New York City Independent Budget Office

Fiscal Brie
March 2011
Analysis of the
Mayor’s Preliminary
Budget for 2012

IBO’s Reestimate
Of the Mayor’s
Preliminary
Budget for 2012
And Financial Plan
Through 2015

IBO New York City

Independent Budget Office
Ronnie Lowenstein, Director
110 William St., 14th floor
New York, NY 10038
Tel. (212) 442-0632
Fax (212) 442-0350
iboenews@ibo.nyc.ny.us
www.ibo.nyc.ny.us
 Preface
As required under the New York City Charter, this report provides IBO’s review of the
Mayor’s Preliminary Budget for 2012 and Financial Plan through 2015. The report
presents our own economic and revenue forecasts and examines some of the Mayor’s
key budget proposals.

As we have for the past 10 years, IBO will also produce a companion volume to this
report, Budget Options for New York City. The budget options report will be released
within the coming weeks. As in past years, the new edition will present dozens of ways
to reduce spending or increase revenue. For each measure presented, IBO will offer
pros and cons and provide an impartial estimate of the potential savings or revenue.

A note on format: unless otherwise indicated, all years refer to the city’s fiscal year,
which runs from July 1 to June 30.

This report is crafted through the hard work and dedication of much of IBO’s staff. The
names and areas of responsibility of IBO’s team of budget analysts and economists
who contributed to this report are included at the end of this volume. The report is
produced under the direction of Supervising Analysts Ana Champeny, Ray Domanico,
Michael Jacobs, and Paul Lopatto, and Assistant Deputy Director Ana Ventura with
guidance from Deputy Directors Frank Posillico and George Sweeting. Tara Swanson
coordinated production and distribution and Elizabeth Brown and Doug Turetsky
provided editorial assistance.

Ronnie Lowenstein

Director

NYC Independent Budget Office March 2011 i

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Contents
Preface i

Overview 1

Economic Oulook

Sustained Recovery 7
U.S. Economy 7
The Local Forecast 9
Policy Boosts and Risks in the Forecast 11

Taxes and Other Revenue 13

Real Property Tax 15

Mortgage Recording and Real Property Transfer Taxes 20
Personal Income Tax 21
Business Income Taxes 23
General Sales Tax 25
Hotel Occupancy Tax 26

Expenditure Outlook 29

Education

The City Is Spending More, the State Less and

Spending Priorities Have Shifted 31
City Funding Replaces State and Federal Support 31
As Classroom Spending Drops Again, Spending on
Private Special Education and Charter Schools Grow 32
Funding and Priorities Are Also Shifting in
the Capital Plan 36

State & Federal Proposals Could Affect the City

City to Eliminate Rental Subsidy Program,

If State Cuts Stand 39
Senior Centers at Risk of Closure Due to Proposed
State Funding Shift 40
Funding Shortfall Could Mean 16,000 Less
Child Care Slots 40
Budget Proposals Put Funding for
Youth Programs at Risk 41
Changes to State Juvenile Justice Funding
Could Increase City Costs 43
Governor’s Budget Plan for Public Assistance:
Some City Savings, Some Bigger Cuts 44

ii NYC Independent Budget Office March 2011

 Medicaid Expenditures Are Rising,
but Some State and Federal Fiscal Relief 45
Proposed State Medicaid Cuts Threaten
HHC’s Already Strained Finances 47

City Budget Initiatives

Fire and Police Staffing Continues to Shrink 49

“Extreme” Weather Hits Budget 49
Parks Department Restores City 51
Funding for Personnel Cost
City Increases Local Support for Job Seekers 52
Labor Costs and Proposed Savings

Capital Spending, Financing & Debt Service

55
Four-Year Capital Commitment Plan 56
Ten-Year Capital Strategy
Ten-Year Strategy Includes $732 Million for Green 57
Infrastructure to Reduce Combined Sewer Overflows 58
Paying for the Capital Program
61
Contributors

NYC Independent Budget Office March 2011 iii

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

iv NYC Independent Budget Office March 2011

 OVERVIEW

Overview
While the recent recession has left many statehouses not addressed in the Mayor’s budget plan and would
and city halls awash in red ink, New York City is affect many popular programs—from providing summer
currently in comparatively good fiscal condition. But jobs for teens to keeping senior centers open. City Hall
comparisons do not tell the full story. While the city’s is already facing pressure to ensure the preservation of
fiscal picture may look relatively good, it is partly due the affected programs.
to steps to cut costs and raise revenue that were
already well under way, and also because the fiscal But New Yorkers should not expect a surge in local tax
implications of some potential new problems were revenues like the city experienced in the middle of the
ignored for now. last decade to make up for the lost aid. The financial
industry may become less profitable, and therefore
A quick review of the Bloomberg Administration’s generate less tax revenue for the city, as it adapts
February 2011 budget plan can leave a reader with a to the Dodd-Frank regulations as well as new bonus
sense of complacency. This is in part because many restrictions proposed by the Securities and Exchange
of the more controversial actions to close the city’s Commission. Local employment in health care, which
projected budget gap for 2012, from eliminating has grown right through several past downturns, may
thousands of teaching positions to closing 20 fire be curtailed by proposed state Medicaid cuts and as
companies, were announced in prior plans. At federal health care reform takes shape.
the same time, the Mayor’s acknowledgement of
substantially more tax revenue than he projected last Based on IBO’s latest revenue and expenditure
fall for this year and next eased the need for additional estimates under the Mayor’s Preliminary Budget for
cost-cutting measures. 2012 and Financial Plan through 2015, the city will end
the current fiscal year with a surplus of $2.9 billion,
The February budget plan also sidesteps some $258 million below the Bloomberg Administration’s
potential issues. Fiscal turbulence in Albany and projection. The projected fiscal year 2011 surplus
Washington means the city will likely lose substantial results from a variety of sources: higher tax revenue
amounts of aid from the state and federal governments collections than expected when the budget was
in the upcoming fiscal years. Some of these losses are adopted, a delay in changing how the city’s pension
contributions
are calculated,
Total Revenue and Expenditure Projections
Dollars in millions
accounting
Average adjustments, and
2011 2012 2013 2014 2015 Change $585 million in
Total Revenues $65,656 $66,228 $68,229 $70,298 $72,630 2.6% agency initiatives to
Total Taxes 39,020 41,319 43,320 45,312 47,616 5.1% reduce spending or
Total Expenditures 65,656 66,423 72,166 73,715 75,625 3.6% increase revenues
IBO Surplus / (Gap) Projections - $(195) $(3,937) $(3,416) $(2,996) are among the major
Adjusted for Prepayments:
factors.
Total Expenditures $66,409 $69,316 $72,166 $73,715 $75,625 3.3%
City Funded Expenditures $44,783 $50,062 $53,036 $54,572 $56,487 6.0%
SOURCE: IBO With the expectation
NOTES: IBO projects a surplus of $2.893 billion for 2011, $258 million below the Bloomberg Administration's that the 2011
forecast. The surplus is used to prepay some 2012 expenditures, leaving 2011 with a balanced budget. surplus will be used
Estimates exclude intra-city revenues and expenditures. City funded expenditures exclude state, federal and
to prepay some of
other categorical grants, and interfund agreement amounts. Figures may not add due to rounding.

NYC Independent Budget Office March 2011 1

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Pricing Differences Between IBO and the Bloomberg Administration

Items that Affect the Gap
Dollars in millions
2011 2012 2013 2014 2015
Gaps as Estimated by the Mayor - - $(4,852) $(4,813) $(4,977)

Revenues
Taxes
Property $(8) $(94) $69 $336 $703
Personal Income (221) (15) 509 365 550
General Sales 98 143 289 445 305
General Corporation 18 84 142 341 488
Unincorporated Business (61) 68 132 123 150
Banking Corporation (61) 22 (154) (135) (104)
Real Property Transfer (25) 5 14 51 25
Mortgage Recording (5) (4) (4) (2) (21)
Utility 24 24 28 28 31
Hotel Occupancy 4 (5) 44 41 30
Commercial Rent (2) (11) (21) (33) (47)
Cigarette 3 (1) (1) (1) (1)
(236) 217 1,046 1,561 2,110
STaR Reimbursement (5) (10) (7) (6) (4)
Total Revenues $(241) $208 $1,039 $1,556 $2,106

Expenditures
Public Assistance $8 $8 $11 $11 $11
Police (25) (100) (100) (100) (100)
Fire - (25) (25) (25) (25)
Correction (10) (10) (10) (10) (10)
Campaign Finance - - - (34) -
Parks and Recreation - (9) - - -
Small Business Services 9 (9) - - -
Total Expenditures $(18) $(145) $(124) $(158) $(124)

Total IBO Pricing Differences $(258) $63 $915 $1,397 $1,981

IBO Prepayment Adjustment 2011 /2012 $258 $(258) - - -

IBO Surplus / (Gap) Projections - $(195) $(3,937) $(3,416) $(2,996)
SOURCE: IBO
NOTES: Negative pricing differences (in parentheses) widen the gaps, while positive pricing differences
narrow the gaps. Figures may not add due to rounding.

next year’s expenditures and that the Mayor’s plan million by eliminating Variable Supplement Fund benefit
will be approved for $1.0 billion in agency gap-closing checks for future police officer and firefighter retirees.
measures first announced in November—on top of $4.2 Winning this additional aid from Albany is far from
billion in gap-closing actions previously announced for certain given the state’s $10 billion shortfall and how
2012—we estimate the city faces a small shortfall of controversial legislation to curtail the supplement fund
$195.0 million, or less than 1 percent of tax and other benefit is likely to be. Without this help from the state the
city-generated revenues, next year. The modest 2012 Mayor says further cuts by the city will be necessary.
shortfall presumes the city receives $400 million in aid
not currently in the Governor’s budget plan as well as Even if the Mayor gets the additional assistance from
legislative action by Albany to allow the city to save $200 Albany, the city’s fiscal picture becomes murkier after

2 NYC Independent Budget Office March 2011

 OVERVIEW

next year because expenditure growth is outpacing Some of the most recent measures planned for 2012
revenues and there is no expectation of a substantial range from eliminating more than 6,100 teaching
surplus that can help prepay some 2013 expenses. positions to cutting the city’s subsidy for public libraries
Although IBO’s forecast of 2013 tax revenues exceeds by $19.7 million (8 percent) to reducing the work year
the Mayor’s by more than $1 billion, we still project a for roughly 1,470 parks employees (about half the
budget gap of $3.9 billion in 2013. agency’s full-time staff).

A Stronger Local Economy, Rising Tax Revenues. City spending is also being supplemented this year and
The city fared better during the recession than many next by the use of funds set aside for retiree health
observers—including IBO—had expected and the benefits. The Mayor is drawing down $395 million in
strength of its rebound has also been surprising. The 2011 and $672 million in 2012 from the Retiree Health
city has already regained nearly half of the 131,700 Benefits Trust Fund.
private-sector jobs it lost during the downturn. IBO’s
latest economic forecast expects this growth to Spending Tempered, But Continues to Grow. While
continue, with the city adding about 73,200 private- most of the planned gap closers generate recurring
sector jobs from the fourth quarter of 2010 through the savings in the ensuing years, city spending continues
fourth quarter of 2011 followed by gains of 50,000 to to grow. IBO projects that total city spending, adjusted
60,000 jobs annually through 2015. for the use of surpluses for prepayments, will rise from
$66.4 billion this year to $69.3 billion in 2012 and
But many of the new jobs the city is adding do not pay $72.2 billion in 2013. Looking just at city funds and
as well as the ones that were lost, which means less again adjusting for the use of surpluses, IBO expects
of a boost for the local economy and city tax revenues. spending to increase from $44.8 billion in 2011 to
Additionally, the city’s unemployment rate remains $50.1 billion next fiscal year and $53.0 in 2013.
stubbornly high at 8.9 percent as of January 2011. And
for those who are unemployed for long spells, finding This spending growth occurs even though under the
work is increasingly difficult. Long-term unemployment Mayor’s February 2011 Financial Plan total spending by
has increased, with 50.7 percent of the unemployed most city agencies would remain relatively flat. A large
in January 2011 jobless for more than 26 weeks, up share of the expected growth in spending is confined
nearly 11 percentage points from January 2010. to just a few portions of the budget: debt service on
the money the city borrows and pension, health, and
Based on our economic forecast and the expectation other fringe benefits for city workers. The city’s share of
of continued job growth, IBO projects tax revenues Medicaid costs is also expected to jump substantially in
will increase by 6 percent in 2012, rising from $39.0 2012 as the temporary increase in the federal portion
billion in 2011 to $41.3 billion. This increase is fueled of Medicaid expires.
in dollar terms by the personal income tax, which will
grow by $900 million and reach $8.2 billion, and the City spending could be further affected by diminished
property tax, which will grow by $710 million and total state and federal aid. The Mayor’s recent budget
$17.5 billion. We anticipate tax revenues will increase plan does not account for a number of proposed aid
another $2.0 billion in 2013 and total $43.3 billion. reductions that could have substantial effects on city
IBO’s tax revenue estimates are similar to those of the programs. The Governor’s budget, for example, does
Bloomberg Administration for 2011 and 2012, but ours not include funding for the Advantage rental subsidy
are substantially higher for 2013 and the ensuing years program for individuals and families leaving the city’s
of the financial plan. shelter system. If the city does not replace the $140
million in state and federal funds to maintain the
Gap-Closing Measures. A series of gap-closing program, the number of people in the city’s shelter
measures totaling $5.2 billion are planned for 2012. system will almost certainly be higher than currently
With budget gaps widening early in the recession, the projected, which would require the city to spend more
Bloomberg Administration first presented proposals on shelter—spending that is not included in the Mayor’s
to close the gap in the January 2008 Financial Plan. budget plan. Issues related to state and federal aid for

NYC Independent Budget Office March 2011 3

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Advantage and other programs are looked at in more retroactively. Each 1 percent increase in salary not paid
detail in this report. for with labor savings would cost the city about $290
million, including additional pension costs.
On the federal level, funding has not kept up with the
rising cost of providing subsidized child care, which The Mayor is also seeking changes in the pension
the Mayor says will mean the elimination of more programs for city workers that would have to be
than 16,600 child care slots for working families in approved by Albany. Although these changes are
2012 (more details are provided in this report). The politically fraught, the Mayor has included the expected
President’s proposed budget for the next federal fiscal savings in his budget plan. One pension-related
year includes cuts to programs such as the Community change, to the Variable Supplement Fund, is expected
Development Block Grant, which supplies much of to save $200 million in 2012, and is part of the $600
the funding for the city’s emergency housing repair million in additional help the Bloomberg Administration
programs as well as supports other services, and is seeking from Albany to balance next year’s budget.
the Community Services Block Grant, which funds Other proposed pension changes would not generate
neighborhood-based antipoverty programs in some of savings until 2013 and beyond.
the poorest communities in the city. City Hall is already
feeling the pressure to preserve the child care slots While spending uncertainties pose a number of threats
and will face similar pressures if the block grants and to the budget plan, there are also economic issues that
other funding streams are reduced without the city could weaken tax revenues and affect budget shortfalls
itself stepping in to pay for the services. in the coming years. New financial regulations under
the Dodd-Frank Wall Street Reform and Consumer
Matters for Concern. While City Hall faces difficult Protection Act are only just getting implemented. As
decisions on whether and how to maintain funding regulations restructuring the financial industry take
for any or all of the programs threatened by eroding effect, they are likely to have long-term implications for
state and federal aid, the Mayor’s budget plan for Wall Street profitability and compensation—and local
2012 counts on $600 million in assistance ($400 tax revenues.
million in direct aid) from Albany that was not part of
the Governor’s budget. The Mayor says that without The implementation of national health care reform as
the additional state aid—which is far from a certainty well as efforts to reduce state Medicaid spending may
given that the state is wrestling with its own $10 billion also have economic and tax revenue consequences
shortfall—the city will need to make commensurate for the city. Health care is a significant part of the city’s
cuts on top of the cumulative $5.2 billion in gap-closing economy and the number of health care jobs here grew
actions already proposed for 2012. The Mayor has right through the 2008-2009 recession, just as they
since instructed most agencies to submit proposals by did through several prior downturns. Proposals recently
March 24, one week before the state budget is due to announced by the Governor’s Medicaid task force, along
be passed. with the national health care reforms that take shape
over the next few years, may change the trajectory of this
Another matter that could substantially affect the city’s longtime growth sector in the city’s economy.
budget is settlements with the municipal labor unions.
Contracts have already expired with major unions such Broader current events could also take a toll on the
as District Council 37, and the teachers, police officers, city’s economy. The uprisings roiling the Middle East
and firefighters. Agreements with sanitation workers have led to a spike in oil prices. If fuel prices remain
and correction officers end early in the upcoming high, the city’s tourism industry could be adversely
fiscal year. The Mayor has not budgeted for raises for affected and the local leisure and hospitality sector,
any contract settlements during the current round of which gained 10,600 jobs last year, could see its
negotiations. The Bloomberg Administration is counting growth slowed or reversed. And the still developing
on productivity to offset any raises, a position that has tragedy in Japan, one of the largest economies in
proven difficult to maintain in the past—particularly the world and a major U.S. trading partner, may have
when productivity would have to achieve savings significant consequences on a local and global scale.

