (BSA) plus a modest increase in agency spending, that is partially offset with savings of $1.981 billion.

As shown in the figure, much of the higher spending in FY 2019 is due to $2.65 billion allocated to the BSA. This funding is on top of $520 million in the November modification, which brings the BSA total to $3.169 billion in FY 2019 and will be used to balance the FY 2020 budget by prepaying expenses in that fiscal year.

The additional BSA funding in the February modification is attributed to the build-up of surplus funds in FY 2019. The city was able to build the surplus from higher-than-projected revenue collections, an agency savings program that we will refer to as the Program to Eliminate the Gap (PEG), and the drawdown of budget reserves.

The build-up of surplus funds in the February modification is shown in the figure to the right. The city projects non-tax and tax revenue collections to rise by $377 million and $227 million, respectively. In addition, as part of the latest PEG, the city expects to collect higher agency revenue of $264 million. The combined revenue increase accounts for $868 million of the surplus. Adding to the higher revenue are net budget savings of $1.781 billion. Combined, the higher revenue and savings create the $2.65 billion in additional surplus funds.

The reduction in city-funded expenditures is attributable to the drawdown of reserves, totaling $1.475 billion, and savings due to the latest expense PEG, totaling $506 million. The city maintains reserves in each fiscal year of the financial plan to address uncertainties that may arise. As a normal budget practice, reserves are reduced when

3 “2018 holiday sales grew 2.9 percent amid turmoil over trade policy and delay in data collection,” National Retail Federation press@nrf.com, February 14, 2019.

FY 2019 Nov to Feb Mod Changes City Funds ($ in millions)

Nov Mod $65,534 Expenditure Increases BSA $2,650 Agency New Needs 161 Budget Adjustments 39 Total Increase $2,850 Budget Savings General Reserve ($825) Expense PEG (506) Prior-Year Payables (400) Capital Stabilization (250) Total Savings ($1,981) Total Net Increase $868

Feb Mod $66,402

Numbers may not add due to rounding.

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they are no longer needed. For FY 2019, the city had maintained $1.125 billion and $250 million in its general and capital stabilization reserves, respectively. In the February modification, the city reduced the general reserve to $300 million with a drawdown of $825 million and fully reduced the capital stabilization reserve by $250 million. To the extent the $300 million general reserve is not needed to offset new expenses, the projected surplus will increase. The city continues the practice of maintaining large reserves in each of FYs 2020-23 with $1 billion in the general reserve and $250 million in the capital stabilization reserve. Also, the city has performed a reestimate of its reserves for prior-year expenses and receivables, and is able to recognize $400 million of savings.

An integral component of the city’s budget is its PEG program. In the November modification, the city had produced savings, which included revenue and expense initiatives, of $328 million for FY 2019. In the February modification, the proposed savings (revenue and expense) increase by $770 million, as shown in the figure below, which brings total savings for FY 2019 to nearly $1.1 billion.

As shown in the figure to the right, about 48 percent of PEG savings, $371 million, are recognized from Health + Hospitals. In recent years, Health + Hospitals had experienced a combination of falling revenue and higher spending that put the hospital system under severe financial stress that required additional financial support from the city. In addition to financial support, the city waived debt service, judgment and claims, and fringe benefit expenses of $146 million, $123 million, and $102 million, respectively, that were made by the city in FYs 2015 and 2016, and were to be reimbursed by Health + Hospitals. Under new leadership, Health + Hospitals modified staffing levels and revenue collections. These actions, as well as congressional agreement to delay cuts to Disproportionate Share Hospital program payments and extend the Children’s Health Insurance Program for 10 years, made an improvement to the system’s financial position. This has allowed Health + Hospitals to satisfy the outstanding payments owed to the city for FYs 2015 and 2016.

In Health and Welfare, total savings aggregate to $208 million with the Department of Social Services recognizing much of that amount, about $166 million, in the form of one-time collection of prior-year Medicaid reimbursements, as well as other claims and receivables. The remaining agency savings include about $51 million of fringe benefit adjustments in miscellaneous expenditures, and about $65 million in delayed hiring and efficiency savings across all other agencies. In addition to agency savings, the

FY 2019 Feb Mod Surplus City Funds ($ in millions)

Revenue (Dec)/Inc Non-Tax $377 Revenue PEG 264 Tax 227 Total Increase $868 Expenditure Dec/(Inc) General Reserve $825 Expense PEG $506 Prior-Year Payables 400 Capital Stabilization 250 Other Adjustments (39) Agency New Needs (161) Total Net Decrease $1,781 Feb Mod Surplus $2,650

Numbers may not add due to rounding.

Feb Mod PEG Program Savings City Funds ($ in millions)

Agencies Health + Hospitals ($371) Health and Welfare (208) Miscellaneous (51) Mayoral Agencies (39) Uniformed Agencies (14) Elected Officials (6) Education (4) Citywide Initiatives (2) Total Agency ($695) Debt Service (75)

Total PEG ($770)

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city also realizes debt service savings of nearly $75 million, primarily from the reduction in variable rate assumptions in FY 2019.

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III. The FYs 2020-23 Financial Plan

In the near term of the financial plan period favorable conditions in the securities industry and local economy are likely to result in slightly higher nonproperty tax revenues than the city’s forecast, and miscellaneous revenue is likely to be boosted by new initiatives and efficiencies. However, given the uncertainties regarding the Federal Reserve’s interest rate policy, trade frictions, economic slowdowns in Europe and China, higher federal deficits and borrowing, and a possible pullback in domestic consumer spending, the city’s conservative revenue and economic forecasts are appropriate. Furthermore, the city is prudent to maintain reserves as a hedge against taxpayer behavior in reaction to federal tax reform, and unintended consequences from initiatives in the state and federal budgets.

In the February modification, over FYs 2019-23, city-funded revenue is projected to increase 2.7 percent on an average annual basis from growth in the property and nonproperty taxes excluding audits. Meanwhile, city-funded expenditures, net of prepaid expenses, are expected to grow at a faster average annual rate of 3.8 percent over the same time period. One of the more accelerated areas of expenditure growth is debt service costs, which are being driven by a substantial capital program. To manage this expense, the city has sized its capital program so that annual debt service costs as a percentage of tax revenues remain under 15 percent, the level the city deems affordable.

In its efforts to manage the personnel service budget, the city has reached labor agreements with more than 99 percent of its workforce through the 2010-2017 round of collective bargaining and 62 percent for the 2017-2021 round. The 2017-2021 round established a new pattern that has been fully funded. The labor agreement also includes health insurance savings that are in addition to the savings agreed to in the 2010-2017 round of bargaining.

Wisely, the city is continuing to be cautious in its approach to budgeting by controlling spending on agency new needs, maintaining high budget reserves and continuing to generate savings to minimize expenditure increases. In fact, the city has already announced a new agency savings program to be included in the executive budget, requiring all agencies to produce a total of $750 million of additional savings in FY 2020. The current modification projects a balanced budget in FY 2020 and outyear gaps in FYs 2021-23 of $3.5 billion, $2.9 billion and $3.3 billion, respectively.

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REVENUE SUMMARY

In the time frame covered by the financial plan, total revenue is essentially flat between FYs 2019-20 at $92 billion and exhibits 1.8 percent growth on an annual average basis from FYs 2019-23, as shown in Table 4. During the plan period, there are projected declines in intergovernmental and categorical aid, and miscellaneous revenue, but a moderate 3.4 percent gain in tax revenue excluding audits. In terms of city funds, revenue increases 2.3 percent in FY 2020 from the prior year, and 2.7 percent on an average annual basis over the plan period, where the majority of the support from the tax base arises from the property tax at 4.4 percent annual average growth as compared with a gain of 2.5 percent for the nonproperty taxes during this same time.

TAX REVENUE SUPPORTS TOTAL REVENUE GROWTH TABLE 4 (year-to-year percent change, $ in millions, annual average growth rates for FYs 2019-23)

FY 20 FY 21 FY 22 FY 23 FY 19 FY 23 FYs 19-23

Property Tax 6.0% 4.7% 4.0% 3.0% $27,865 $33,110 4.4% Nonproperty Taxes 2.0% 2.3% 2.8% 3.0% $31,759 $35,064 2.5% Subtotal Taxes 3.8% 3.4% 3.4% 3.0% $59,624 $68,174 3.4% Audits (5.6%) (27.8%) 0.0% 0.0% $1,057 $721 (9.1%) Total Taxes 3.7% 2.9% 3.3% 2.9% $60,681 $68,895 3.2% Intergov’t Aid (106.2%) 0.0% 0.0% 0.0% $242 ($15) -- Miscellaneous (8.7%) (0.6%) (0.5%) (0.2%) $5,479 $4,943 (2.5%)

City Funds 2.3% 2.7% 3.1% 2.7% $66,402 $73,823 2.7% Categorical Aid (5.2%) 1.1% 1.6% 0.1% $24,927 $24,335 (0.6%) Interfund (4.2%) 0.2% (0.2%) 0.0% $690 $661 (1.1%) Total Revenue 0.2% 2.3% 2.7% 2.1% $92,019 $98,819 1.8% Numbers may not add due to rounding. Nonproperty taxes include STAR Aid.

Table 4 also shows how the initial momentum in the property tax at six percent year-to-year growth in FY 2020 from higher market and billable assessed values in the FY 2020 tentative roll slows each year thereafter until reaching three percent growth by FY 2023. While the nonproperty taxes exhibit the opposite trend and start off very modestly with a two percent projected yield in FY 2020 and improve slowly to three percent in FY 2023, it is still a marked change from the recent past when the nonproperty taxes provided the means to drive overall revenue growth within a year and a financial plan.

Property Tax

After rising by 6.3 percent in FY 2019, the city expects property tax revenue to increase 6.0 percent to $29.5 billion in FY 2020 based on the FY 2020 tentative assessment roll. The property tax projection is for 4.4 percent growth during the plan period of FYs 2019-23, as each of the four classes experience slower growth in billable assessed value in the outyears.4 To the extent that billable assessed value per class, such as in Class 2, does

4 State law requires that the Department of Finance assign every property to one of four tax classes. Class 1 consists of one-, two- and three-family residential properties and small condominiums. Class 2 comprises all other residential properties, including cooperatives, condominiums, and multi-family rentals. Class 3 represents utility real properties. Class 4 consists of all other real properties, such as office buildings, factories, stores, and vacant lands.

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not slow as much as the city expects in the outyears, additional funds would be available to add to existing reserves.