4 NYC Independent Budget Office March 2011

 OVERVIEW

A Precarious Balance. While New York City’s fiscal services while maintaining budget balance may be
picture looks stronger at the moment than that of many severely tested if state and federal cutbacks continue
states or municipalities, that continued strength is to mount.
far from certain. Although IBO’s projected budget gap
for the upcoming year is quite small, the $3.9 billion Economic uncertainties could also undo the city’s
shortfall we forecast for 2013 is nearly 8 percent of tax current strength. Although we weathered the recession
and other city-generated revenues. better than most expected and over the past year job
growth here exceeded the national rate, factors ranging
Ongoing state and federal cutbacks pose significant from regulatory reform of Wall Street to Medicaid
and growing challenges. The city’s current budgetary cuts and health care reform to rising oil prices could
strength was built in part on successive and substantial substantially affect the city’s employment growth and
rounds of local budget cuts over the past three years. tax revenues.
The city’s ability to deliver needed and expected

NYC Independent Budget Office March 2011 5

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

6 NYC Independent Budget Office March 2011

 REVENUE / Economic Outlook

Economic Outlook
Sustained Recovery percent of private-sector jobs, real average wages fell a
total of 12.2 percent during 2008 and 2009, with the
The U.S. economy resumed growing well over a year ago, industry with the highest pay, securities, accounting
first in terms of output and now in terms of employment. for two-thirds of the loss. The recession battered the
(All years in this section refer to calendar years, unless securities industry and the financial sector as a whole,
otherwise noted.) Economic growth has been halting, but the maintenance of rock-bottom interest rates by
in spite of the federal stimulus spending and tax cuts, the Federal Reserve generated enormous profits on
and the Federal Reserve’s highly stimulatory monetary Wall Street, averaging $44.5 billion in 2009 and 2010.
policy. Recent economic data, however, are encouraging. These rates will not be maintained, and IBO forecasts
By the end of 2010, increases in personal consumption, Wall Street profits to fall gradually, from $21 billion this
nonresidential investment, and net exports were all year to the $11 billion at the end of the forecast period,
contributing to real GDP growth. Despite the continued constraining both employment and wage growth in the
loss of government jobs, by February total employment industry. Still, the industry accounts for 28.7 percent
had increased for five consecutive months. of forecast wage growth through 2015 yet only 4.5
percent of the projected employment growth. The three
Conditions for a long-awaited acceleration of the sectors that account for 69.1 percent of employment
economy’s expansion are in place—high profits and strong growth—business and professional services, education
balance sheets of businesses, reduced indebtedness of and health, and leisure and hospitality—will account for
households, increased nonresidential asset values, and only 43.6 percent of expected wage growth.
recapitalization of lenders. IBO forecasts faster economic
growth beginning in the second half of this year, with The risks to IBO’s forecasts of the nation’s and
real GDP growth reaching an average annual rate of the city’s economies are many including long-term
3.5 percent in 2012 and remaining at a still-robust 3.4 increases in oil prices, the question of long-term federal
percent and 3.3 percent in 2013 and 2014, respectively. fiscal sustainability, the sufficiency of government
stimulus to propel the economy to self-sustained
In contrast to previous downturns, the 2008-2009 growth, potential implementation of financial regulation
recession was shorter and had a less severe impact on that could substantially constrain employment and/
employment in New York City than it did in the nation or profits of New York-based financial firms. These and
as a whole, and the recovery to date has been stronger. other risks are highlighted after discussions of the
Newly revised employment data reveals that the city national and local economic outlooks.
regained about half of the 131,700 private-sector jobs
it lost in four quarters—the fourth quarter of 2008 U.S. Economy
through the third quarter of 2009. IBO forecasts a total
of 73,200 private-sector jobs will be added to the city’s The economy continues to recover, albeit at a more
economy from the fourth quarter of 2010 through the halting rate than in past recoveries and unemployment
fourth quarter of 2011, followed by annual employment remains stubbornly high. Real gross domestic product
gains of 50,000 to 60,000 jobs through 2015. (GDP) rose in the third and fourth quarters of 2010
at annualized rates of 2.6 percent and 2.8 percent,
But in terms of income, the collapse of earnings in respectively, after dipping to 1.7 percent in the second
the city during the recession was on a scale more quarter. Although government spending and private
consistent with the extent of the dislocations for the inventory investment, which had lifted the economy
U.S. economy as a whole. In contrast to the loss of 4.1 earlier, declined in the fourth quarter of 2010, increases

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 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

IBO versus Mayor's Office of Management and Budget Economic Forecasts weaker dollar helped raise exports and
2010 2011 2012 2013 2014 2015 lower imports.
National Economy
Real GDP Growth In the labor market, February’s
IBO 2.8 3.3 3.5 3.4 3.3 3.0
OMB 2.9 3.2 2.8 3.2 3.4 3.0 private sector gain of 222,000 jobs
Nonfarm Employment Growth was certainly welcome news after the
IBO -0.7 1.1 1.7 1.8 2.9 2.4 discouraging gain of 68,000 jobs in
OMB -0.5 1.4 2.0 2.1 2.1 1.7
January. Despite continued losses of
Inflation Rate (CPI-U)
IBO 1.6 1.2 1.8 2.6 2.7 3.3 government jobs, total employment
OMB 1.7 1.6 1.9 2.0 2.3 2.2 has increased for five consecutive
Personal Income Growth months, with average gains per
IBO 3.0 5.1 6.5 7.7 5.4 4.7
month of 138,700 jobs. At this point,
OMB 3.0 4.9 3.3 4.7 5.7 5.9
Unemployment Rate 1.3 million (14.5 percent) of the 8.8
IBO 9.6 9.3 8.3 7.1 5.7 5.5 million jobs lost between January
OMB 9.7 9.3 8.8 8.0 7.3 6.7 2008 and February 2010 have
10-Year Treasury Bond Rate
IBO 3.2 3.7 5.0 5.1 4.9 5.0
been regained. The unemployment
OMB 3.2 3.6 4.2 4.6 4.8 5.6 rate also dropped slightly from 9.0
Federal Funds Rate percent in January to 8.9 percent in
IBO 0.2 0.2 1.0 3.0 3.8 4.0
February as the number of Americans
OMB 0.2 0.2 1.3 3.4 3.6 4.7
NYC Economy employed increased by more than the
Nonfarm New Jobs (thousands) decrease in the number unemployed.
IBO 14.7 43.2 64.5 63.3 67.0 57.4 The unemployment rate was last
OMB -10.0 32.0 39.0 41.0 44.0 43.0
below 9.0 percent in April 2009.
Nonfarm Employment Growth
IBO 0.4 1.2 1.7 1.7 1.7 1.5
OMB -0.3 0.9 1.0 1.1 1.1 1.1 This recent news on the labor
Inflation Rate (CPI-U-NY) market strengthens IBO’s view that
IBO 1.5 1.6 2.1 2.5 2.3 2.3
OMB 1.7 1.7 2.0 2.1 2.4 2.4
conditions are finally in place for
Personal Income ($ billions) economic growth to accelerate this
IBO 433.3 460.1 486.2 521.2 549.0 580.5 year. Businesses are enjoying high
OMB 429.5 446.2 455.0 472.7 496.7 522.5 profits and healthy balance sheets.
Personal Income Growth
IBO 5.2 6.2 5.7 7.2 5.3 5.7 Households continue to improve their
OMB 3.3 3.9 2.0 3.9 5.1 5.2 balance sheets as well, thanks partly
Manhattan Office Rents ($/sq.ft) to very low interest rates and partly
IBO 62.7 65.0 65.7 66.2 67.1 68.7
to improved stock market returns.
OMB 61.6 63.0 66.2 66.6 68.3 72.6
SOURCES: IBO; Mayor's Office of Management and Budget Although home values have continued
NOTES: Rates reflect year-over-year percentage changes except for unemployment, 10-Year to decline, households have reduced
Treasury Bond Rate, Federal Funds Rate, and Manhattan Office Rents. The local price index for their indebtedness and seen the
urban consumers (CPI-U-NY) covers the New York/Northern New Jersey region. Personal income
is nominal. IBO's 2010 employment figures are based on "benchmarked" Bureau of Labor value of their nonresidential assets
Statistics data released March 9, 2011. rise again. Lenders, as a group, are
well capitalized and face higher
in personal consumption expenditures (particularly on quality credit applicants and profitable
durable goods), net exports, and nonresidential fixed lending margins. Business and consumer confidence
investment helped raise GDP. Real personal consumption remains fragile, but shows signs of improvement. IBO
expenditures finally returned to the peak level they had expects businesses to step up hiring and investment in
reached in the fourth quarter of 2007, and private fixed the first half of this year.
investment in equipment and software came closer to
where it had been. The temporary 2 percentage-point IBO forecasts real GDP growth of 3.3 percent this year,
cut in payroll taxes and higher expense allowances likely with growth accelerating through the year, to reach
pushed consumption and investment up, while the an annualized rate of 4.1 percent in the fourth quarter,

8 NYC Independent Budget Office March 2011

 REVENUE / Economic Outlook

before slowing slightly next year. Annual real GDP growth The Local Forecast
is expected to peak at 3.5 percent in 2012 and then stay
at 3.4 percent and 3.3 percent in the next two years. Employment and Income in Recession and Recovery.
New York City’s job losses during the recession of 2008-
Employment growth is projected to jump sharply in the 2009 were less protracted and less severe than the
second quarter of 2011, and then stay at moderate rest of the nation’s, and the city’s recovery since the
levels through the end of 2012. IBO forecasts an beginning of 2010 has been stronger. Indeed, newly
annual employment growth rate of 1.1 percent this year revised payroll employment data show that the city’s
and 1.7 percent next year, and stronger growth in the private sector shrank by 131,700 jobs (4.1 percent) over
out-years of the forecast. At least initially, hiring could four quarters (the fourth quarter of 2008 through the
be constrained because of a substantial mismatch third quarter of 2009)—20,000 fewer jobs lost and one
between the skills employers require and the skills less quarter (three months) of job losses than previously
of the long-term unemployed. Reduced home values estimated.1 Through the end of 2010, the city has
may also limit migration of workers to job locations, already recovered close to half of the private payroll jobs
particularly those workers whose mortgages exceed the lost—though not the same jobs as were lost.
value of their homes. Cuts in state and local payrolls
will continue to be a drag on overall employment and That the overall losses were not much worse was
continue to offset private-sector employment gains. especially surprising given the convulsions engulfing
The prerecession employment peak of 137.9 million the city’s critical financial sector (which on its own
jobs in first quarter 2008 is not expected to be reached lost 33,000 jobs) during the crisis. That the rebound
until the first quarter of 2014. The unemployment has gained traction here—and is expected to remain
rate is expected to continue its decline at a slow pace solid—also seems a bit unexpected given the modest
through 2013, because of slow job growth and return of projected job gains on Wall Street.
discouraged workers to the labor force.
A notably different picture emerges, however, when we
IBO forecasts accelerating annual personal income move from jobs to incomes. The collapse of earnings
growth of 5.1 percent in 2011, 6.5 percent in 2012, in the city was on a scale more consistent with the
and then 7.7 percent in 2012, as more people become extent of the dislocations for the U.S. economy as
employed, work longer hours, and earn more. Although a whole. Real average wages in New York City fell a
oil prices are projected to remain high as demands total of 12.2 percent during 2008 and 2009, by far
of emerging economies grow and continuing
political unrest in the Middle East threatens Shares of New York City Employment Growth, 2010-2015
to disrupt oil supplies, inflation is expected
to stay at moderate levels of 1.2 percent this Other Services, Gov., 1.6%
Constr., 4.2%
3.1%
year and 1.7 percent in 2012. IBO expects the
Transp. & Util.,
Federal Reserve to raise interest rates sharply Trade, 8.6% 0.1%
beginning in 2012 to keep inflation at bay. Information, 4.0%
Leisure &
In the near term, IBO’s U.S. economic Hosp., 15.3% Securities, 4.5%
forecast is somewhat more optimistic than
that of the Mayor’s Office of Management Other Fin. &
and Budget (OMB). Unlike IBO, OMB Ed.& Health Care, RealEst., 5.5%
expects GDP growth to slow sharply in 27.5% Prof. & Bus.
2012 and their forecast of personal income Services, 26.3%
growth—particularly in 2012 and 2013—is
considerably below IBO’s. Conversely, OMB
expects more rapid employment growth than
SOURCE: IBO
IBO in 2011 and 2012. NOTE: Manufacturing contributes -0.01% to 2010-2015 New
York City employment growth.

NYC Independent Budget Office March 2011 9

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Wall Street and Main Street. The securities

Shares of New York City Aggregate Real Wage Growth,
2010-2015 industry share of aggregate city wage growth
in IBO’s forecast is actually well below this
Other Services Constr. Man. Trade
2.5% 1.4% 0.3% 5.4% Transp. & industry’s share of overall wage growth in
Leisure & Hosp. Util. recent decades (37.3 percent in 1995-2001
5.1% Gov. Information 1.2%
6.6% 5.2% and 57.6 percent in 2004-2007). This reflects
IBO’s outlook for low securities employment
growth and for average real wage growth—8.1
Ed.& Health
Care
percent per year over 2010 through 2015—that
13.8% Securities is itself relatively tame for this industry. Looking
28.7%
just at the recent and anticipated performance
Prof. & Bus. of New York Stock Exchange (NYSE) member
Services
17.9% firm profits, more might have been expected.2
Wall Street firms bounced back from
Other Fin. & catastrophic losses from mid-calendar year
Real Est. 2007 through 2008 (a combined loss of $63.9
SOURCE: IBO 11.9% billion) to stratospheric profits in 2009 ($61.4
billion), followed by another exceptional year for
the steepest drop on record in the city. And while wages profits in 2010 ($27.6 billion). IBO’s forecast for
slumped across most of the city’s industries, the small but 2011 is also relatively strong ($21.0 billion).
highly paid securities industry alone accounted for close to
two-thirds of the aggregate decline. Real average wages in However, while NYSE member firms’ profits have
securities nose-dived 27.2 percent over two years (including rebounded from the crisis, there has been no such
23.4 percent in 2009 alone)—again a drop off without recovery in terms of firms’ revenues. Wall Street
precedent, even going back as far as the Great Depression. revenues fell almost in half from 2007 ($352.0 billion)
to 2008 ($178.1 billion), and had drifted even lower
Turning to the recovery of the local economy—at least by 2010 ($160.9 billion). Nor do we anticipate much
measured by employment—we see a pattern similar to of a rebound over the next few years: only by 2015 do
that during the downturn: the city is once again, doing forecast revenues (barely) top $200 billion again. This
better than the nation. Payroll employment in New York does not lend itself to rapid growth in hiring.
City slipped in the fourth quarter of last year but was
still up 55,200 from the fourth quarter of 2009. IBO’s With revenues so depressed, it has been the
forecast calls for another 64,700 jobs to be added by extraordinary plunge in interest costs—the result of
the fourth quarter of 2011, followed by average gains of federal funds rates being reduced to nearly zero to
61,000 per year through 2015. Education and health combat the fiscal crisis—that generated the enormous
care services are expected to generate over a quarter of Wall Street profits of the past few years, and it is the
that job growth (averaging 16,800 jobs added per year gradual return towards something approaching normal
from 2010 through 2015) and professional, technical, interest rates and costs that gradually squeezes profits
and business services another quarter (+16,000 jobs in our forecast (down to $14.9 billion in 2012 and $11
per year), while the leisure and hospitality industries billion to $12 billion per year thereafter).
(including eating places, hotels, and entertainment)
account for another 15 percent (+9,300 jobs per year). Turning to Main Street, the forecast for New York City
employment growth from 2010 through 2015 also
In contrast, the securities industry accounts for less than includes contributions from wholesale and retail trade
5 percent of the city’s recent and projected employment (averaging a combined 5,200 jobs added per year),
gains (averaging 2,800 jobs added per year)—but at the other financial services and real estate (a combined
same time close to 30 percent of the aggregate wage 3,400), construction (2,600), and information (2,400).
gains, nearly as much as will be contributed by business, Except for information, projected employment growth
education, and health care services combined. in these industries lags below prerecession levels. In