In the FY 2020 tentative roll, total market value citywide increased 5.8 percent from the prior year, where 83.3 percent of the increase reflects market forces, and the remainder is from new construction and apportionments. Of the four classes, market value advanced the most in overall Class 2 and Class 1 at 6.6 percent and 6.2 percent, respectively from higher sales prices or market forces. Total citywide construction added around $13.8 billion in new market value, and rental apartments accounted for over a third of new construction activity.5 The citywide total billable assessed value on the FY 2020 tentative roll increased by $20 billion or 8.3 percent from the prior year to $259.7 billion. Between the publishing of the FY 2020 tentative roll and the final roll, the city expects a reduction of $3.8 billion, which will result in billable assessed value growth on the final roll of 6.7 percent.

Nonproperty Taxes

In the February modification nonproperty tax revenue increases modestly by two percent in FY 2020 from the prior year, and 2.5 percent on an average annual basis from FY 2019 through FY 2023. The forecasts of individual taxes reflect the impacts of tax changes during FYs 2018 and 2019, and the assumption of a slowdown in the national and local economies that will affect employment, wages, Wall Street profits, and pre-tax corporate profits in FY 2020 and the outyears. Based on current collections for the nonproperty taxes, and the likelihood that local employment and income growth will continue in the near term of the financial plan period, the nonproperty taxes could be higher by $150 million in each of FYs 2019 and 2020.6

Business Taxes. After several one-time factors that boosted payments from finance and nonfinance sector firms in FY 2019, including the depletion of prior-year overpayments related to the 2015 state business tax changes, general corporation tax revenue remains at about $3.7 billion annually in each of FYs 2020-23 and falls 0.6 percent on an average annual basis during FYs 2019-23. While FY 2019 unincorporated business tax payments are negatively impacted from weakness in the hedge fund industry, and comparison with a strong FY 2018 that was enhanced by federal tax changes, collections from the finance and nonfinance industries are expected to recover in the financial plan period and exhibit four percent annual average growth.

Sales Tax. Building on job and income gains, and federal tax cuts that increased paychecks, consumer spending increased 2.8 percent on a year-to-year basis in the December 2018 quarter, according to the latest gross domestic product report. While still positive, the market volatility last December and the government shutdown negatively

5 Department of Finance Publishes Fiscal Year 2020 Tentative Assessment Roll, January 15, 2019.

6 In this case, additional revenue above the city’s estimates could originate from the personal income, general corporation, real property transfer, and mortgage recording taxes.

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impacted consumer confidence levels, but the level of domestic and international visitors to the city has remained over 60 million since 2016. In the forecast period, sales tax collections rise 3.7 percent on an average annual basis or $1.2 billion to $9.0 billion by FY 2023. During this time, job creation slows annually from 54,800 jobs in 2019 to 47,700 jobs in 2023, and total wage growth moderates from 5.0 percent in 2018 to 3.4 percent at $479.5 billion in 2023.7

Personal Income Tax. From FYs 2019 through 2023, personal income tax (PIT) collections increase 3.4 percent on an annual average basis and climb $1.8 billion to $14.2 billion by FY 2023. The city’s latest PIT forecast can be seen in two parts—taxpayers response to the federal limit on deductions for state and local taxes during FYs 2018 and 2019, and changes in the payment patterns that are longer-lasting and affect FYs 2020-23. The city expects a pickup in revenue in the April final settlement, but this is far from certain. It is unclear if the smaller installment payments received thus far indicate less taxpayer liability or a shift in the amount paid in the four payments since the end of the calendar year deadline is not as important as before. This tax-reform induced uncertainty in the last quarter of the fiscal year adds another reason for the city to maintain high reserves, some of which can be applied to the upcoming year’s expenses if not needed in FY 2019.

During FYs 2020-23 withholding is projected to grow about four percent annually, assisted by continued employment gains but at a decelerating rate, modest growth in finance sector earnings and bonuses, and New York Stock Exchange (NYSE) member firm profits between $15 billion to $18 billion annually, after reaching $24.5 billion in 2017 and $27.3 billion in 2018. So far in the first quarter of 2019, volatility in the financial markets has not reached the extremes seen in December 2018, which negatively impacted the trading and investment banking revenues of several large banks whose clients became less active and more risk-averse. Yet, most banks also realized profits from asset management and mergers, and experienced better lending margins from the higher interest rates. If there is not a pronounced slowdown globally or extreme volatility, there might be a pickup in initial public offerings, underwritings, and more mergers in the relatively calmer environment, which may result in higher profits and finance sector compensation.

Miscellaneous Revenue

In the February plan, miscellaneous revenue falls 9.8 percent or $536.5 million to $4.9 billion from FYs 2019-23 primarily from the front-loaded nature of the nonrecurring

7 The city’s latest sales tax forecast incorporates the end of the reimbursement to the state for the prior-year refinancing of STARC bonds in FY 2019, but not two initiatives before the state legislature. The South Dakota v. Wayfair ruling by the Supreme Court enables New York State to require businesses that meet the two criteria of over 100 sales of tangible personal property delivered to residents and income of over $300,000 in the prior year to register as sales tax vendors. The other proposal is to eliminate the tax advantage of online vendors by compelling businesses that provide a marketplace for internet sales to collect the tax. However, some portion of this revenue from online sales to city residents would become a dedicated funding source for the MTA.

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resources in FY 2019 compared with the outyear forecast. The one-time revenues include asset sales and restitution, and prior-year payments. After removing nonrecurring and other resources from the city’s forecast, miscellaneous revenue declines 1.3 percent or $44.5 million from FY 2019 to FY 2023, and remains at about $3.4 billion annually. With the exception of interest income and licenses, the rest of the core categories--charges for services, fines, rent, and miscellaneous--decline during the plan period. Based on current collections primarily in the license, fines, and charges for services categories, and historical trends, miscellaneous revenue could be higher than the city’s projections by $40 million in FY 2019 and $100 million in each of FYs 2020-23, as shown in Table 3 on page 5.

Interest income advances from $193.2 million in FY 2019 to $249.5 million in FY 2023 as the Federal Reserve resumes raising the federal funds rate on a gradual basis. The license category, projected at $750.7 million by FY 2023, continues to benefit from construction-related activity and infrastructure upgrades that result in higher demand for building, sidewalk interruption, and street-opening permits. The projected declines in the remaining four categories of charges for services, fines, rent, and other miscellaneous do not necessarily represent weakness, but a forecasting option of returning to baseline revenue in the outyears. In the case of fines, however, there is a downward reevaluation of the projections in each year of FYs 2019-23 of bus lane camera and red light camera fines, particularly given the delay in the restart of the latter program, which overshadows additional revenue from the Department of Buildings and Environmental Control Board.

EXPENDITURES

The November financial plan for FYs 2020-23 had assumed budget gaps of $3.2 billion, $3.5 billion, $3.4 billion, and $3.3 billion, respectively. While in the February modification, the FY 2020 gap is closed and FY 2022 is lower by $422 million, the gaps in FYs 2021 and 2023 are only slightly lower by $19 million and $22 million, respectively. As shown in Table 5 on page 16, the city projects revenues to rise by $983 million and expenditures to decrease by $9 million over the plan period.8 The revenue forecast in FYs 2020 and 2022 exceeds the November modification estimate by $558 million and $421 million, respectively. However, the city estimates just $11 million in higher revenue in FY 2023 and reduces its forecast by $7 million in FY 2021. The higher-than-anticipated revenue in FY 2020 and additional surplus funds of $2.65 billion in FY 2019 close the FY 2020 gap.

8 Revenue excludes $32 million in FY 2020 and about $21 million in each of FYs 2021-23, which are a component of the city’s February modification PEG program and included in the expense PEG, as shown on Table 5 on page 16.

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CHANGES FROM NOVEMBER TO FEBRUARY MODIFICATIONS FYs 2020-2023 TABLE 5 City Funds ($ in millions)

FY 2020 FY 2021 FY 2022 FY 2023 Total

Gap to be Closed (Nov Mod) ($3,179) ($3,535) ($3,361) ($3,318) -- Revenue (Dec)/Inc Tax $564 $5 $434 $34 $1,037 Non-Tax (6) (12) (13) (23) (54) Revenue Change $558 ($7) $421 $11 $983 Expenditure (Dec)/Inc Agency Spending $300 $238 $263 $270 $1,071 PEG (271) (264) (264) (281) (1,080)

Expenditure Change $29 ($26) ($1) ($11) ($9) FY 2019 Prepayment in FY 2020 $2,650 -- -- -- --

Gap to be Closed (Feb Mod) $0 ($3,516) ($2,939) ($3,296) --

As shown in Table 5, the February modification assumes just $9 million of net

lower spending over the four-year financial plan period. The city adds $1.071 billion of new agency spending in FYs 2020-23, which is offset by savings of $1.080 billion generated through the latest Program to Eliminate the Gap (PEG). Some of the new agency spending over FYs 2020-23 is dedicated to funding the expansion of existing programs in the Departments of Education (DOE), Homeless Services, and Youth and Community Development. The city adds $143 million to the DOE budget to expand the prekindergarten program for three-year olds to two new districts; $100 million to Homeless Services for the Street Solution Program that will fund additional outreach services, drop-in centers and safe haven beds; and $133 million to Youth and Community Development for the Summer Youth Employment Program.

There are also new initiatives that the city has funded. Over the plan period, the city allocates $300 million to cover the cost of NYC Care and in FY 2020, $106 million to partially fund the Fair Fares program. Through NYC Care, any uninsured New Yorker is able to visit one of Health + Hospitals’ clinics and see a primary care physician. The city is providing initial funding of $25 million in FY 2020, $75 million in FY 2021 and $100 million in each of FYs 2022-23 to subsidize the cost of treatment. The Fair Fares program that began January 2019 provides reduced-fare MetroCards to low-income subway and bus riders living below the federal poverty line. On March 4, 2019, the Mayor and City Council Speaker announced that the program will be expanded to include eligible residents that reside in the New York City Housing Authority system, enrolled students in the City University of New York, and military veterans. The city provided initial funding of $106 million in FY 2019 to cover the half-year cost of the Fair Fares program. The city has maintained the same funding level of $106 million for FY 2020, but has not included funding for FY 2021 and beyond. We estimate that the approximate full-year cost will be $212 million in each of FYs 2021-23, which we hold at risk as shown in Table 3 on page 5.

Over FYs 2020-23, the PEG program generates total agency and debt service savings of $948 million and $132 million, respectively, as shown in Table 6 on page 17. The majority of the PEG savings over the plan period comes from a reduction in miscellaneous and other spending totaling $457 million. Procurement savings are the primary component in this budget category achieved through improved procurement

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management that has resulted in greater efficiency. These efficiencies are expected to reduce the city's operating costs by $111 million in each of FYs 2020-23.