10 NYC Independent Budget Office March 2011

 REVENUE / Economic Outlook

part, this reflects our tempered expectations regarding for inflation and interest rates—hangs over the out-
Wall Street—and how many dollars Wall Street firms years of our forecast.
and their employees are pumping into the broader city
economy—but other factors are at play as well. There is also some uncertainty about what happens
after the December round of stimulus ends. Demand is
The moderate gain in construction (and real estate) receiving a boost through the temporary 2 percentage-
employment flows directly from conditions in the city’s point break in employment taxes, but employment and
commercial and residential property markets, where earnings growth could weaken after the cut expires at
prices have been firming but activity remains sluggish. the end of this year, just as consumption slackened
This is especially true on the commercial side, where in early 2010, in part due to the waning of the 2009
even with significantly increased activity in the second stimulus program. Similarly, the December stimulus
half of the year, aggregate sales revenue for the whole package provides a boost to business investment
of 2010 was barely a quarter of the peaks reached in through a short-term loosening of expensing rules.
2007 and 2008. This may shift some investment into this year, but
once the stimulus is withdrawn the pick-up in business
New York City retail trade employment recovers a bit investment may weaken.
more slowly than might be expected given the forecast
for growth in real personal income (a robust 5.3 percent Closer to home, New York State is also grappling with
per year average over 2010–2015) and continued daunting budget gaps, and the response to this includes
strength in tourism coupled with increases in business probable large cuts in state aid to the city (discussed
travel. But average growth in the city’s real after-tax elsewhere in this report) and an attempt to curb the
disposable income is a full percentage point lower growth—and actually cut the costs—of Medicaid.
(4.3 percent). This is a consequence of the expiration
of federal tax cuts included in the recent stimulus The cuts in state aid and in direct state outlays are likely
packages and to other projected policy impacts. to have consequences for government employment
in the city. Government payrolls have already fallen by
Policy Boosts and Risks in the Forecast 4,800 in 2009 (fourth quarter to fourth quarter) and
1,600 in 2010. A larger decline of 8,500 is projected
There are considerable downside risks to IBO’s for 2011, with local government accounting for most
national economic forecast. Sustained upward of the drop, after which we anticipate a return to fairly
pressure on oil prices because of concerns about tepid growth. IBO’s forecast anticipates impending state
political instability could constrain economic growth cutbacks, but it remains to be seen if we have been
both here and abroad. Home construction is usually sufficiently guarded in this part of our outlook.
a major factor in economic recoveries, but not in
the current recovery. IBO expects the decline in Also unknown at this point is how Medicaid funding
home prices to continue as the glut created in the changes and cuts may impact health care services
housing boom is gradually depleted. Although office employment. Over the past four decades nothing has
employment is expected to rise, incentives for new interrupted or even appreciably slowed the growth of
commercial construction are expected to stay low until this sector in New York City—not crisis, not recession,
office vacancy rates come down. not the shifts in comparative advantage that have
winnowed other industries here. But this has been in
Both our national and local growth forecasts for no small part due to the ever rising tide of mandated
2011 has been strengthened somewhat by the public health spending (principally in Medicaid and
federal tax cut extensions and additions enacted Medicare) through all these years.
in December—an additional stimulus package
in all but name. These measures, however, have If part of that funding tide is now dammed (at least
exacerbated the already fraught federal deficit and temporarily) by implementation of the Governor’s
debt outlook, and uncertainty over what this may Medicaid reform program, retrenchments among
imply for future federal spending and taxes—and hospitals, managed care providers, and other

NYC Independent Budget Office March 2011 11

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

health care institutions may follow. In the slightly Bonus regulation and other elements of the Dodd-Frank
longer term, federal health care reform introduces financial overhaul would appear to further reduce the
further unknowns with respect to funding and cost prospects of a return to former rates of wage growth on
containment in the industry. Wall Street.

Wall Street is also the locus of major policy uncertainty,

in the form of potential restructuring needed to Endnotes
comply with the Dodd-Frank legislation, as well as new
1
When government jobs are included, the downturn had about the same
bonus restrictions recently proposed by Securities depth (134,700 total payroll jobs lost) but lasted through the fourth
and Exchange Commission. On top of the revenue quarter of 2009. A large drop in reported local government employment
at the end of 2009 was due to an unusually large summer youth employ-
crunch discussed above, the fallout from the crisis has ment program in July and August 2009.
2
Note that the member firm revenues, expenses, and profits reported by the
already impelled a shift away from cash bonuses in the NYSE encompass the broker/dealer operations, including investment banking,
financial sector, with more pay channeled into deferred trading, underwriting, and commissions, but not asset management.
compensation and (to some extent) baseline salaries.

12 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

Taxes and Other Revenue

Large revenue increases from a variety of taxes plus a growth in the forecast period is 2.6 percent—the
rise in federal categorical grants are fueling a projected result of a forecast of faster growth in tax collections
$2.3 billion increase in 2011 total revenues—3.5 offset by a projected decline in revenues from nontax
percent greater than 2010 revenue. In this section, all revenue sources. A slight decrease in nontax revenue
references are to fiscal years, unless otherwise noted. is projected this year, to be followed by a 8.7 percent
Revenues are projected to increase in subsequent decrease in 2012 and little growth thereafter. In
years as well, from $66.2 billion in 2012 rising to $72.6 contrast, 7.5 percent growth of tax collections is
billion in 2015. The average annual rate of revenue forecast for 2011, followed by average annual tax

IBO Revenue Projections

Dollars in millions
Average
2011 2012 2013 2014 2015 Change
Tax Revenue
Property $16,839 $17,549 $18,266 $18,968 $19,765 4.1%
Personal Income 7,256 8,156 8,943 9,290 10,071 8.5%
General Sales 5,607 5,941 6,228 6,531 6,650 4.4%
General Corporation 2,433 2,809 3,021 3,333 3,586 10.2%
Unincorporated Business 1,644 1,867 2,005 2,079 2,191 7.4%
Banking Corporation 1,184 1,128 856 883 922 -6.1%
Real Property Transfer 743 775 799 901 996 7.6%
Mortgage Recording 439 498 548 616 684 11.7%
Utility 407 422 440 453 470 3.7%
Hotel Occupancy 422 393 425 441 457 2.0%
Commercial Rent 601 611 621 630 639 1.5%
Cigarette 75 71 69 68 66 -3.1%
Other Taxes, Audits, and PEGs 1,371 1,099 1,099 1,119 1,119 -4.9%
Total Taxes $39,020 $41,319 $43,320 $45,312 $47,616 5.1%

Other Revenue
Anticipated State Aid - $600 $600 $600 $600 n/a
STaR Reimbursement 722 808 880 879 880 5.1%
Miscellaneous Revenues 4,289 4,250 4,302 4,367 4,397 0.6%
Unrestricted Intergovernmental Aid 14 12 12 12 12 -3.7%
Disallowances (15) (15) (15) (15) (15) 0.0%
Total Other Revenue $5,010 $5,655 $5,779 $5,844 $5,875 4.1%

Total City-Funded Revenue $44,030 $46,974 $49,099 $51,156 $53,491 5.0%

State Categorical Grants $11,525 $11,300 $11,321 $11,367 $11,368 -0.3%

Federal Categorical Grants 8,212 6,252 6,119 6,088 6,087 -7.2%
Other Categorical Aid 1,330 1,201 1,197 1,195 1,191 -2.7%
Interfund Revenues 559 500 493 493 493 -3.1%

Total Revenues $65,656 $66,228 $68,229 $70,298 $72,630 2.6%

SOURCE: IBO
NOTES: Estimates exclude intra-city revenues. Figures may not add due to rounding.

NYC Independent Budget Office March 2011 13

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

revenue growth of 4.8 percent, through 2015. IBO’s The forecast of total tax collections (including audit
forecast that the current economic recovery will lead revenue) in 2011 is $39.0 billion, $2.7 billion greater
to continued economic growth throughout the forecast than 2010 collections. Eliminating STAR’s personal
period underlies the tax forecast. income tax (PIT) rate cut for filers with $500,000 or
more taxable incomes is boosting 2011 collections
Nontax Revenues. The city’s nontax revenue sources relative to 2010 by an estimated $228 million, but
plus categorical state and federal aid provide 40.6 this is the only substantial tax policy change affecting
percent of the funding in the city’s budget this year, and 2010-2011 growth. After 2011, growth is projected to
about 35 percent in each of the subsequent years. The be steady if more moderate, at an average annual rate
city’s own nontax revenue sources include unrestricted of 4.8 percent. Projected tax revenue is $41.3 billion in
intergovernmental aid, other categorical grants, School 2012, rising to $47.6 billion in 2015.
Tax Relief (STAR) reimbursements, interfund capital
transfers, and miscellaneous revenue from a variety IBO’s 2011 forecast is $285 million higher than our
of sources, including fines, license fees, interest and December forecast. Though the economic outlook has
rental income, water, and other charges. improved, collections so far in the year have prompted
downward revisions in forecasts of the PIT, unincorporated
IBO’s forecast of nontax revenues for this year is $26.6 business tax (UBT), and the banking corporation tax (BCT).
billion, a $118 million decrease (-0.4 percent) from These revisions, however, are more than offset by higher
2010 revenues. A $512 million increase in federal projections, relative to the December forecast, of the real
categorical grants to $8.2 billion accounts for most of property, general corporation, general sales, and real
the change from 2010 to 2011. But in 2012, projected estate transfer taxes.
federal grant revenues decline by $2.0 billion and
remain at that lower level throughout the forecast With an outlook for accelerating economic growth this
period, bringing total nontax revenues down to $24.3 calendar year and next, IBO’s forecast of total revenues
billion in 2012, with little growth in subsequent years. in 2012 is $2.3 billion (5.8 percent) greater than the
Most of the decline in federal revenue comes from 2011 forecast. Revenue from all the major taxes is
the winding down of the American Recovery and projected to increase in 2012, with the exceptions of
Reinvestment Act stimulus money, which totaled $1.6 the highly volatile BCT and the hotel occupancy tax; in
billion in 2011. The act’s funding for expenditures in the latter the expiration of a temporary tax increase
education, public safety, neighborhood stabilization, will reduce 2012 collections relative to 2011. For 2013
energy efficiency, infrastructure, and debt service for through 2015, revenue growth slows, but receipts of
bond programs falls from $1.3 billion this year to $34 all the major taxes, are expected to steadily increase
million in 2012. Stimulus funds for health and social throughout the forecast period.
support, community development, economic and
workforce development, the city university system, IBO’s forecast for the current year is $236 million less
and COBRA, which totaled $155 million in 2011, are than the Preliminary Budget forecast, due mostly to
eliminated altogether in the 2012 budget. lower PIT, UBT, and BCT projections. Only our sales
tax forecast is substantially higher than that of the
State categorical and other categorical grants are Mayor’s Office of Management and Budget (OMB).
also expected to decline, though not at as fast a pace In 2012 and beyond, our forecast of faster economic
as federal grants. Only STAR reimbursements and growth compared with the Mayor’s leads to a total
miscellaneous city revenues are expected to increase revenue forecast $217 million greater than OMB’s in
after the current year, but their annual revenue 2012, and greater by much large amounts thereafter.
together increases by only $266 million from 2011 Higher levels of income and employment in our
through 2015. forecast, relative to the Bloomberg Administration’s,
fuel our greater forecasts of PIT and sales tax growth,
Tax Revenues. In contrast to IBO’s forecast of modest and higher rates of economic growth are fueling
growth of nontax revenue, for this year we expect a more general corporation tax (GCT) and UBT growth
large 7.5 increase in tax revenue over 2010 collections. compared with the Bloomberg Administration’s. IBO’s

14 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

stronger forecast of market values and assessments, growth waiting to be phased in is called the pipeline.
relative to OMB, account for our higher property tax When market values declined or grew more slowly in
forecast in 2013 and especially in the following years. recent years, that pipeline provided a cushion and
assessments continued to increase. The pipeline would
Real Property Tax have been largely exhausted if market values on the
2012 assessment roll had at least sustained the trend
IBO projects that property tax revenues will grow from of slowly declining market values. However, the very
$16.8 billion in 2011 to $17.5 billion in 2012, a 4.2 robust growth seen on this year’s tentative assessment
percent increase. The current 2012 revenue forecast roll will replenish the pipeline and lead to continued
is roughly the same as our December 2010 forecast, growth in assessed value for tax purposes over the
with higher than expected assessed value for tax forecast period.
purposes on the tentative 2012 assessment roll offset
by a higher reserve for abatements, delinquencies, Background. The amount of tax owed on real estate in
and other adjustments. Property tax revenue will grow New York City depends on the type of property, its value
throughout the plan period at an average annual rate of for tax purposes (as calculated by the city’s Department
4.0 percent. of Finance from estimated market value), and the
applicable tax rate.1 Under New York State property
Numerous changes instituted by the Department of tax law, there are four tax classes for the city: Class
Finance (DOF) led to some significant—and somewhat 1, consisting of one-, two-, and three-family homes;
unexpected—changes in market values this year. The Class 2, composed of apartment buildings, including
tentative assessment roll for 2012 showed higher than cooperatives and condominiums; Class 3, made up
expected market value growth, especially among larger of the real property of utility companies; and Class 4,
residential properties (defined as residential buildings comprising all other commercial and industrial property.
with 11 or more units) at 12.8 percent. Conversely,
smaller residential buildings saw market value declines The method of assessing properties and recognizing
of almost 15 percent. There has been considerable market value appreciation differs by tax class, so
pushback against these increases, especially each class can have its own assessment ratio (the
from owners of apartment buildings, coops, and share of market value actually subject to tax) and tax
condominiums in Manhattan and Queens. As reported rate. Generally, Class 1 homes account for a much
by the New York Post, the Department of Finance has smaller share of the assessment roll’s total assessed
already adjusted the market value of more than 2,000 value than its share of market value (10.1 percent
apartment buildings by limiting market value increases of assessed values on the 2011 roll compared with
to 50 percent in response to complaints by property 49.2 percent of total market value in the city). The
owners. To account for these and other changes that other classes, especially Classes 3 and 4, bear a
IBO expects as the finance department continues its disproportionate share of the property tax burden
review, we have projected a larger than usual reduction because their shares of assessed value and tax levy
from the tentative to final roll, about $1.6 billion or 1.0 are larger than their shares of market value.
percent in assessed value for tax purposes.
The Tentative Assessment Roll for 2012. In January,
The robust market value growth of the real estate the Department of Finance released the tentative
boom which was still being phased into assessments 2012 assessment roll. After taxpayer challenges and
helped maintain property tax assessments during the other department adjustments are processed, the
downturn so that annual growth in assessed value for assessment values will be finalized in May and used
tax purposes averaged 5.4 percent from 2009 through for setting 2012 tax rates and bills. Implementation of
2011, down only moderately from the average of 6.0 updated computer models, automation of comparable
percent a year from 2002 through 2009. For large building selection, and a switch in assessment
residential buildings and all commercial property, the methodology for certain residential properties
rapid growth seen during the boom is being phased in resulted in some dramatic increases and decreases in
over a five-year period—this backlog of accumulated market values, although as noted, IBO expects that a

NYC Independent Budget Office March 2011 15

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

somewhat greater share of these changes (at least the compliance in reporting required income and expense
increases) may be reversed this year after review by the statements (the number of nonfilers has declined by
department and the city’s independent Tax Commission. 64 percent since 2007) may have factored in as well.

Excluding utility property, which is assessed by the The gross income multiplier is just as it sounds—market
state in April, overall market value grew just 3.9 value equals gross income times a multiplier, which
percent. Aggregate market value on the tentative 2012 is set annually by the finance department. Under
roll grew robustly for large apartment buildings and income capitalization, gross income less expenses is
commercial properties, 12.8 percent and 10.0 percent, divided by a capitalization rate (set by DOF each year)
respectively, while one-, two-, and three-family homes to determine market value. Income capitalization is
saw modest growth and smaller apartment buildings often preferred for estimating market value because
saw a decline of 14.8 percent. Comparing market it incorporates more information, considering not only
values on the tentative roll with the final roll for 2011, the income of a building, but also its expenses. For
IBO found that 7.3 percent of apartment buildings and example, two buildings of equal size could have similar
4.6 percent of commercial properties saw their market income and therefore similar market value under GIMs.
values increase by more than 50.0 percent, while 4.7 However, if their expenses differ significantly, because
percent of residential buildings in Class 2 saw market of building characteristics such as age or services, this
value decline of more than 50.0 percent. would not be reflected in their valuation. In contrast,
under income capitalization, both factors would be
Excluding Class 3 utility property, aggregate assessed considered in setting the value.
value for tax purposes grew 7.1 percent on the
tentative 2012 roll. Assessed value for tax purposes, Under state law, cooperative and condominium
used to calculate property tax bills, grew more slowly buildings are valued based on the income and
than market value—8.5 percent for large apartment expenses of a comparable rental building. With this
buildings and 7.3 percent for commercial property— tentative roll, DOF implemented a new computer model
because certain features of the property tax moderate to select comparable rental buildings. It appears that
growth in assessed value. Assessed value for tax selection of comparable buildings, especially in certain
purposes grows at a different rate than market value areas of the city, such as northeast Queens, led to
because the methods used to determine assessed dramatic increases in market value this year.
value for most property types incorporate both past and
current market value changes (see Stabilizing Revenue However, because we do not have comparable
Collection During the Downturn: How Assessment data for 2011 and 2012, we cannot determine how
Phase Ins and Caps Affect the City’s Property Tax). much of the change seen on the tentative 2012 roll
stems from change in net operating income (actual
Apartment Buildings with More than 10 Units. Two growth as well as changes stemming from selection
changes were implemented simultaneously that of the comparable building) versus the change in
affected assessments for residential buildings with assessment methodology. A detailed comparison
more than 10 units. First, the Department of Finance would require that we have income and expenses
went back to using the more traditional income data for both years, as well as know what the
capitalization method which had been replaced by capitalization rates would have been in 2011 and
gross income multipliers (GIMs) beginning with the the GIMs in 2012. Furthermore, the database of
2009 tax roll. (Income capitalization had remained comparable buildings used in 2012 has not yet been
the approach to value most Class 4 properties.) made public by DOF. Since we only have gross income
At the same time, the department implemented a data in 2011, it is not possible to parse out how
computerized system for selecting comparable rental much of the increase results from changes in income,
buildings for valuation of cooperative and condominium rather than the change in methodology. Given that
buildings (use of income from comparable rentals the shift to GIMs in 2009 appeared to redistribute
rather than sales prices is required for valuing these market value within the class, with certain groups of
properties under state law). Additionally, increased properties seeing significant increases or decreases,

16 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

it is reasonable to assume that the shift back would assessed value for tax purposes of $157.0 billion, a
also redistribute market value among large buildings reduction of $1.6 billion (1.0 percent) from the tentative
(see March 2008 report for IBO’s analysis of change roll. Looking at assessed value for tax purposes,
to GIMs). projected tentative roll reductions of $1.3 billion in
Class 2 and $1.0 billion in Class 4 are partly offset by
Rental Buildings with Four or Five Units. A change in tentative roll increases of $655 million in utility property
assessment methodology also appears to have resulted (in anticipation of the state assessment due in April) and
in dramatic declines in market value for small rental $73 million for one-, two-, and three-family homes.
buildings with four or five units in Class 2A. Last year,
these buildings were assessed based on comparable The Outlook for Market Value and Assessed Value in
sales, like one-, two-, and three- family homes in Class 2012. When the roll is finalized in May, IBO forecasts
1. Rental buildings with six units, also in Class 2A, total market value in the city will be $813.4 billion,
however, were assessed based on projected income 2.5 percent greater than 2011. This growth follows
and a GIM. However, since state law requires that all two years of aggregate market value decline in the
properties in a tax class be assessed the same way, in city. Even with a larger than usual tentative to final roll
2012 DOF switched to assessing rental buildings with reduction expected, assessed value for tax purposes is
four and five units using GIMs. This switch appears still projected to grow 5.5 percent over 2011.
to have led to major reductions in market values for
these buildings. The assessed value for tax purposes Class 1. The aggregate market value of Class 1
was much less likely to decline because the cap properties is expected to resume growth, albeit at just
limiting increases in assessed value to 8.0 percent a 0.3 percent this year. This reverses the trend of the
year or 30.0 percent over five years had left many of last three years, 2009 through 2011, when aggregate
these buildings under-assessed relative to the target market value declined by 5.0 percent, 1.0 percent, and
assessment ratio of 45.0 percent of market value. In 2.8 percent, respectively. But IBO projects stronger
most cases, the lower market value for 2012 still left growth in assessed value for tax purposes, an increase
the properties below the target ratio which allowed of 3.2 percent over 2011. In Class 1, the assessed
assessed value to grow until it hit the target ratio or value of a property moves toward a target of 6 percent
the cap. Just 1.2 percent of properties in Class 2A saw of market value, with assessment increases capped at
lower assessed value for tax purposes on the 2012 roll 6.0 percent a year or 20.0 percent over five years. If a
compared with 2011. parcel is assessed at less than 6.0 percent of market
value, its assessed value grows until it hits the target
Commercial Property. For commercial properties, ratio of 6.0 percent of market value or it reaches the
the increase in aggregate market value stems from cap on annual assessment increases—even if the
higher income as well as lower capitalization rates. The market value stays flat or declines.
market value of a commercial property is estimated by
dividing the net operating income by the capitalization During the period of surging real estate prices,
rate, so lower capitalization rates translate into higher many Class 1 properties benefited from the caps
estimated market value at the same level of income. on assessment increases that kept their assessed
Across different types of commercial property, 2012 value growth below market growth, and the median
cap rates as set by the finance department declined by assessment ratio for single-family homes outside
about 90 basis points to 110 basis points for properties Manhattan fell from 5.4 percent in 2004 to a low of
with median income. 3.7 percent in 2008, well below the 6.0 percent target.
Since 2009, when Class 1 market values started
Projected Tentative to Final Roll Changes. As noted, IBO to decline, the median assessment ratio has been
projects a larger than usual reduction on the 2012 roll increasing, to 4.0 in 2009, 4.6 percent in 2010, and
resulting from departmental changes and decisions by 5.0 percent in 2011. In 2012, IBO forecasts a median
the Tax Commission. A downward revision to aggregate assessment ratio of 5.1 percent. From 2013 through
market value is expected, reducing the tentative roll 2015, assessed values are expected to increase and
by about 1.2 percent. The final roll is expected to show recapture more of the market value growth that was

NYC Independent Budget Office March 2011 17

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

above the cap in the prior years, getting closer to but Class 1. IBO projects that following declines from
remaining below the 6.0 percent target. 2009 through 2011 and essentially flat market value
in 2012, Class 1’s aggregate market value resumes
Class 2 and Class 4. On the final roll for 2012, modest growth of about 2.0 percent a year from 2013
aggregate market value for all properties in Class 2 is through 2015. Total assessed value for tax purposes in
projected to total $191.0 billion, 1.1 percent greater Class 1 is expected to grow an average of 2.6 percent
than 2011. This relatively slow growth overall reflects a year, as assessed values inch toward the 6.0 percent
the divergent changes seen on the tentative roll—12.8 assessment ratio.
percent growth for large apartment buildings and a
14.8 percent decline for residential buildings with 4 to Class 2 and Class 4. From 2013 through 2015, market
10 units. In Class 4, market value is expected to reach value in Class 2 is forecast to grow an average of 4.4
$205.0 billion, an 8.1 percent increase over 2011. percent a year. In Class 4, market value is expected to
Class 2 aggregate assessed value for tax purposes is grow at an average annual rate of 3.8 percent a year
expected to be $53.9 billion, 5.2 percent higher than from 2013 through 2015.
2011, and Class 4 is expected to be $75.1 billion, 5.9
percent higher than 2011. Growth in assessed value In 2013, assessed value for tax purposes in Classes
for tax purposes is less variable than growth in market 2 and 4 will grow moderately, 3.5 percent and 3.9
value and the projected growth in 2012 is in line with percent, respectively, in part due to the phase-in of
average annual growth rates from 2006 through 2011 robust market value growth in 2012. The Class 2
of 5.6 and 6.9 percent, in Classes 2 and 4, respectively. pipeline, estimated at $6.1 billion in 2012, is expected
to grow gradually to $6.4 billion in 2013 and $6.7
This more stable growth in assessed value for tax billion in 2014. IBO projects the total pipeline in Class
purposes stems partly from the method for capturing 4 to be $7.3 billion after the 2012 roll is finalized,
changes in market value. Increases, and in many declining slightly to $6.1 billion and $6.2 billion in
cases, decreases in parcels’ market values are phased 2013 and 2014, respectively. While modest growth in
in over five years. The assessed value changes from the market value expected during the plan period will keep
preceding four years that have yet to be recognized on the pipeline steady, the significant increases in this
the tax roll are called the pipeline. While slower growth year’s assessment roll that doubled the value of the
in the last few years had gradually shrunk the pipeline, pipeline will be a major source of growth in assessed
the strong growth this year will replenish it. IBO expects values as they phase in through 2016.
the pipeline to reach $13.3 billion in 2012, up from
$6.7 billion this year. Revenue Outlook. After the Department of Finance
completes the assessment roll, the actual property tax
Outlook for Market and Assessed Values in 2013– levy is determined by the City Council when it sets the
2015. For 2013, IBO forecasts an increase in aggregate tax rates for each class. IBO’s baseline property tax
market value of 2.1 percent. Growth in market value is revenue forecast, and the Bloomberg Administration’s,
projected at 1.1 percent in Class 1, 3.9 percent in Class assume that the average tax rate during the forecast
2, and 2.1 percent in Class 4. For the rest of the forecast period will be 12.28 percent, the rate set by the
period, these classes are expected to see market value City Council in December 2008 when it enacted the
growth averaging about 3.1 percent a year. Mayor’s proposal to rescind a short-lived 7 percent
rate reduction. The rate in each class differs from the
IBO projects growth of 3.6 percent in aggregate average rate based on formulas in state law intended
assessed value for tax purposes in 2013, slightly slower to limit changes in the share of the overall tax burden
than the last few years corresponding with the slower borne by each class.
projection for market value growth. With the pipeline of
prior assessed value increases in Class 2 and Class 4 The amount of property tax revenue in a fiscal year
replenished by the strong growth in 2012, the growth is determined not only by the levy, but also by the
rate for assessed value for tax purposes averages 4.0 delinquency rate, abatements granted, refunds for
percent a year for the rest of the plan period. disputed assessments, and collections from prior

18 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

years. Taking these other factors into account, IBO equivalent amount. Owners no longer eligible for STAR
projects that property tax revenue for 2011 will total would see their property taxes increase by about $290.
$16.8 billion, 4.0 percent above revenue for 2010. In effect, about $8.9 million in property tax liability is
For 2012, IBO forecasts property tax revenue of $17.5 being shifted from the state to city taxpayers.
billion, roughly the same as our December 2010
forecast. An increase of $207 million in IBO’s forecast Property Tax Incentives for Construction Have Expired.
of the levy is offset by a $193 million increase in our Certain major property tax exemption programs
forecast of the reserve. The adjustments to the reserve have expired. Benefits under 421a, the costliest tax
reflect expected increases in certain abatements, exemption for residential construction, expired in
decreases in overpayments and payments for prior December 2010. Applications for the Industrial and
years, and higher refunds. Commercial Abatement Program, the successor to the
largest commercial tax exemption, the Industrial and
From 2013 through 2015, growth is projected to Commercial Incentive Program (ICIP), established in
average 4.0 percent a year, with revenue totaling $19.8 2008, were due by March 1, 2011. In 2011, foregone
billion by the last year of the forecast period. This tax revenue from 421a and ICIP was $920 million and
projected revenue growth is slower than the average $623 million, respectively. Extension of both programs
annual growth of 6.6 percent from 2005 through the requires legislative action in Albany. IBO expects
current year. that these programs will be on the agenda once the
state budget is resolved. IBO’s forecast assumes
IBO’s property tax revenue forecast is just $8 million continuation of the programs.
(0.1 percent) below OMB’s for 2011 and $94 million
below OMB’s for 2012. This difference stems mainly Coop-Condo Abatement. The coop-condo abatement
from IBO assuming a slightly greater reduction from provides a reduction in property taxes for owners of
the tentative roll to the final roll and from modest cooperative and condominium units. Established in
differences in estimates of the property tax reserve. 1997, the abatement is intended to reduce some
With IBO forecasting stronger growth in market values of the disparities in tax burdens between owners
and assessments in 2013, our revenue forecast for of apartments and houses. It was conceived as
that year is $69 million higher than OMB’s. In 2014 and a temporary fix while the Department of Finance
2015, IBO’s forecast further diverges from OMB’s due to resolved technical challenges and considered ways to
differences in our outlook for the real estate market. permanently address the disparities. The abatement
was due to expire in 2008, but the state Legislature
Tax Policy Changes. There are a number of tax policy extended it for another four years. The abatement,
issues affecting the forecast of property tax revenue. which will cost the city about $450 million in foregone
revenue this year, is slated to expire next year, thereby
STAR Eliminated for High-Income Households. New affecting the 2013 tax roll, unless the state passes a
York State has eliminated the STAR property tax further extension. IBO’s forecast assumes continuation
exemption for owners with income over $500,000. of the abatement.
Income is based on the federal adjusted gross income
(AGI) calculated for income tax purposes, less taxable IBO has documented shortcomings of the abatement—
individual retirement account distributions. IBO it was supposed to be temporary, does not address
estimates that this change makes about 31,000 city disparities among apartment owners, and is inefficient
household ineligible for STAR (roughly 4.7 percent of (if the goal was to equalize tax burdens for apartment
current STAR recipients) and affects mainly owners of and homeowners, the abatement provides more relief
cooperatives and condominiums in Manhattan. The than needed to some owners and less to others). The
change does not impact overall city revenues because legislation creating the abatement directs the city to
the state reimburses the city for tax revenue lost to the prepare a report with recommendations for addressing
STAR exemption. Removing these property owners from the disparities between owners in Class 1 and owners
STAR means that their property tax will go up and the of coop and condo apartments in Class 2. The city
city’s reimbursement from the state will decline by an missed the initial report deadline of June 30, 1999, and

NYC Independent Budget Office March 2011 19

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

it has missed several others set by the Legislature since December 2010 was around $28.4 billion, a 18.8
then. Although the most recent (2008) extension of the percent increase over the prior six months. There was
abatement pushed back the deadline for the city’s report a similar increase in real estate sales between the
on disparities between Class 1 and Class 2 owners to second half of (fiscal year) 2009 and the first half of
February 2011, no report has yet been released. 2010. The difference is that in July-December 2009
the growth was driven primarily by residential sales,
Mortgage Recording and Real while in July-December 2010 the main driver was the
Property Transfer Taxes commercial sector.

After peaking in 2007 and then declining for three Residential Properties. The total value of residential
straight years, revenues from the real property transfer real estate sales in New York City is projected to
tax (RPTT) and the mortgage recording tax (MRT) are increase 10.1 percent in 2011, compared with a 22.2
recovering. IBO projects that RPTT revenue in 2011 will percent increase in 2010, which was artificially inflated
be $743 million, 20.8 percent above the level of 2010. by the federal homebuyer tax credit that is no longer
MRT revenue is projected to increase by 19.9 percent, available. A combination of pent-up demand, low
to $439 million. RPTT revenues are projected to rise mortgage rates (for buyers who qualify), and prices that
an additional 34.1 percent in 2012 through 2015, and are below their peak of a few years ago will continue
MRT revenues an additional 55.8 percent. Despite to provide growth in aggregate sales in the coming
this robust growth, however, IBO expects transfer tax years. IBO projects that the value of residential sales
revenue in 2015 to total $1.7 billion, just over half the will increase at an average annual rate of 6.2 percent
record amount collected in 2007. during 2012 and 2013, and 12.1 percent during 2014
and 2015. Because prices of residential properties are
Background. The RPTT is levied directly on the sale forecast to increase at a lower rate, IBO expects the
price when property is sold and is typically paid by increase in aggregate sales value to be driven primarily
the seller, and the MRT is levied on mortgages used by volume.
to finance the purchase of real property and is paid
by the buyer. The portion of a mortgage refinancing Commercial Properties. Sales of commercial real
that involves new money (“cash out”) is also subject estate in New York City rebounded sharply in the first
to the MRT, as are mortgages that are refinanced with half of 2011. There were 17 sales of commercial
a different lender unless the original lender “assigns” properties valued at more than $100 million during
the mortgage to the new lender. Changes in the terms this period, compared with 11 sales during all of 2010.
of an existing mortgage involving the same lender are Google’s $1.77 billion purchase of its new New York
generally not subject to the MRT. The intense level of City headquarters at 111 8th Avenue has been by
refinancing activity during the early 2000s caused MRT far the largest transaction this fiscal year. The surge
revenue to exceed that from the RPTT. Since 2007,
however, RPTT revenue has been higher than MRT Aggregate Value of Property Sales, 2005-2011
receipts, and IBO expects it to stay that way for the Dollars in billions
remainder of the forecast period. A portion of RPTT Residential Commercial Total
and MRT levied on commercial transactions above $90
$500,000 (commonly referred to as the “urban 80
tax”) is dedicated to the Metropolitan Transportation 70
60
Authority (MTA)—the urban tax is discussed 50
separately and is not included in the RPTT and MRT 40
revenues shown in this report. 30
20
10
Real Estate Markets. Real estate markets 0
continued to show signs of recovery during the
20 roje
20

20
20

20
20

20

11 cte
09

10
07

08
05

06

first half of the current fiscal year. The aggregate

value of taxable real estate sales from July through SOURCES: IBO; Department of Finance
d

20 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

of high-valued commercial transactions since the sales are assumed to rely more on conventional
beginning of July 2010 has pushed the total value of mortgage financing than transactions involving
commercial sales well above the levels of the previous commercial buildings. Strong growth in MRT is expected
two years. IBO projects commercial sales for the current to continue in 2014 (12.4 percent) and 2015 (11.0
fiscal year will reach $22.8 billion, compared with only percent), propelled by increases in both residential
$9.4 billion in 2010. The average annual rate of growth and commercial real estate activity. The MRT increases
of commercial sales during 2012-2015 is projected to for 2014 and 2015 are similar to the forecast trend
be a much more modest 3.5 percent. in RPTT. However, because the MRT begins from such
a low base, by 2015 forecast collections are only
Real Property Transfer Tax. IBO’s forecast of RPTT expected to reach $684 million.
receipts in 2011—$743 million—is 20.8 percent above
2010 revenue. It is also around 10.1 percent above IBO’s MRT forecasts for the years 2011-2015 are slightly
what IBO had projected in December, primarily due to below OMB’s. Compared with OMB, IBO’s forecasts are
the surge in sales of commercial properties valued at lower by 1.1 percent in 2011, less than 1.0 percent in
more than $100 million. 2012 through 2014, and 3.0 percent in 2015.