PEG PROGRAM SAVINGS FOR FEBRUARY FINANCIAL PLAN FYs 2020-23 TABLE 6 City Funds ($ in millions)

FY 2020 FY 2021 FY 2022 FY 2023 Total

Agencies Miscellaneous and other* ($115) ($114) ($114) ($114) ($457) Major Organizations (89) (89) (51) (51) (281) Other Mayoral (44) (22) (21) (20) (106) Uniformed (14) (17) (29) (45) (104) Total Agency ($262) ($242) ($215) ($230) ($948)

Debt Service (9) (22) (49) (51) (132)

Total PEG Savings** ($271) ($264) ($264) ($281) ($1,080) *Other includes citywide initiatives and procurement savings **Includes revenue and expense PEGs

In Major Organizations, DOE is projected to have lower spending of $281 million

over the life of the financial plan, reducing planned expenses by $89 million in each of FYs 2020 and 2021, and $51 million in each of FYs 2022 and 2023. The DOE will save about $25 million by finding efficiencies in professional development and travel expenditures, and about $26 million through the consolidation and reestimate of programs. Also, the DOE anticipates additional revenues of $38 million in each of FYs 2020-21 from expanded participation in federal food programs.

Elsewhere, Other Mayoral and Uniformed Services agencies are expected to achieve combined savings of $210 million over FYs 2020-23. In Uniformed Services, the Department of Correction generates more than half of the savings, accounting for over $56 million. The savings is attributed to the closure of one of the detention centers on Rikers Island. In addition to agency savings, the city also realizes debt service savings of $132 million, primarily as a result of reduced long-term borrowing projections in FYs 2020-22.

In total, over FYs 2019-23, and including the November modification, the city will produce nearly $3.2 billion of agency savings with an additional PEG of $750 million for FY 2020 to be included in the executive budget. By continuing to develop savings programs and controlling agency new needs, the city is able to keep outyear gaps manageable. Moreover, included in each fiscal year of the financial plan are $1.25 billion of reserves.

Growth in City-Funded Expenditures

The February modification projects total city-funded expenditures, net of prepaid expenses, to grow by 16.1 percent, or $10.7 billion, between FYs 2019 and 2023, increasing from $66.4 billion to $77.1 billion, as shown in Table 7 on page 18. The expected average annual growth rate over the plan period is 3.8 percent.

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PROJECTED GROWTH IN CITY-FUNDED EXPENDITURES IN FYs 2019 TO 2023 TABLE 7 City Funds (yr/yr percent change, $ in millions)

FYs

2019-20 FYs

2020-21 FYs

2021-22 FYs

2022-23 FYs

2019-23 Level in FY 2019

Level in FY 2023

Avg Yr Growth

Service Categories (0.9%) 1.3% 1.2% 0.8% 2.4% $43,126 $44,182 0.6% Uniformed 0.8% (0.1%) (0.1%) (0.2%) 0.4% 10,153 10,194 0.1% Health and Welfare (0.8%) (0.5%) (0.1%) 0.0% (1.3%) 10,823 10,677 (0.3%) Mayoral (5.6%) 0.0% (0.5%) 0.0% (6.1%) 6,590 6,190 (1.6%) Major Organizations 0.0% 4.1% 3.8% 2.4% 10.7% 14,844 16,428 2.6% Elected Officials (3.5%) 0.3% (0.2%) 0.0% (3.4%) 716 692 (0.9%) Expense Categories 9.3% 6.0% 3.6% 6.5% 27.9% $24,783 $31,687 6.3% Miscellaneous 18.8% 8.1% (0.9%) 9.0% 38.8% 8,583 11,911 8.5% Debt Service 9.2% 4.5% 9.2% 9.3% 36.3% 6,495 8,851 8.0% Pensions 1.0% 4.8% 4.3% 1.9% 12.6% 9,706 10,925 3.0% Subtotal 2.8% 3.1% 2.2% 3.1% 11.7% $67,909 $75,868 2.8% Other Adjustments -- -- -- -- -- ($100) $1,250 -- Prior-Year Payables -- -- -- -- -- (400) -- -- General Reserve -- -- -- -- -- 300 1,000 -- Capital Stabilization -- -- -- -- -- -- 250 -- Total City Funds 4.8% 3.1% 2.1% 3.1% 13.7% $67,809 $77,118 3.3% Net Surplus Roll -- -- -- -- -- (1,407) -- -- Total Net of Prepayment 2.3% 7.9% 2.1% 3.1% 16.1% $66,402 $77,118 3.8%

Miscellaneous includes energy, lease and inflator adjustments. Debt service, Major Organizations and Miscellaneous are net of prepayment. Net surplus roll includes prepaid expenses to debt service, the RHBT and Health + Hospitals. Numbers may not add due to rounding.

Uniformed Services (Police, Fire, Correction and Sanitation Departments) is expected to grow by just 0.4 percent between FYs 2019-23, as shown in Table 7. The overtime expense component in Uniformed Services, which includes both uniformed and civilian personnel, is expected to total $1.187 billion in FY 2019. The majority of that spending is for uniformed personnel at $1.048 billion. Over FYs 2020-23, spending on overtime for uniformed personnel is projected to fall from $1.023 billion to $1.006 billion. Through January 2019, actual overtime expenditures for uniformed personnel totaled $629 million. Based on this amount, uniformed overtime spending is expected to be $1.078 billion by fiscal year end. We believe that the city has underbudgeted overtime spending and will have to increase funding to cover the shortfall. Our risk assessment, as shown in Table 3 on page 5, is $29 million in FY 2019, $54 million in FY 2020 and $72 million in each of FYs 2021-23.