With slow but steady improvement in real estate MTA-dedicated Revenue. The Metropolitan
markets expected over the next several years, IBO Transportation Authority receives a portion of the city
forecasts increases in RPTT revenue of 4.3 percent RPTT and MRT levied on commercial transactions
in 2012, 3.1 percent in 2013, 12.8 percent in 2014, valued above $500,000. These revenues, referred to
and 10.5 percent in 2015. By 2015, RPTT revenue is collectively as the urban tax, peaked at $883 million in
projected to be $996 million, almost two-thirds higher calendar year 2007. By 2009, urban tax revenues had
than the 2010 trough, but still only 57.8 percent of the plummeted to $145 million, less than one-sixth of the
2007 peak of $1.7 billion. peak level reached just two years earlier. Thanks to the
recovery in the commercial real estate market, urban
IBO’s RPTT forecast for 2011 is $25 million (3.3 tax revenues began a comeback—albeit slight—in 2010,
percent) below OMB’s; unlike the Bloomberg with revenues of $188 million (subject to final revision).
Administration, IBO assumes that sales of commercial The MTA projects that urban tax revenues will rise to
real estate will not be as strong in the second half $250 million in calendar year 2011, and reach $353
of the fiscal year as they were in the first. Beginning million by 2014.
in 2012, IBO’s RPTT forecast exceeds OMB’s by $5
million (0.6 percent) in 2012, $14 million (1.8 percent) Personal Income Tax
in 2013, $51 million (6.0 percent) in 2014, and $25
million (2.6 percent) in 2015. Though economic growth has continued as expected,
trends in current collections has led IBO to lower its
Mortgage Recording Tax. IBO’s MRT forecast for 2011 personal income tax forecast to $7.3 billion,
2011—$439 million—is 19.9 percent above 2010 $329 million less than the December projection. Still,
revenue. Since December, IBO has raised its current- the new forecast is 5.8 percent greater than 2010
year forecast by 9.8 percent due to strong second- revenue. With local economic growth expected to
quarter collections. accelerate in the next few years and income growth
peaking in the first half of calendar year 2013, we
MRT revenues fell an unprecedented 77.1 percent forecast faster revenue growth in the next two years.
between their peak in 2007 ($1.6 billion) and their PIT revenues will reach $8.2 billion in 2012 and $8.9
trough in 2010 ($366 million). IBO expects MRT billion by 2013, the first year in which collections will
revenues to increase 13.4 percent in 2012 and 10.0 exceed the record amount collected in 2008. We expect
percent in 2013, higher than the forecast rate of RPTT the PIT to continue to increase in the two subsequent
growth. MRT growth is expected to be faster than RPTT years, but at a slower pace averaging 6.1 percent
growth in part because residential sales are projected annually, and reach $10.1 billion in 2015.
to grow faster than commercial sales, and residential Our 2011 forecast is $221 million below OMB’s

NYC Independent Budget Office March 2011 21

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

estimate in the Preliminary Budget. For 2012, there 2011, to $7.3 million. Withholdings, estimated
is little difference in the two forecasts. Due to the payments, and final returns payments are all
generally faster economic growth in IBO’s forecast, expected to be greater this year than in 2010, while
after 2012 IBO’s PIT forecasts are substantially higher refunds are expected to be lower.
than OMB’s, by $509 million in 2013, $365 million in
2014, and $550 million in 2015. Withholding payments, which usually account for at
least two-thirds of gross collections, are projected
Background and Recent Changes. The personal to reach $6.1 billion, 5.2 percent higher than 2010
income tax is levied on the incomes of city residents. withholdings. Revenue during the traditional bonus-
For most of the past decade, taxable income was paying months (December–March) this year suggest
subject to four marginal rates but last year the state that a greater share of withholdings from bonus
Legislature added a fifth bracket, retroactive to the compensation have come earlier than in recent years.
beginning of calendar year 2010.2 The marginal rates Withholdings through February 2011 were 6.1 percent
in the city’s tax table reflect not only a base rate plus a greater than in the comparable period last year, with
surcharge but also take into account the state-financed a disproportionate share of the growth coming from
tax cut under the School Tax Relief program. Since the withholdings in December, which set a new collections
beginning of calendar year 2001, STAR established record for that month. This pattern supports the notion
marginal rates ranging from 2.907 percent in the that bonus compensation for some employees in
lowest of four brackets to 3.648 percent in the highest finance and other high-paying industries was shifted
bracket. Under STAR the state reimburses the city for from the beginning of calendar year 2011 to the end
the PIT revenue forgone due to the tax cuts—an amount of 2010 due to the uncertainty—until almost the end
estimated to have been $462 million in 2010.3 Thus, of the year—as to whether federal tax cuts would be
the net effect of STAR on total city revenues is zero. extended after December 31st. January receipts were
also strong, but February withholdings were 7.6 percent
In seeking to address the huge deficit in New York less than a year ago. We expect withholding growth to
State’s budget, last summer the Legislature in Albany slow in the remainder of 2011.
eliminated STAR’s rate cut for filers with incomes above
$500,000, effectively creating for these filers a fifth Unlike withholding, estimated payments to date in
bracket with a 3.876 percent marginal rate. The law 2011 are lower, by 5.3 percent, than in the same
was written to make the change retroactive to the start period last year. Still, for this year IBO forecasts $1.8
of calendar year 2010. This change is increasing the billion in estimated payments, 5.9 percent more than
liabilities of high-income taxpayers by an estimated in 2010. For the most part, quarterly payments made
$175 million a year—an amount offset by an equal so far in 2011 have been based on estimated liability
reduction in STAR aid. for calendar year 2010, when personal income began
to expand again. But many taxpayers rely on “safe
Fueled primarily by a strong economy bouncing back harbor” rules, which permit taxpayers to make quarterly
after the 2001-2003 recession, PIT receipts grew payments consistent with their prior-year liability—which
from $4.5 billion in 2003 to $8.7 billion in 2008, at in this case was 2009, when liabilities were quite low.
an annual average rate of 14.4 percent. While the These rules have constrained estimated payments
recent recession had relatively less of an effect on local growth so far this year and led to a substantial
employment or economic growth than it did nationwide, underpayment of overall liability. Our 2011 forecast
it led to a sharp drop in personal income and a 24.7 is premised on much higher first- and second-quarter
percent drop in PIT revenue in 2009, to $6.6 billion. PIT payments for calendar year 2011 liability, to be made
growth resumed in 2010, with a total of $6.9 billion in by most taxpayers in April and June, relative to the
revenue (4.1 percent growth). payments made earlier in the fiscal year. Consistent
with substantial underpayment of calendar year 2010
Revenue in the Current Year. With the local liabilities, IBO also expects estimated payments made
and national economic recovery under way, IBO by taxpayers filing extensions this coming April to be
forecasts 5.8 percent growth in PIT revenue in greater than last April.

22 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

For 2011, IBO forecasts a 20.1 percent increase of final years, PIT revenue is expected to reach $10.1 billion
returns revenue, to $346 million, and a 9.1 percent in 2015. OMB predicts slightly faster growth in 2014
decline in refunds, to $1.2 billion. These predictions and 2015, averaging 6.3 percent, but the Bloomberg
are also consistent with the premise of substantial Administration’s forecast for 2015 is still $550 million
underpayment of current-year liabilities thus far. less than IBO’s.
Refunds to date in 2011 are 12.8 percent less than in
the same months last year, primarily due to a decline in Business Income Taxes
refunds given for calendar year 2009 liability.
After a record three-year, $1.5 billion (25 percent)
IBO’s 2011 forecast is $221 million (2.6 percent) decline, business tax revenues resumed growing in
lower than OMB’s. About half the difference is due 2011. Through January (a little past the midpoint of the
to our lower forecast of withholding revenue, and the fiscal year), revenues were up 15.2 percent over the
rest results from IBO projecting more refunds and less year before, and IBO projects a gain of $756 million
estimated payments than OMB. (16.8 percent) for the year as a whole. This is followed
by forecast growth of $543 million (10.3 percent) in
The Forecast for 2012 and Beyond. IBO’s outlook of 2012, and then slower growth (averaging a little under
accelerating income and employment growth starting $300 million, or 4.9 percent, per year) for 2013-2015.
in the latter half of calendar year 2011 will boost PIT
revenue in the coming fiscal years. We forecast 12.4 Background. New York City levies three entity-
percent growth in PIT collections in 2012, to $8.2 level taxes on business net income: the general
billion, mostly the result of increases in withholdings corporation tax, the banking corporation tax, and the
and estimated payments. Withholding is expected to unincorporated business tax. These three taxes were
increased slightly faster in 2012 than in 2011 (6.3 established (along with now defunct city insurance and
percent v. 5.3 percent), but estimated payments growth transportation corporation taxes) in 1967, replacing the
will increase substantially, to 23.4 percent in 2012—a city’s previous taxes on general and financial business
large but hardly unprecedented rate of growth. A sharp gross receipts. New York City is almost unique among
increase in capital gains realizations is projected localities in imposing substantial business income
in calendar year 2011, boosting 2012 estimated taxes at the local level.
payments. Also contributing to the growth in estimated
payments is the projected increase in overall PIT Over four-fifths of the GCT is collected through
liability in 2010, which will boost estimated payments an 8.85 percent tax on corporations’ entire net
made for calendar year 2011. It will also reduce income allocated to New York City; the remainder
underpayment of liability, and as a result, the forecast is collected through alternative tax bases: income
includes a modest (4.9 percent) increase in refunds. plus compensation (which starting this year is being
partially phased out), capital allocated to the city,
IBO’s 2012 PIT forecast is only $15 million dollars and a minimum tax. The principal rate and base
less than OMB’s. We project more revenue from of the BCT is similar to that of the GCT. Over nine-
withholdings and estimated payments than does OMB, tenths of collections are derived from a 9.0 percent
offset by less revenue from final returns and a higher tax on banks’ entire net income allocated to the city,
forecast of refunds. the remainder from alternative tax bases. The city’s
UBT imposes a 4.0 percent tax on the income of
IBO forecasts $8.9 billion in PIT revenue in 2013, 9.7 partnerships, proprietorships, and (since 1994) limited
percent more than 2012 revenue, based on the outlook liability corporations.
for solid economic growth throughout calendar year
2012 and continuing into 2013. This forecast revenue Today about half of total city business tax revenues is
growth stands in contrast to OMB’s projections of derived from “flow-through entities”—S-corporations
only 3.2 percent PIT growth; IBO’s forecast is $509 taxed under the GCT, and limited liability corporations,
million greater than OMB’s. With a projected 6.1 partnerships, and proprietorships taxed under the
percent average annual growth rate in the next two UBT. For federal and state tax purposes, the net

NYC Independent Budget Office March 2011 23

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

income of such entities is for the most part subject securities industry’s profits in GCT collections. Current
only to personal income taxation and not business tax year collections from the finance sector did plunge by
income tax at the federal and state levels. The city more than 40 percent the first part of fiscal year 2009
taxes this income at the personal level as well if it is (that is, September–December 2008) compared with
received by city residents, but it somewhat mitigates the same period the year before, but subsequently grew
double-taxation by providing a partial credit in its only 5.2 percent in the same months of fiscal year 2010
personal income tax for UBT liabilities of city residents. and then another 8.4 percent in the same months of
There is currently no comparable credit for resident 2011. It is possible that the enormous profits recorded
shareholders of city-taxed S-corps. in the past two years by Wall Street firms have not really
shown up yet in city tax coffers because operating
All the revenue numbers provided in this section do not losses from previous years are being carried forward
include revenues generated by audits undertaken by to offset current liability. Another possible explanation,
the Department of Finance. The business taxes differ as discussed immediately below, is that the profits are
from the city’s other tax sources in that audits account showing up in the collections of another tax.
for a significant portion of revenues. Nearly $750 million
in audit collections are expected in 2011. After that, Banking Corporation Tax. One of the major fiscal
OMB assumes a drop to around $500 million per year, surprises of the last several years has been the strength
but this would be well below the $800 million per year of the bank tax. BCT revenues indeed fell sharply from a
averaged over the past six years. Since overall business record $1.22 billion in 2007 to $628 million in 2008—
tax liabilities are not returning to old (pre-2006) levels, but even the latter number was only $28 million below
the more recent audit amounts may well indicate a the previous BCT record high set in 2006. Then, defying
“new normal” of audit revenue greater than what OMB expectations, BCT revenues shot up again to $1.10
projects. The city’s business income taxes are highly pro- billion in 2009, followed by a still very strong $969
cyclical, meaning that their revenues tend to grow very million in 2010. IBO is projecting another 22.1 percent
strongly during an economic upswing and fall sharply jump, back up to $1.18 billion, in 2011 (midway through
during a downswing. This has been particularly true of the year, the BCT is up 40.1 percent), and then only a
collections stemming from the financial services sector. slight dip to $1.13 billion in 2012.
The BCT’s inherent volatility is exacerbated by very large
fluctuations in refunds, the result of adjustments to tax It is possible that we are seeing the effects of crisis-driven
liabilities based on losses and gains not recognized until finance sector consolidation, in which heretofore free-
a year or more after they are incurred. standing financial activities firms have been brought under
the umbrella of bank holding companies, resulting in
Current Year Projections. IBO projects growth in liabilities being created under the BCT rather than the GCT
all three business income taxes in 2011, though (and UBT). But we have no direct confirmation of this yet.
considerably less for the UBT than for the other two
business taxes. Unincorporated Business Tax. The UBT has historically
shown much less downside cyclical sensitivity than the
General Corporation Tax. A little more than midway other business income taxes, making last year’s 12.4
through the current fiscal year the GCT is up $139 million percent revenue drop unusual—indeed, it was by far the
(16.4 percent) but even stronger gains are projected over worst in the history of this tax. Things are not looking
the remainder of the year, resulting in annual growth of much better so far this year: through January revenues
$458 million (23.2 percent) for 2011 overall. are basically flat (up just 0.7 percent), though we expect
a somewhat stronger second half, resulting in overall
Wall Street whipsawed from record losses from mid- revenue growth of 5.3 percent for 2011, to $1.6 billion.
calendar year 2007 through 2008 (a combined -$63.9
billion) to supernormal profits in 2009 ($61.4 billion), Finance and real estate were major contributors to
followed by another very strong year for New York Stock last year’s UBT debacle and this year’s pallid recovery.
Exchange member firm profits in 2010 ($27.6 billion). This again raises the question of whether liabilities are
But it is difficult to find evidence of all the rebound of being shifted to the BCT.