In Expense categories, the overall growth of 27.9 percent over FYs 2019-23 is led by miscellaneous spending and debt service, as shown in Table 7. Miscellaneous spending, which is expected to increase by 38.8 percent, reflects the year-to-year increase in labor reserve funding and the takedown of the capital stabilization reserve.9 For a discussion of debt service growth, see “Analysis of the Capital Strategy and Debt Service Costs,” beginning on page 19.

9 Miscellaneous spending encapsulates funding for the labor, general and capital stabilization reserves, fringe benefits, Transit Authority and private bus services, judgment and claims, state building aid, contractual services, water and sewer, and Other Than Personal Service budget areas (includes some state and federal funding).

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Pension costs are projected to grow by 12.6 percent. The financial plan reflects FY 2018 investment returns of 8.67 percent, which was higher than the actuarial assumed rate of return of seven percent and reduces pension costs over the plan period. In anticipation of changes to actuarial assumptions and methods that may be recommended in the forthcoming independent audit performed by Bolton Partners, the city had added funds to cover the cost of annuity prefunding and created a reserve with initial funding of $100 million in each of FYs 2019-20 and $400 million in each of FYs 2021-22 in the April 2018 executive budget. The final audit report is expected to be released in May 2019. The impact of any adopted changes over the plan period is expected to be included in the April 2019 executive budget and offset by the reserve. Additionally, an oversight in the administration of the New York City Employees’ Retirement System (NYCERS), one of the five actuarial systems in the pension fund, wrongly accounted for workers participating in the system. To correct the error and right-size pension liabilities, pension costs are expected to increase by about $150 million in each of FYs 2019-22. It is likely that some of the added expense will be offset by any remaining monies in the reserve.

ANALYSIS OF THE CAPITAL STRATEGY AND DEBT SERVICE COSTS

In the February modification, the city has released its Preliminary Ten-Year Capital Strategy for FYs 2020-29. Produced biennially, the preliminary strategy identifies the city’s capital program goals, anticipated sources of financing, and projected debt service costs for the ensuing ten-year period. The strategy incorporates the city’s four-year authorized capital commitments, or contracts, in the initial years, and extends the forecast for an additional six years. During the two-year interval between strategies, modifications are made regularly to the immediate four years of capital contracts to reflect actual data, programmatic changes, and fiscal circumstances, with commitment levels fluctuating from plan to plan.

The profile of the preliminary strategy has a significant long-term impact on the city’s operating budget. With the debt service burden a principal consideration when assessing the affordability of the capital program, the city has sized its preliminary ten-year strategy to remain under its affordability benchmark of 15 percent of tax revenues. This section of the report reviews the major allocation of capital commitments in the preliminary ten-year strategy, with attention to new initiatives, funding sources, and the resulting debt service burden.

Capital Strategy

The city’s ten-year capital strategy is used as a planning tool, with the first four years reflecting authorized commitments (or contracts) in the city’s financial plan. The FYs 2020-23 capital plan includes $64.4 billion of total-funded commitments. For the ten-year preliminary strategy period of FYs 2020-29, there are $104.1 billion of capital commitments. 10

10 FY 2019 authorized commitments are part of the city’s five-year capital plan but are not included in the preliminary capital strategy, which covers FYs 2020-29. In FY 2019, commitments total $19.4 billion, which includes $17.4 billion of city-funded contracts and almost $2 billion of noncity-funded contracts.

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The preliminary strategy includes a total $104.1 billion of authorized capital commitments, $98.3 billion of which are city-funded while $5.8 billion are supported with noncity funds. Of the city-funded commitments, the city and the New York City Transitional Finance Authority (NYCTFA) will finance a combined $79 billion by issuing tax-supported bonds; and the New York City Municipal Water Finance Authority will finance $19.3 billion by issuing revenue bonds backed by user fees levied on city rate payers to fund environmental protection capital projects, as illustrated in Table 8.

THE PRELIMINARY STRATEGY FOR FYs 2020-29 IS OVER $8 BILLION LARGER THAN THE PRIOR STRATEGY

TABLE 8 ($ in billions)

Ten-Year Capital Strategy FYs 2020-29 FYs 2018-27 Change

Commitments by Funding Sources:

Tax-Supported Bonds $79.0 $71.1 $8.0 Water Authority Bonds 19.3 17.9 1.4

Total City Funds $98.3 $88.9 $9.4 Federal Funds $3.9 $4.0 ($0.1) State Funds 1.7 2.7 (1.0) Other NonCity Funds 0.2 0.2 0.0

Total NonCity Funds $5.8 $6.9 ($1.1) Total Financing $104.1 $95.8 $8.3

Numbers may not add due to rounding.