24 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

Forecast for 2012 and Beyond. IBO projects another due to accelerating local and national economic growth
year of solid if unspectacular business tax revenue and tax law changes introduced in 2010 and 2011.
growth in 2012, an overall increase of $543 million Had these tax changes not been enacted, collections
(10.6 percent). This gain will be divided between the would be projected to grow 8.9 percent—$177 million
GCT (up $376 million, or 15.5 percent) and UBT (up lower than the current forecast. After 2011, as the
$223 million, 13.6 percent), while the BCT is projected economy continues to recover, IBO forecasts annual
to lose a bit—still another very strong year, but not quite revenue increases averaging 3.8 percent from
as strong as 2011. 2012 through 2015 when sales tax receipts reach
a projected $6.6 billion. IBO’s 2011 estimate is $97
Growth falls off after 2012, but this belies the million higher than OMB’s, and with IBO forecasting
continued overall strength in the business taxes. In the faster growth in personal income than OMB, this
GCT we project gross collections growth of 8.8 percent, difference grows over time.
10.5 percent, and 7.8 percent over 2013-2015, but
net revenues increase somewhat more slowly because Background. Sales in the city of most retail goods,
of rising refunds—the latter connected to the previous utility charges, and a variety of personal and business
rebound in collections. Still, growth is expected to be services are currently subject to a combined sales
strong enough to bring GCT revenues back over $3.0 and use tax rate of 8.875 percent. The tax rate is the
billion in 2013 and then over $3.3 billion in 2014— sum of the city’s 4.5 percent rate, a 4.0 percent state
finally back above the old 2007 peak. In the BCT, gross tax rate, and a 0.375 percent Metropolitan Commuter
collections fall back in 2013, but only to $1.2 billion, a Transportation District (MCTD) surcharge.
level they remain at or above in succeeding years—and
a level that was simply unknown prior to 2007. With Several recent changes made to the sales tax rate
refunds breaking old bounds, net revenues slip a little and base are affecting current and future city sales
further—back to $856 million in 2013, then climbing tax revenue. In August 2009, the sales tax rate was
slowly to $922 million in 2015—but these too are much increased from 4.0 percent to 4.5 percent, adding
higher than anything seen before the 2007 peak. $521 million in 2010 and more in later years. Four
sales tax base broadeners have also lifted sales tax
The UBT is projected to finally rebound in 2012, growing revenue considerably. First, suspension of the tax
13.6 percent to $1.87 billion, surpassing its previous exemption on clothing and footwear costing more than
2008 high. This is followed by a slow but steady $110 dollars added $108 million to city coffers in 2010
climb, growth averaging 5.5 percent over 2013-2015. and is projected to add more than $118 million in
IBO’s business tax forecasts are collectively $103 2011. Second, the city is expected to add $8.6 million
million below OMB’s in 2011, but higher than OMB’s in 2011 due to an April 2011 change in the MCTD
thereafter, the difference rising from $175 million in surcharge exemption that will limit the exemption to
2012 to $534 million in 2015. For 2012-2015, IBO clothing costing less than $55—half of the initial cost
projects substantially higher gross collections in the limit of $110. This decrease in the MCTD tax will help
GCT and UBT and about the same levels of gross boost clothing sales and city sales tax receipts. Third,
collections in the BCT, but also substantially higher hotel room resellers are now required to remit sales
refunds in all three taxes. The higher collections tax to New York City, which is estimated to add $11.3
forecast reflect IBO’s generally more bullish forecast million this year and increase over time. Last, the
for the city economy, while the higher refunds merely repeal of a tax credit applicable to private label credit
recognize the historical (lagged) relationship between cards is expected to bring in $3.8 million this year,
collections growth and refunds growth. growing to $3.9 million in later years.

General Sales Tax Sales tax revenue is determined primarily by the

consumption spending of city residents, but also by
IBO forecasts $5.6 billion of city general sales tax sales to businesses, commuters, tourists, and business
revenue in 2011, a $542 million (10.7 percent) travelers. Among the many variables that determine
increase above 2010 revenue. The projected growth is spending, disposable household income, consumer

NYC Independent Budget Office March 2011 25

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

confidence, and foreign exchange rates all play major coming years, solid though not unprecedented growth
roles. Sales tax receipts continued to grow until the is projected throughout the forecast period. For 2012,
last quarter of calendar year 2008—months after the IBO forecasts $5.9 billion in sales tax revenue—6.0
nation’s economy officially slipped into recession. percent greater than projected revenue this year. The
Consumers felt the pinch of the recession in 2009, slower expected revenue growth in 2012 compared
which saw sales tax revenue fall from $4.7 billion to 2011 is due to a number of factors. Among them,
to $4.4 billion—a decline of 5.3 percent. However, personal income growth is expected to slow down
sales tax revenue surged 13.9 percent in 2010 to just slightly between calendar years 2011 and 2012,
over $5.0 billion and is on pace to exceed that figure declining from 6.2 percent to 5.7 percent. In addition,
easily in 2011. Notably, fears that Europe’s multiple Wall Street profits and compensation are expected to
economic crises would slow the city’s tourism industry decline significantly from 2011 levels as the Federal
proved unfounded: the number of domestic and foreign Reserve looks to head off inflationary pressure by
tourists combined grew 6.8 percent in calendar year raising the benchmark Fed Funds rate and rolling back
2010 to 48.7 million—a new record. NYC & Company, strategic policies that have provided cheap financing
which promotes tourism to the city, estimates that to financial service firms which helped stimulate
visitors spent $32.1 billion in the city that year. investment, merger, and acquisition activity.

Revenue in 2011. Collections to date this fiscal year With economic growth expected throughout the
plus continued improvements in the economic outlook forecast period, IBO projects sales tax revenue to
have led IBO to raise its forecast of 2011 sales tax grow 11.9 percent from 2012 through 2015. The IBO
revenue to $5.6 billion—10.7 percent higher than 2010 forecast for 2015 is $6.6 billion. Due to IBO’s forecast
collections. The strong growth is due to the momentum of a more rapid recovery than OMB expects, our sales
of the national and local economic expansion which tax forecast exceeds OMB’s in all years—from $97
lifted financial service company profits, compensation, million in 2011 to $304 million in 2015.
and accelerated personal income growth generally.
Without the revenue generated due to changes in tax Hotel Occupancy Tax
policy, collections would grow 8.9 percent above 2010.
Tourism in New York is expected to rise as the economy
A significantly improved outlook on job and income recovers and revenue from the hotel occupancy tax is
growth is the primary reason for IBO’s higher revenue expected to increase substantially over the forecast
forecasts. IBO expects the city to add an average of period. Hotel occupancy tax collections for the first seven
59,100 jobs per year for calendar years 2011 through months of 2011 (July 2010–January 2011) recorded
2015 compared with OMB’s projection of 39,800 a 20.9 percent increase compared to the same period
additional jobs per year for the same period. Personal in 2010 and this strong growth is expected to continue
income is projected to grow at a faster clip too. IBO through the second half of the year. For 2011, IBO
estimates that annual personal income will grow 6.1 forecasts tax revenue of $421 million—growth of 16.6
percent on average for the forecast period compared percent above 2010 revenue of $361 million. The
with 4.0 percent for OMB. Sales tax collections recorded strong growth forecast is due to evidence that New
during the first two quarters of 2011 suggests that an York City tourism demand shows no signs of ebbing
improved outlook on job and wage growth may be driving and that increased city hotel room inventory has not
higher levels of consumption. Revenue collected during put downward pressure on average daily room rates. In
this period registered a 14.4 percent gain in revenue 2012, revenue is expected to fall 6.7 percent to $393
for the same period in 2010. The holiday season in million due to the reduction of the hotel occupancy
particular proved a robust revenue generator for the city, tax rate from 5.875 percent to 5.0 percent. By 2015,
with December 2010 collections growing 13.8 percent revenue is expected to reach $456 million. Compared
above December 2009 collections. with OMB’s latest forecast, IBO’s tax forecasts are higher
over the forecast period, reflecting the outlook that
Revenue in 2012 and Later Years. As the economic revived business travel and tourism will compensate for
recovery gains momentum and growth accelerates in the revenue lost due to the shift to the lower tax rate.

26 NYC Independent Budget Office March 2011

 REVENUE / Taxes and Other Revenue

Background. Since 1970, New York City has imposed over the same period in 2009. According to NYC &
hotel occupancy tax, which is levied in addition to the Company, the number of room nights sold in New York
combined city, state and commuter district sales taxes. City reached a record 21.2 million for the 10-month
The city’s hotel tax currently equals a flat fee of $2 per period January through October 2010. Adjusted for
night for rooms with daily rates of $40 or more plus tax policy changes, hotel occupancy tax receipts for
5.875 percent of total room charges. Together with the the first two quarters of 2009, 2010, and 2011 have
combined city and state sales tax rate of 8.5 percent, recorded year-on-year average annual growth of 5.7
and the MCTD surcharge of 0.375 percent, the total tax percent. The robust tax revenue growth rate suggests
on hotel occupancy is 14.75 percent. The city’s current that the impact of the city’s hotel occupancy tax rate
hotel occupancy tax rate, which took effect March 1 was more than offset by other factors, such as the
2009, will revert to the previous rate of 5.0 percent growth of tourism and business travel to the city.
after November 30, 2011.
The 2011 Forecast. IBO’s forecast of hotel tax revenue
The recent strong growth in city hotel occupancy tax for 2011 is $421 million—16.6 percent higher than
revenue is a notable change from the downturn the 2010 revenue of $361 million. Data from NYC &
hotel industry suffered in 2009. The recession hurt Company shows that demand in New York City’s tourist
hotel revenue even though hotel operators reduced industry has continued to flourish and that the addition
room rates in order to buoy occupancy rates. The of new hotel room stock has not depressed room rates.
average daily rate of a Manhattan hotel room for the
second quarter of 2009 (October through December) The Forecast in 2012 and Beyond. IBO forecasts that
fell from $374 to $343—an 8.3 percent decline city hotel tax revenue will decline 6.7 percent in 2012
compared with the same quarter in 2008. Full-year to $393 million. The decline is due to the November
revenue for 2009 fell from $377 million to $341 2011 return of the city’s hotel tax rate to 5.0 percent, a
million—a decline of 9.4 percent. decrease of 0.875 percentage points from the current
rate. Revenue is expected to grow 8.1 percent in 2013
In 2010, city hotel occupancy tax revenue began to to $425 million. In 2014 and 2015, revenue growth
rebound, climbing 5.8 percent to $361 million. The is projected to slow to an annual average rate of 3.7
momentum of hotel occupancy tax revenue growth percent, with revenue reaching $456 million in 2015.
carried over from 2010 into 2011 as the city’s hotel
industry benefitted from the rising supply of hotel Endnotes
rooms and sustained demand for them. The city added 1
For additional information about the complications of the city’s real
approximately 6,650 rooms in calendar year 2010—a property tax, see IBO’s Twenty-Five Years After S7000A: How Property
Tax Burdens Have Shifted in New York City. When IBO refers to market
net increase of 8.0 percent since December 2009— values and assessments, the reference includes only taxable property.
while occupancy rates hovered steadily above 85 The assessed value for tax purposes (also referred to as billable
taxable value) reflects the required phase-in of assessment changes
percent. Even though the number of hotel rooms was for apartment, commercial, and industrial buildings. In this report the
billable taxable values are shown before applying the STAR exemptions.
increasing, demand was strong enough for hoteliers to 2
A surcharge in effect for calendar years 2003 –2005 added two new
brackets affecting high-income filers.
raise room rates. Average daily rates during the most 3
In 2010, the state reimbursed the city $782 million for the state-
recent holiday season (October through December enacted PIT cuts under STAR—the rate cuts plus per filer tax credits that
were not altered when the state’s budget was adopted.
2010) grew from $287 to $305—a 6.3 percent increase

NYC Independent Budget Office March 2011 27

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

28 NYC Independent Budget Office March 2011

 EXPENDITURE / Outlook

Expenditure Outlook
IBO projects that under the Mayor’s Preliminary Budget 2015, an average annual increase of 3.6 percent.
for 2012 and financial Plan through 2015 spending
will grow from $65.7 billion in 2011 to $75.6 billion in Under the Mayor’s plan, projected spending by many
large city
IBO Expenditure Projections agencies is
Dollars in millions expected
Average to be flat or
2011 2012 2013 2014 2015 Change decrease
Health & Social Services slightly. Police,
Social Services fire, children’s
Medicaid $5,054 $6,308 $6,493 $6,630 $6,810 7.7% services,
All Other Social Services 3,132 3,025 3,028 3,028 3,028 -0.8% homeless
HHC 60 82 79 79 79 7.3% services, and
Health 1,650 1,572 1,563 1,562 1,563 -1.3% health would
Children's Services 2,710 2,710 2,683 2,680 2,681 -0.3%
all decrease
Homeless 846 809 802 802 802 -1.3%
over the 2011-
Other Related Services 614 469 457 457 457 -7.1%
2015 period
Subtotal $14,066 $14,975 $15,105 $15,238 $15,420 2.3%
based on IBO’s
Education
DOE (excluding labor reserve) $18,775 $19,062 $19,377 $19,762 $19,965 1.5%
projections
CUNY 720 673 667 668 668 -1.9% under the
Subtotal $19,496 $19,734 $20,044 $20,430 $20,633 1.4% Mayor’s plan.
Uniformed Services Pension, debt
Police $4,688 $4,461 $4,427 $4,423 $4,423 -1.4% service, and
Fire 1,774 1,693 1,660 1,639 1,638 -2.0% City spending
Correction 1,046 1,031 1,023 1,023 1,023 -0.6% on Medicaid—
Sanitation 1,399 1,295 1,337 1,420 1,420 0.4% as the
Subtotal $8,906 $8,479 $8,446 $8,505 $8,505 -1.1% federal share
All Other Agencies $6,992 $6,622 $6,587 $6,618 $6,711 -2.3% * reverts to its
Other Expenditures prerecession
Fringe Benefits (excluding DOE) $3,892 $3,841 $4,866 $5,258 $5,674 7.3% * level—are
Debt Service 4,677 3,015 6,672 6,919 7,269 9.5% *
driving the
Pensions 6,875 8,295 8,442 8,320 8,597 6.5% **
rise in city
Judgments and Claims 637 675 705 738 774 5.0%
spending
State Education Building Aid (TFA) 424 252 437 437 437 0.8%
General Reserve 100 300 300 300 300 n/a
Labor Reserve:
Spending on
Education 12 42 40 40 40 n/a education is
All Other Agencies 55 106 270 528 804 n/a also expected
Expenditure Adjustments (475) 87 252 383 462 n/a to grow, from
Total Expenditures $65,656 $66,423 $72,166 $73,715 $75,625 3.6% $18.8 billion
SOURCE: IBO this year to
NOTES: *Represents the annual average rate of growth/(decline) after adjusting for prepayments. nearly $20.0
**The annual average change excludes estimated savings assumed by the Bloomberg's Administration's billion in
pension reform proposal. 2015. This
Expenditure adjustments include prior-year payables, IT efficiency savings, energy and lease adjustments,
increase is
and non-labor inflation estimates. Estimates exclude intra-city expenses. Figures may not add due to
rounding. driven by city

NYC Independent Budget Office March 2011 29

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

dollars. State aid for city schools is more than $2.0 to the elimination of more than 6,100 teaching
billion below what the city had been expecting for 2012 positions. The budget plan also includes $400 million
under the terms of the 2007 legislation resolving the in state aid that is not in the Governor’s budget as
Campaign for Fiscal Equity lawsuit. well as legislative action that would save the city an
additional $200 million.
The Preliminary Budget includes a cumulative $5.2
billion in measures to cut costs and raise revenues in The February 2011 Capital Commitment Plan covering
order to close the budget gap that had been projected 2011–20014 provides $33.2 billion for infrastructure
for 2012. These measures range from the closing of and other capital spending. This is a decrease of $1.9
20 fire companies to increasing the cost of parking billion from the level in the September 2010 plan.

30 NYC Independent Budget Office March 2011

 EXPENDITURE / Education

Education
The City Is Spending More, the State Less and fiscal years from 2007 through 2010, the portion of
Spending Priorities Have Shifted the schools’ budget not directed toward nonpublic and
charter schools increased by slightly more than $1.8
Classroom spending would decline under the Mayor’s billion, an average of $611 million or 4 percent per
proposed budget and the city’s ambitious plans to year. Under the Preliminary Budget, in the two years
continue to add building capacity is being scaled back. since 2010, that portion of the budget would decrease
This marks the second year in a row the Bloomberg by a total of $146 million or 1 percent. Meanwhile, the
Administration has presented a budget that would cost of private special education and public charter
decrease the number of teachers and classes (thereby schools is slated to grow by an average of 20 percent
increasing class size) and cut other school services. At per year from 2010 through 2012.
the same time, some areas of the schools budget are
growing rapidly, particularly the cost of private special City Funding Replaces State and Federal Support
education placements and charter schools. Spending
in these areas is likely welcome to the families that The 2012 preliminary budget for the Department of
use those particular schools, but families of the Education (DOE) totals $19.1 billion, $482 million
roughly 1 million students in the traditional public higher than the current plan for 2011, and perhaps
schools may see it as resources lost to their own more notably, $631 million more than had been
schools and children. planned for 2012 at the time the 2011 budget was
adopted last spring.
On the surface, this tension appears to be driven by
the current fiscal conditions in New York State, and The share of the DOE budget that will be borne by city
the state government’s response to those conditions. funds shifts dramatically in the Preliminary Budget.
Yet, other factors have contributed as well. In the three Faced with a reduction of $948 million in state
education aid from what it had projected in the
City Takes On A Much Higher Portion of November financial plan, the city has increased its
Department of Education Budget own funding of the schools budget by $983 million
City State Federal Other Categorical over the November projection. In year-over-year
100% terms, city funding of the schools has increased
90% by $1.467 billion while state ($69.3 million),
80% federal ($848 million) and categorical ($67 million)
70% funding have all decreased.
60%
50% State Foundation Aid is in Deep Freeze. Under
40% state legislation enacted in the spring of 2007,
30% state foundation aid for the city was scheduled to
20% grow by at least $3.2 billion over four years in order
10% to satisfy the court ruling that ended the Campaign
0% for Fiscal Equity case on the adequacy of funding
20

20
20

20

20

for the city’s public schools. Under the legislation,

11

12
09
08

10

Fiscal Years New York City was also required to increase city-
SOURCES: IBO; Mayor’s Office of Management and Budget funded support for public schools by $2.2 billion
NOTE: Fiscal years 2008-2010 are actual shares, and 2011 and 2012 are
projected. over the same four years.