The preliminary ten-year capital strategy increases by $8.3 billion in total funds, compared to the prior strategy for FYs 2018-27 released in April 2017. As shown in Table 8, the increase is projected to be city funded at $9.4 billion, which is partially offset by a $1.1 billion decrease in noncity funds. The decline in noncity funding is comprised of a $1 billion reduction in state funding and an approximate decrease of $100 million in federal funding. The greater part of the reduction in state funding is for education projects. Approximately $867 million education commitments were state funded in the prior strategy in FYs 2018-19. As state-supported funding sources such as the Smart School Bond Act and Building Aid Revenue Bonds have been exhausted or near its limit, more education funding is provided by city tax-supported bonds.11

11 The city has received about $780 million over FYs 2016-19 from the Smart Schools Bond Act, which authorized the issuance of $2 billion of state general obligation bonds to finance the improvement of technology and infrastructure for schools throughout New York. Additionally, as a partial satisfaction of the Campaign for Fiscal Equity school funding lawsuit, the state authorized the NYCTFA to sell Building Aid Revenue Bonds (BARBs) in an amount outstanding of up to $9.4 billion, which is secured by state building aid payable to the city and assigned to the NYCTFA. Currently, the NYCTFA has approximately $8.2 billion of BARBs outstanding.

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When the annual distribution of commitments is compared between the two strategies, $7.9 billion of the $8.3 billion growth in the preliminary strategy takes place in the first five years. The preliminary strategy reflects commitments that continue to be front loaded, with 73 percent authorized to occur in the first five years, which is similar to 71 percent in the first five years of the FYs 2018-27 strategy. The figure on the right shows the front loading is driven by city-funded commitments. With 68 percent of city-funded commitments slated for the first five years in the preliminary strategy, the average is $14.1 billion of contracts, compared to a much lower average of $5.6 billion for the 26 percent of commitments in the second five years. The front-loaded distribution of commitments is reflective in the debt service burden peaking in FY 2026 and declining in the following years, which will be discussed in the debt service review later in this section.

THE COMPOSITION OF PRELIMINARY TEN-YEAR CAPITAL STRATEGY REMAINS SIMILAR TO LAST TEN-YEAR CAPITAL STRATEGY

TABLE 9 ($ in millions)

FYs 2020-29 Preliminary

Strategy

Percent of Total

FYs 2018-27 Final

Strategy

Percent of Total

Change

Total Program $104,095 100% $95,845 100% $8,250 --

Infrastructure Total $35,258 34% $33,940 35% $1,318 (2%)

Environmental Protection 19,667 19% 18,073 19% 1,594 0% Transportation and Transit 15,591 15% 15,867 17% (276) (2%) Non-Infrastructure Total $68,839 66% $61,905 65% $6,934 2%

Education 23,618 23% 20,918 22% 2,700 1% Housing 12,954 12% 10,944 11% 2,010 1% Citywide & Business Services & Equipment 12,501 12% 10,894 11% 1,607 1% Hospital, Health, Social Services & Sanitation 7,558 7% 7,529 8% 29 (1%) Public Safety 6,535 6% 6,771 7% (236) (1%) Cultural & Recreation 5,673 5% 4,849 5% 824 0% Numbers may not add due to rounding.

In a comparison review, the prior and current strategies have a similar content distribution, as illustrated in Table 9. Non-infrastructure projects comprise $68.8 billion (or 66 percent) of the total commitments, while infrastructure projects comprise the

Preliminary Capital Strategy FYs 2020-29 ($ in billions)

First Half: FYs 2020-24 5-Year Percent 5-Year Subtotal of Total Average City Funds $70.4 68% $14.1 Noncity Funds 5.1 5 1.0 Total $75.5 73% $15.1 Second Half: FYs 2025-29 5-Year Percent 5-Year Subtotal of Total Average City Funds $27.9 26% $5.6 Noncity Funds 0.6 1 0.1 Total $28.5 27% $5.7

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remaining $35.3 billion (or 34 percent).12 In developing the preliminary strategy, the city added $6.9 billion of commitments to non-infrastructure areas, with education and housing combined receiving $4.7 billion of the increase. Meanwhile, commitments were augmented by $1.3 billion for infrastructure areas, which include investments in environmental protection, transportation and transit.

In the current strategy, the non-infrastructure area of education contains the largest sum of commitments at $23.6 billion, with almost all allocated to the Department of Education (DOE) and $594 million to the City University of New York (CUNY). At $23 billion in total funds, commitments for DOE were increased by $2.5 billion compared to the prior strategy, and remained at a similar share of the total strategy. Of the overall increase for DOE, $2 billion is earmarked for new school expansion, which will provide additional capacity to address the issue of overcrowding.

Housing contains the second largest sum of commitments under the non-infrastructure area at almost $13 billion, with $9.9 billion for Housing Preservation and Development (HPD) and $3 billion for New York City Housing Authority (NYCHA). Commitments for these agencies combined have been enlarged by $2 billion relative to the prior strategy, with the greater part of the growth, totaling $1.6 billion, for NYCHA.

Funding for HPD reflects the Mayor’s initiative to preserve, upgrade and expand the city’s affordable housing stock. In fact, $5.1 billion of city-funded HPD commitments are dedicated to the construction of new units serving low-, moderate- and middle-income New Yorkers as well as seniors, persons with disabilities and formally homeless households. In addition to the support for affordable housing is funding for public housing that is managed by NYCHA. The increased funding for NYCHA is to satisfy an agreement with the federal government and to address the deterioration caused by long-term deferred repairs and maintenance to the city’s public housing system serving over 380,000 low-income residents.13

Investments in environmental protection, transportation and transit comprise the infrastructure category, making up 34 percent of the capital program. Compared to the prior strategy, commitments increased by $1.6 billion for the Department of Environmental Protection (DEP) and decreased by $276 million for transportation and transit. DEP with $19.7 billion of commitments, remains at 19 percent of the program,

12 In distinguishing infrastructure from non-infrastructure areas, we use the traditional public works definition of infrastructure and include the agencies that are responsible for physical assets that are indispensable to economic activity such as transportation, transit and environmental protection.

13 On January 31, 2019, the city, the US Department of Housing and Urban Development and US District Court for the Southern District of New York reached an agreement that included the appointment of a federal monitor, a commitment from the city to spend $2.2 billion over the next ten years to address crucial repairs in NYCHA’s buildings as well as organization changes that include the development of internal controls to prevent deceptive practices.

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similar to the prior strategy. With the reduction in the areas of transportation and transit, the proportional representation declines from 17 percent to 15 percent.

Subsequent to the release of the preliminary capital strategy, the Governor and Mayor announced a joint proposal to transform and fund the Metropolitan Transportation Authority (MTA). The proposal includes a 10-point plan to reorganize the MTA and create dedicated funding streams for the agency. Some of the details include a reorganization plan to make the agency more efficient by centralizing common functions among the MTA’s entities. Also included in the proposal is the creation of funding sources such as revenues from congestion pricing tolls, as well as internet sales and cannabis excise taxes. These items among others included in the proposal will need approval by the state legislature.

In addition to the distribution of commitments by functional areas, the preliminary strategy provides a summary classification of total commitments as repair, replacement or expansion. This piece of information is critical in gauging the prioritization of asset maintenance. Similar to the composition of the last strategy, the portion dedicated to the repair and replacement of the city’s physical assets is approximately 75 percent, with the remaining share designated for expansion at 25 percent. Of the $8.3 billion increase in the current strategy, over 80 percent, $6.7 billion, is for commitments categorized as repair and replacement. The continued emphasis on asset maintenance in the preliminary ten-year capital strategy presentation suggests that the city is giving priority to maximizing the useful life of its assets.

Debt Service Profile

In conjunction with the release of the preliminary ten-year capital strategy, the city provides debt service analysis for the time period through FY 2029. Based on projections, debt service costs generated by the city and the NYCTFA are forecasted to rise in the ten-year period of the strategy from $7.3 billion in FY 2020 to $11.1 billion in FY 2029, as shown in the figure to the right. This growth in debt service amounts to an average annual rate of 4.7 percent.

The primary source of debt service payments is city tax revenues. The forecasted tax revenues for FYs 2020-29 will rise from $62.9 billion in FY 2020 to $87.7 billion in FY 2029, for an average annual growth rate of 3.8 percent. As a share of tax revenues, debt service is projected to climb from 11.7 percent in FY 2020 and peaks at 13.6 percent in FY 2026 before dropping to 12.7 percent in FY 2029. Although debt service is projected to grow at a faster rate than tax revenues, the annual debt service burden remains under the 15 percent the city deems as affordable over the fiscal years of the capital strategy.

City and NYCTFA Debt Service Net of Prepayments

($ in millions)

Debt Tax DS as % FYs Service Revenues Tax Rev

2020 $7,345 $62,916 11.7% 2021 7,658 64,768 11.8% 2022 8,337 66,930 12.5% 2023 9,086 68,895 13.2% 2024 9,573 71,509 13.4% 2025 10,049 74,394 13.5% 2026 10,519 77,461 13.6% 2027 10,783 80,692 13.4% 2028 11,067 84,106 13.2% 2029 11,126 87,717 12.7%

Average Annual Growth 4.7% 3.8%

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The forecast of a declining debt service burden beyond FY 2026 assumes capital needs will stabilize in the second half of the ten-year strategy. As shown in the figure on page 21, approximately 73 percent of the commitments are scheduled to be undertaken in the first five years and 27 percent in the second five-year period. If commitments funded from city and NYCTFA tax revenue-supported bonds are expanded beyond the levels in the strategy, debt service costs could increase.

The city prudently applies conservative interest rate assumptions to its future bond issuances, providing a cushion in the event capital spending becomes higher than forecasted. Potentially adding to this cushion is Moody’s Investors Service recent rating upgrade of the city’s general obligation bonds to Aa1 from Aa2, which may translate into lower borrowing costs. The city recognizes that tax revenue collections can be volatile and on occasion have even fallen year-over-year. As a precaution, citing fiscal uncertainties, the city has set aside $250 million in each of FYs 2020-23 in a capital stabilization reserve fund that could be used to defease debt in the case of a sudden economic downturn that weakens tax collection.

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IV. Glossary of Acronyms

BARBs Building Aid Revenue Bonds

BSA Budget Stabilization Account

CUNY City University of New York

DC 37 District Council 37

DEP Department of Environmental Protection

DOE Department of Education

FCB Financial Control Board

FY Fiscal Year

HPD Housing Preservation and Development

MTA Metropolitan Transit Authority

NYCERS New York City Employees’ Retirement System

NYCHA New York City Housing Authority

NYCTFA New York City Transitional Finance Authority

NYSE New York Stock Exchange

PEG Program to Eliminate the Gap

PIT Personal Income Tax

RHBT Retiree Health Benefits Trust

STAR School Tax Relief Program

STARC Sales Tax Asset Receivable Corporation

UBT Unincorporated Business Tax

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