NYC Independent Budget Office March 2011 31

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

the school building) is reduced, in year-over-year terms,

State Education Aid Far Below 2008 Expectations
Dollars in millions by $207 million. The Preliminary Budget maintains the
Actual State Aid Unfulfilled Expectations Program to Eliminate the Gap cuts announced with
the November 2010 Financial Plan, including a 6,158
$11,000
reduction in the number of teachers employed by the
system. This reduction would be accomplished through
10,000 a combination of layoffs (4,658) and attrition (1,500).

9,000 This is the second consecutive year of reductions in

these core categories, with the total loss to services
8,000 to schools over two years totaling $364 million.
Meanwhile, in the 2012 Preliminary Budget, the rest
7,000 of the Department of Education’s budget is expected
to be $689 higher than in 2011 (current projection)
6,000 and $981 million higher than projected when the 2010
budget was adopted.
5,000
The biggest driver of this shift of funds from services
20

20
20

20
20

to schools to other uses is the rapid and significant

12
11
09

10
08

Fiscal Year growth in payments made to nonpublic and charter

SOURCES: IBO; Mayor’s Office of Management and Budget; schools, including special education prekindergarten
New York City Financial Plan, January 2008
programs, contract schools, foster care programs, and
NOTE: Fiscal years 2008-2010 are actual spending, and 2011
and 2012 are projected. funds passed through to nonpublic schools and the
Fashion Institute of Technology. The nonpublic and
The Mayor’s Preliminary 2012 budget and the charter school payments portion of the DOE budget
Governor’s Executive Budget for state fiscal year has increased from less than $1.1 billion in 2007 to
2011–2012 are each the fifth budget presented an anticipated level of $2.6 billion in 2012. Comparing
after that 2007 legislation. While city funding of the 2012 projected spending in the Preliminary Budget
schools surpasses the amount specified in the 2007 with actual spending in 2010, growth in payments to
legislation in this Preliminary Budget, the Governor’s nonpublic and charter schools ($764 million) over the
proposed budget maintains a freeze on state two years will outstrip the total growth of the DOE’s
foundation aid to education for the fourth consecutive budget ($548 million), forcing cuts in other areas.
year. (Foundation aid includes the lion’s share of state
education aid.) In the Preliminary Budget, the city now Growth in spending on nonpublic special education
expects state aid for both 2011 and 2012 to be more schools (special education pre-k, contract schools
than $2 billion below what was expected under the and “Carter Cases”) is driven by entitlements granted
2007 legislation. The Governor’s budget now calls for to students with special needs by federal law and
the legislatively mandated increase in state education enforced through the courts. Parents of 4 year olds
aid to be stretched out until school year 2016–2017, with special needs are able to petition family court to
a full six years past the end of the original four year require DOE to fund their child’s placement in private
phase-in period. special education prekindergarten. Between 2007
and 2012, the cost of this program will have almost
As Classroom Spending Drops Again, Spending on doubled, even though enrollment increased by only 42
Private Special Education and Charter Schools Grows percent. Roughly 31,000 students were expected to be
served by these vendors during 2011.
The influx of city funds, however, does not spare the
classroom from cuts in the Preliminary Budget. The The Department of Education operates extensive
2012 budget for services to schools (services provided special education programs beginning in kindergarten,
directly to public school students and staff, primarily in although parents of special needs children in those

32 NYC Independent Budget Office March 2011

 EXPENDITURE / Education

Department of Education Budget, by Program Area

Dollars in millions
Budget by Selected Agency Programs 2007 2008 2009 2010 2011 2012
TOTAL DOE BUDGET $15,888 $16,978 $17,906 $18,502 $18,821 $19,119
Services to Schools $12,368 $12,992 $13,611 $13,705 $13,723 $13,341
Classroom Instruction $7,331 $7,857 $8,362 $7,820 $7,839 $7,824
General Education Instruction 5,539 6,113 6,384 6,052 6,008 6,028
Special Education Instruction 1,130 1,046 1,270 1,020 1,047 1,024
Citywide Special Education Instruction 663 698 708 748 785 772
Instructional Support $2,430 $2,389 $2,308 $2,805 $2,916 $2,434
Special Education Support 323 395 395 489 531 598
Categorical Programs 2,107 1,995 1,912 2,315 2,385 1,836
Instructional Administration $215 $221 $221 $213 $191 $207
Regional/Citywide Instructional Administration 215 221 221 213 191 207
Noninstructional Support $2,391 $2,524 $2,719 $2,867 $2,776 $2,807
School Facilities 569 576 743 744 596 562
School Food Services 365 379 384 409 405 446
School Safety 180 204 217 295 296 230
Pupil Transportation 938 967 968 996 1,012 1,101
Energy and Leases 340 399 407 423 468 468
Systemwide Costs $2,398 $2,651 $2,731 $2,895 $2,920 $3,112
Fringes $2,007 $2,252 $2,355 $2,536 $2,631 $2,788
Fringe Benefits 1,991 2,230 2,314 2,502 2,619 2,747
Collective Bargaining 16 22 41 34 12 42
Central Administration 391 399 376 359 289 324
Nonpublic and Charter Schools $1,122 $1,335 $1,565 $1,902 $2,178 $2,666
Special Education Prekindergarten Contracts $574 $644 $739 $853 $964 $1,129
Prekindergarten Transportation 75 86 97 135 148 148
Prekindergarten Tuition 499 557 643 718 816 981
Charter, Contract School & Foster Care Payments $490 $630 $764 $978 $1,142 $1,465
Charter Schools 165 232 311 418 572 711
Contract Schools (in-state) 245 233 236 268 295 403
Contract Schools (out-of-state) 40 61 32 35 32 44
Carter Cases 0 63 144 215 191 246
Nonresident Tuition/Foster Care 26 27 27 27 37 47
Tax Levy Match for Chapter 683 14 14 14 14 14 14
Nonpublic School and
Fashion Institute of Technology Payments $58 $61 $61 $71 $71 $71
Nonpublic School Payments 20 23 23 26 26 26
Fashion Institute of Technology Payments 37 38 38 46 46 45
SOURCES: IBO; February 2012 Departmental Estimates
NOTES: Fiscal years 2007-2010 are actual spending, 2011 and 2012 are projections. Does not include debt service and pensions.
Includes intra-city sales. Numbers may not add due to rounding.

NYC Independent Budget Office March 2011 33

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Spending on Services to Schools Shrinks: Everything Else Grows granted to these nonprofits for a maximum
Change From Fiscal Year 2010 to Preliminary Fiscal Year 2012, dollars in millions of five years. At the conclusion of the term
$1,000 of a charter, the performance and fiscal
800 integrity of the school is examined and a
600 decision to renew or rescind the charter
400 is made. Funding of charter schools is
200 determined on a per-pupil basis through a
0 formula embedded in state law. Currently,
-200 the per-pupil amount provided for each
-400 student in a charter school is $13,527.
-600 Charter school enrollment was expected to
Se

Pa nd C

Sy
reach 39,932 in 2011.

st
rv

ym ha
a
ic

em
en rte
es

wi
ts r S
t

de
o

to ch
Sc

The funding that is provided to charter

Co
No oo
ho

st
np ls
ol

schools enrolling New York City residents

s
ub
s

lic

SOURCES: IBO; Mayor’s Office of Management and Budget is deducted from DOE’s budget. In the
Preliminary Budget charter school grants
grades are also entitled to petition the courts for tuition are expected to reach $711 million in
reimbursement for private schools when they feel that 2012, up $166 million or 30 percent from this year.
DOE’s programs do not adequately respond to their The cost of charter schools has tripled over the last
child’s particular needs. The right of parents to do so four years, driven by increasing enrollment and the
without having first enrolled their child in a district mandated increases in the per pupil funding level.
school was upheld by the U.S. Supreme Court in 2007.
The cost of these Carter Cases is up $55 million, or 29 Although it is not clear why the cost of special education
percent, in the Preliminary Budget over the past year private schools, Carter Cases and contract schools are
growing so rapidly, the source of the growth in charter
In addition to the Carter Cases, there is rapid growth school costs is clear. Enrollment in charter schools, and
in the contract costs for a separate group of students thus their cost, has been and will be increasing for the
served by specialized private schools.
DOE has long contracted with residential Rapid Increase in Cost of Private and Charter School Placements
schools, both in- and out-of-state, to Charter Schools Spec. Ed Pre-k
educate particular students whose Contract Schools Carter Cases
needs are beyond the expertise of in-
city schools. The Preliminary Budget Annual Cost, dollars in millions
allocates close to $447 million for these $1,200
contracts in fiscal year 2012. That
1,000
represents an increase of $119 million
or 36 percent over the current budget. 800
In 2011, contract school enrollment was
expected to reach 7,700 students. 600

400
Growth in spending on charter schools
is driven by the ongoing impact of policy 200
initiatives that have had the strong
support of the Department of Education. 0
20
20

20

20
20

20

Charter schools are public schools which

09

11

12
10
07

08

are operated by individual nonprofit Fiscal Year

corporations, independently of the SOURCES: IBO; Mayor’s Office of Management and Budget
Department of Education. Charters are NOTE: Fiscal years 2008-2010 are actual spending, and 2011 and 2012 are projected.

34 NYC Independent Budget Office March 2011

 EXPENDITURE / Education

foreseeable future. For much of the last decade, the Spending Shifts in Other Categories. In 2012, general
Department of Education has actively promoted and education, special education, and citywide special
supported the establishment of charter schools in the education classroom instruction would each fall by 1
city. The department has provided space within New percent to 2 percent under the Mayor’s Preliminary
York City public school buildings and has advocated for Budget which amounts to a combined $93 million
state legislation which raised the cap on the number of drop in total classroom instruction. Other services
city charters. The cap is currently set at 200 schools and to schools that are expected to decline next year
125 schools are currently operating in the city. include some noninstructional support services such
as school facilities ($562 million) and school safety
Charter schools typically phase in their operations over ($230 million) which will both fall by 3 percent and 22
a number of years. For example, a school may earn a percent, respectively. Despite a 15 percent increase
charter to operate grades kindergarten through eight, in special education instructional support, which rises
but may choose to only operate grades kindergarten and to $598 million, spending for categorical programs
one in its first year. As that first group of children ages, overall will fall by 15 percent to $1.8 billion, mostly due
the school will grow by one grade a year (assuming it to the loss of American Recovery and Reinvestment
earns its charter renewal at the end of five years.) Given Act funding, which is largely being replaced with city
this growth pattern, there is a pipeline of authorized funds. Special education instructional support includes
charter school slots that are not yet in operation. As positions for the School Based Assessment Teams
those grades fill, the amount of funding taken from the and Related Services providers. Although the budget
DOE and provided to charter schools will grow. includes an additional $12 million in spending on
full-time related services positions, it also calls for a
IBO estimates that approximately 65 percent of $65 million increase in contracted related services
authorized school grades in charter schools are providers as well.
operating in the 2010-2011 school year. This means
that even if no additional charter schools were to open, Other areas of budget growth within the category
the maturation of existing charter schools would lead “services to schools” include instructional
to a 50 percent increase in enrollment, and therefore administration, school food services, and pupil
spending. If charter school creation continues until the transportation. Spending on school food services is
current cap of 200 schools is reached, enrollment and expected to grow by 14 percent next year. The food
funding of charter schools in the city could reach 150 services budget has traditionally gone mostly to
percent of current levels, independent of any increase support school cafeteria operations. Recently, DOE
in the annual per-student funding level. considered penalizing schools for uncollected school
meal fees from parents and students but collection has
In theory, the diversion of funds to charters should be always been somewhat difficult to enforce. Although it
offset by a reduction in the number of students being is estimated that the city could lose roughly $8 million,
served by the department itself. No estimates exist of the plan to place the collection burden on the school
the path that students and families in New York follow has been suspended for now. Pupil transportation
to charter schools. Are these students who would have will also see its highest levels in eight years, reaching
been attending public schools or are they students who $1.1 billion. Growth is driven by the cost of special
would have enrolled in private or religious schools? education buses which added $86 million to the fiscal
The answer is unknown but is likely some combination year 2012 budget. Fringe benefits—unlike other city
of the two. Total enrollment in the public school system agencies most costs for DOE employees are carried in
has remained relatively stable in recent years as the department’s own budget—will reach $2.7 billion in
charter enrollment has grown. Regardless of how many 2012, a 5 percent year-over-year increase. The increase
charter school students would otherwise have attended is mostly due to health insurance benefits.
public schools, the fact remains that--at least for now--
the public schools are being asked to educate roughly The central administration budget will be below the
the same number of students with a reduced budget levels of fiscal years 2005–2010, but 10 percent
available for services to schools. higher than this year at $324 million. There is still some

NYC Independent Budget Office March 2011 35

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

restructuring occurring but the general trends show funding would be cut significantly, by 39 percent. SCA’s
strong budget support for the Division of Instructional assumption that the state contribution each year would
and Information Technology, the Division of Assessment be $500 million is based upon proposed changes to the
and Accountability, and the Office of School and Youth state’s building aid calculations. The Governor’s budget
Development. Central administration will grow by bill proposes capping the amount of reimbursable
218 positions, adding more than $10 million to the expenses for the city at $1 billion, so the city anticipated
current 2011 budget. Despite this, levels of spending receiving $500 million from the state each year for
on consultants for administrative professional services fiscal years 2012 through 2014. However, this is likely
will be over $39 million and consultants for computer to be revised upward from $500 million since the city
services will cost another $36 million. generally is reimbursed for about 61 percent of its
eligible expenses, though it would still result in a level of
Funding and Priorities Are Also building aid that is much lower than the state’s historical
Shifting in the Capital Plan contribution of about $1 billion a year.

In February 2011, the School Construction Authority The decrease in funding in this proposed amendment is
(SCA) issued the latest version of its proposed second even deeper when compared with an earlier proposed
amendment to the 2010-2014 Education Capital Plan, second amendment released in November 2010.
calling for significant shifts in both the sources and Comparing the February version with the November
uses of funds compared with the most recently adopted version suggests a decrease in state funding of 56
amendment to the plan. The city-funded portion of the percent and a decrease in total funding of 42 percent.
plan would increase significantly to 63 percent, and the However, it is important to note that the November
portion of the plan dedicated to capital improvement version had incorporated 40 percent increases in
would increase to 69 percent while the share dedicated both city and state funding over the amounts planned
to new capacity would decrease. when the first amendment was approved in June
2010, despite signs of budget strains for the city and
Funding the 2010-2014 Education Capital Plan. especially the state that made a significant increase in
According to the SCA’s latest version of its proposed funding improbable.
second amendment, there would be a decrease of
just over $2 billion (or 20 percent) for the 2010-2014 The stable city contribution to the capital plan is
plan compared with the first amendment, which was perhaps in part due to the city’s ability to issue qualified
approved by the City Council in June 2010. The annual school construction bonds (QSCBs), which thanks to a
amendment process includes a series of revisions to federal subsidy of some or all of the interest payments,
the proposed amendment, first in November
and again in February, as it moves through Planned State Commitments in 2011 Through 2014 Fall
the review process prior to final action by the Relative to Historic Levels
Dollars in millions
Panel for Educational Policy and then the City
City Funds State Funds
Council in the spring. The first amendment
Actual Commitments Planned Commitments
from June 2010 planned for a total of $11.7 $3,500
billion over the five years, with about half of the
3,000
funding coming from the state and the other
half coming from the city. The current proposed 2,500
second amendment from February 2011 plans 2,000
for a total of $9.3 billion, with the city bearing a
1,500
significantly higher share of the total cost—63
percent—offsetting a decline in the amount 1,000
projected from the state. 500

0
Overall, city funding would decrease slightly 2007 2008 2009 2010 2011 2012 2013 2014
(about $100 million, or 2 percent) while state SOURCES: IBO; Mayor’s Office of Management and Budget

36 NYC Independent Budget Office March 2011

 EXPENDITURE / Education

Sources of Funds for the 2010-2014 Education Capital Plan:

February 2011 Proposed Second Amendment
Dollars in millions
Decrease in Total
Shares of Decrease in Total From November
Total from June 2010 2010 Proposed
2010 2011 2012 2013 2014 TOTAL Funding First Amendment Second Amendment
City $1,176 $1,247 $1,400 $888 $1,168 $5,879 63% -1.8% -29.0%
State 1,071 880 500 500 500 3,451 37% -39.3% -56.3%
TOTAL $2,247 $2,127 $1,900 $1,388 $1,668 $9,330 100% -20.1% -42.3%
SOURCES: IBO; School Construction Authority 2010-2014 education capital plan amendments

results in substantial savings for the city. So far, $397 reimbursable capital projects based on the tiered
million in QSCBs have already been issued, with $967 priorities, slightly less than the $2.5 billion that was
million planned in the future, for a total of $1.4 billion. budgeted for the 2009–2010 school year. The February
The total city contribution to the capital plan is expected version of the proposed second amendment allocates
Sources of Funds for the 2010‐2014 Education Capital Plan: February 2011 Proposed Second Amendment
(in millions)
to be $5.9 billion, so a quarter of the total city funds for $6.4 billion for capital investment over the 2010–
Shares of  Decrease in Total from  Decrease in Total from 
the capital plan could be raised interest free, assuming 2014 period, an increase of 2 percent over the first
Total  June 2010 First  November 2010 Proposed 
market conditions 2010hold steady
2011 and
2012 the
2013government
2014 TOTAL Funding amendment,Amendment and theSecond Amendment
amount allocated to new capacity
subsidy for the interest payments on the bonds covers
CITY $1,176 $1,247 $1,400 $888 $1,168 $5,879 63%would be $2.9 billion, a 46‐29.0%
‐1.8% percent decrease.
STATE $1,071 $880 $500 $500 $500 $3,451 37% ‐39.3% ‐56.3%
the interest that the buyers demand.
TOTAL $2,247 $2,127 $1,900 $1,388 $1,668 $9,330 100% ‐20.1% ‐42.3%
This shift in the focus of the plan from new capacity
Fewer New School Buildings, More Investment in projects to improvements in existing schools means
Existing Buildings. The use of funds within the capital that the planned 30,377 new seats from the first
plan would shift significantly away from new capacity amendment would be scaled back by about a third
and towards improvements in existing buildings. In the to 20,560 new seats in the latest version of the
past, the plan was divided roughly equally between proposed amendment. Relative to the June 2010 first
two main categories—capacity and capital investment. amendment, 26 projects that cost more than $1 billion
The current proposed amendment would allocate 69 and funding 12,480 seats would be cut, seven projects
percent to capital investment and just 31 percent to that would cost $202 million and fund 3,373 seats
capacity, perhaps reflecting changes in the type of would be added, and the 31 projects that would remain
projects likely to be approved for reimbursement under in the plan would be scaled back, on net, by 710 seats.
the pending state building aid legislation. The degree to which the plan is being scaled back
would appear much larger if compared with the earlier
The state legislation under consideration would version from November, when the SCA planned for
implement a six-tier system for capital projects, where 50,000 new seats during the five-year period.
projects to improve existing
buildings would be ranked in New Capacity Scaled Back in Proposed Second Amendment
tiers one through four and new February 2011
capacity projects would be
Seats
ranked in tier five—the second
Number of Seats in First Fmendment (June 2010) 30,377
lowest priority. Projects would
Seats in Projects Dropped From the Plan -12,480
be ranked by the age of the
Seats in Projects Added to the Plan + 3,373
building, giving preference to
Net Change in Seats to Projects Remaining in the Plan -710
older buildings in need of repair.
Number of Seats in Proposed Second Amendment (February 2011) 20,560
Districts across the state would
SOURCES: IBO; School Construction Authority 2010-2014 education capital plan amendments
compete for the maximum of $2 NOTE: The number of seats in each amendment includes a portion of seats funded for design
billion that the state education only in this plan and construction in the next. In the first amendment, there were 2,300 such
department would allocate for seats and in the proposed second amendment, there are about 6,000 seats.

NYC Independent Budget Office March 2011 37

New Capacity Scaled Back in Proposed Second Amendment

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Environmental Remediation—Some Now, A Lot amendment. In addition, the city plans to spend
More Down the Road. Two initiatives within the $708 million from 2012 through 2021—all of it city-
capital improvement program were highlighted in funded— for the removal of lighting ballasts identified
the proposed second amendment: investment in as leaking PCBs. For the 2012-2014 years of the
educational technology, and remediation of light current five-year capital plan, the city is planning for
fixtures leaking polychlorinated biphenyls (PCBs). $141 million for this remediation effort, accounting
Technological improvements needed to expand the for almost all of the money dedicated to lighting
department’s Innovation Zone (which provides for fixtures in the current plan. Since the plan was
individualized instruction for children through the issued the federal Environmental Protection Agency
use of technology, online courses, and modified rejected the city’s 10-year timeline for fixing the
teacher roles) and enable online assessments lights, saying it was too lengthy.
account for $486 million in the proposed

38 NYC Independent Budget Office March 2011

 EXPENDITURE / State & Federal Proposals Could Affect the City

State & Federal Proposals

Could Affect the City
City to Eliminate Rental Subsidy a budgeted $206.9 million in 2011, of which the city is
Program if State Cuts Stand scheduled to contribute $67.2 million. The Bloomberg
Administration contends it would be unable to take over
The Department of Homeless Services’ (DHS) rental the full cost of the program if federal and state funds
subsidy program, Advantage New York, is in jeopardy are cut.
after Governor Cuomo proposed cutting state and
federal funds to the program in his Executive Budget. The loss of the rental subsidy program would likely
DHS reports that it will eliminate Advantage—which it lead to an increase in the cost of the city’s emergency
says has helped more than 25,000 families and single shelters, especially for family shelters, as 95 percent
adults move out of homeless shelters over the past of Advantage funds go toward rental subsidies for
four years—if the state fails to restore the funding. The families. It is likely that some of the 15,000 households
loss of the rental assistance program would likely drive currently receiving Advantage would be unable to pay
up the city’s emergency shelter costs as families and their rent and would return to the shelter system if
adults who would have received the subsidy return to or the program ends. In addition, because Advantage is
remain longer in the city shelters. one of the main subsidy programs DHS uses to move
families from shelters and into permanent housing, its
The Advantage program provides up to two years elimination would increase the average length of time
of rental assistance to families and single adults homeless families stay in the shelter system overall.
moving out of emergency shelter and into permanent
housing. Introduced as a pilot program in April 2007, To illustrate the possible impact on the city’s shelter
Advantage was redesigned in 2010 to strengthen budget, IBO estimated how much the elimination of
work requirements and raise the rental contribution the Advantage program could increase emergency
for participants. In order to be eligible for the current shelter costs in 2012 under two scenarios. If 30
program, families and individuals must be in the percent of households currently receiving Advantage
shelter system for at least 60 days, make less than return to emergency shelter, IBO estimates that
200 percent of the federal poverty level, and work at spending on shelters would increase by $279 million
least 20 hours a week. Participating households then (an increase of 40 percent above fiscal year 2012
pay 30 percent of their gross monthly income for rent budgeted adult and family shelter costs), of which
(up from $50 a month in the pilot program), with the the city would be responsible for $115 million. If 70
subsidy covering the balance. Participants are eligible percent of households return to shelter, the additional
for a second year of the program if they work at least shelter spending would be $455 million (a 66 percent
35 hours a week. Rental contributions increase to 40 increase), with the city bearing $188 million. These
percent of their income during participants’ second estimates also account for the families and adults
year in the program. About 15,000 households are currently in shelters whom the city had assumed would
currently receiving Advantage subsidies, according to move from the shelters into the Advantage program
the Mayor’s Office of Management and Budget. next year. This estimate of the number of families
and adults returning to shelters may include some
Advantage has been funded through a combination households that would have exhausted their two years
of city, state, and federal welfare funds, with about a of Advantage prior to the elimination of the program.
third coming from the city. The program’s price tag has
grown substantially from $54.2 million in fiscal year The potential increase in emergency shelter costs
2008 (the first full year of program implementation), to would come after the city has already increased its

NYC Independent Budget Office March 2011 39

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

spending on adult shelter by $16 million beginning this provided at the centers, affecting about 8,000–10,000
year to offset the state’s cut to its share of funding from seniors. This would represent a significant reduction
$85 million to $69 million. in services to a vulnerable population; New York City’s
Center for Economic Opportunity has estimated that
Senior Centers at Risk of Closure Due one-third of New York City’s seniors are living in poverty.
to Proposed State Funding Shift
Although the Mayor’s Preliminary Budget did not
The Governor’s Executive Budget proposes a change in include any new proposals to cut city funding for senior
the use of federal funds that could result in the closure centers, additional centers may have to close by the
of more than 100 senior centers supported by the end of June 2011. Last year, city funding reductions
city’s Department for the Aging (DFTA). These closures led to the closure of 27 senior centers. An additional
would be in addition to the recent loss of several senior 24 centers that had also been scheduled for closure
centers due to reductions in city funds. were restored as part of the 2011 Adopted Budget
agreement; seven of these were restored by the Mayor,
The department provides services for older New while 17 received funding from the City Council for
Yorkers to help them maintain their independence and 2011 only. The Preliminary Budget does not include
participation in their communities. DFTA administers funding to maintain these 17 centers after this year
the contracts of 259 senior centers and provides more and it is not yet clear if City Council funding will be
than 10 million meals annually, both home-delivered available for 2012.
and at senior centers. The Mayor’s preliminary budget
for DFTA in 2012 is $217 million, down significantly Funding Shortfall Could Mean 16,000
from $270 million in 2011. Fewer Child Care Slots

The Governor’s Executive Budget includes a proposal The Administration for Children’s Services (ACS)
to change the federal Social Services Block Grant (Title provides early childhood education through the
XX) formula. New York City receives about $64 million federally funded Head Start program and subsidized
annually in Title XX funds, of which nearly $40 million is child care programs for eligible families. In 2010, the
used to provide mandated services, including domestic city provided child care for about 102,000 children,
violence and adult protective services. The remainder, down slightly from 104,000 in 2009, and a 12.1
$24 million, is discretionary funding for social services percent reduction from a peak of 116,000 children in
that the city has traditionally allocated to DFTA to fund 2006. Over the last few years, ACS has been working
senior centers. The state’s proposed funding switch to control growth within the child care budget as
would eliminate the discretionary portion of the Title increasing costs have outpaced federal funding, which
XX block grant and instead use it to offset the cost of has stagnated since 2004. In 2010 and 2011 the
mandated child welfare services for both the city and city used reductions in the supply of vouchers to help
state. A similar proposal was made in the Executive control the child care budget and the financial plan
Budget last year but it was dropped when the budget assumes an additional reduction of more than 16,000
was finally adopted. The Mayor’s Preliminary Budget vouchers for 2012.
does not reflect the impact of this proposed change.
From 2004 through 2009 the city increased its own
The change would mean the loss of $24 million funding by 61 percent in order to maintain service
currently in DFTA’s senior center budget. Unless the city levels, but with a tougher fiscal environment since, the
were to make up for the loss of state funding, spending city has not sustained that growth in city funds for child
on senior centers would fall to $77 million in 2012, care, and the financial plan assumes that additional
down 32 percent from 2011. It would likely lead to the city resources will not be available. This has led city
closure of many senior centers throughout the city. The officials to reduce the child care system’s capacity.
department has estimated that a funding reduction These actions have included the elimination of certain
of this magnitude would result in the closure of 105 categories of child care vouchers. In 2010, ACS
senior centers and a loss of about 8,000 meals a day eliminated all vouchers in priority level 9, which were

40 NYC Independent Budget Office March 2011

 EXPENDITURE / State & Federal Proposals Could Affect the City

available when child care is needed to enable parents An alternative strategy currently being considered by
to look for work, and priority level 8, which served ACS—also not part of the Preliminary Budget—would
families with parents who are sick or incapacitated. eliminate 9,800 vouchers and 6,500 classroom slots,
Over the course of 2010 and 2011, ACS also eliminated reducing the total slots eliminated slightly from 16,644
all priority level 7 vouchers, which serve families to 16,300. Priority levels 5 and 6 vouchers and child
referred by a social service agency and whose social care for families above 200 percent of poverty remain
service needs are not dependent on work status. targets for elimination, although it is unclear how many
from each group. ACS will also employ a “first in-first
Even after these and other reductions, ACS reported a out” strategy to identify slots for elimination. These
difference of $80 million between the funding available proposals would reduce the number of child care slots
for child care services and the program’s expenses available to nonpublic assistance children by a third,
for 2011. Federal stimulus money and City Council and could make it difficult for some low-income parents
funding, as well as savings from contract delays, eased to continue to participate in the work force.
the deficit by about $50 million, but a $30 million
shortfall remains in this fiscal year. ACS officials are Increase in Child Care Copays. In addition,
counting on decreased demand for child care services November’s financial plan included a proposal to
among public assistance recipients and additional increase the minimum and maximum copayments from
contract delays to further reduce costs for 2011. parents for contracted child care starting in 2012. The
Although there is some evidence of decreased demand plan increases minimum weekly payments from $5 to
for public assistance child care vouchers within the last $15 and maximum payment levels will rise from 12
six months, it is unclear whether this will be sufficient percent to 17 percent of adjusted family income. This
to cover the remaining shortfall for 2011. If it proves proposal follows a previous increase in copayments
insufficient the city would have to allocate additional in the spring of 2009. Changes to copayments in
funding to the program to cover the shortfall. November’s financial plan reflect a city savings of
$13.0 million for 2012 and for each of the out-years.
For 2012, ACS officials project a $100 million difference
between funding and program costs. In an initial Budget Proposals Put Funding for
proposal—not included in the Preliminary Budget because Youth Programs at Risk
it does not involve any funding changes— the agency
would further reduce spending through the elimination of The Governor’s Executive Budget proposes funding
16,000 priority levels 5 and 6 vouchers and an additional changes that could significantly reduce funding for
644 slots through a reduction of eligibility for families with some core programs at the Department of Youth and
incomes above 200 percent of poverty or $44,000 a year Community Development, including the Summer Youth
for a family of four. Priority level 5 vouchers serve families Employment Program (SYEP), Out-of-School Time
with parents who work 20 hours or more per week and (OST), and the Runaway and Homeless Youth program
families with special needs children; priority level 6 (RHY). Moreover the Mayor’s Preliminary Budget also
vouchers serve families with parents who are in education proposes to cut city spending for these programs,
and training programs. compounding the impact of the loss of state funds.

Changes in the Child Care Populations

Enrollment Numbers
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Public
Assistance 30,000 38,000 38,000 35,000 43,000 44,000 52,000 57,000 49,000 47,000 49,000 51,000
Nonpublic
Assistance 59,000 56,000 57,000 61,000 60,000 60,000 59,000 59,000 57,000 55,000 55,000 51,000
TOTAL 89,000 94,000 95,000 96,000 103,000 104,000 111,000 116,000 106,000 102,000 104,000 102,000
SOURCES: IBO; Administration for Children's Services; Human Resources Administration; Mayor's Office of Management and Budget

NYC Independent Budget Office March 2011 41

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Summer Youth Employment Program Reduction. The currently receive dollars directly from the state through
Department of Youth and Community Development’s funding streams such as the Special Delinquency
(DYCD) Summer Youth Employment Program is a Prevention Program. The block grant program would be
seven-week summer employment initiative that serves operated as a competitive grant, and localities would
youth between the ages of 14 and 24. Participants have to provide a 38 percent match.
work up to 25 hours a week while earning $7.25
per hour in assignments that include government Out-of-School Time. The department’s OST program
agencies, hospitals, summer camps, nonprofits, small provides activities for school-age youth during after-
businesses, and retailers. school hours, on weekends, and during school
vacations. All OST programs are offered at no cost
Last summer, the total budget for SYEP was $51 to participants and provide a mix of academics,
million. This included $24 million in city funds, $9 recreational activities, and cultural experiences for
million in state-allocated Temporary Assistance to elementary, middle school, and high school students.
Needy Families (TANF) funds, $3.4 million in federal OST service providers operate mostly in public school
Workforce Investment Act funds, $12 million in federal buildings and in facilities of the parks department and
stimulus money, and a $2 million donation from the the New York City Housing Authority.
Mayor’s Fund to Advance New York City. The program
for summer 2010 had 35,612 youth enrolled, out of In 2011, OST received $7.6 million from the state Youth
more than 140,000 applications received. Development Delinquency Prevention program, one of
the funding streams that would be subsumed under
The outlook for this summer’s program is grimmer. With the new block grant. This represented about 8 percent
the city and state continuing to face budget constraints, of OST’s 2011 budget. While DYCD may secure some
additional cuts to the program have been announced. funding for OST from the new block grant, given that
The city is proposing to cut about $3.2 million for the total grant is budgeted at only 40 percent of the
fiscal year 2012 (summer 2011), which would result combined budgets last year for the funding streams
in 2,140 fewer city-funded slots. More significantly, the being consolidated, it is quite likely that whatever is
Governor’s Executive Budget proposes to eliminate all received will be less than last year. The Preliminary
Temporary Assistance to Needy Families funds for SYEP Budget does not account for the impact of this change.
statewide, a loss of another $9 million for the city’s
program. As a result of these proposed cuts and the In addition to the proposed state funding cuts, the
expiration of the short-term federal stimulus money, Mayor’s November financial plan included proposed
the city’s SYEP program this summer has a proposed reductions in city funds that could have a significant
budget of about $25 million, enough funding to serve impact on the OST program. OST’s budget would lose
approximately 17,200 youth, about 18,000 fewer than about $6 million in city funds on an annual basis. With
last summer, and about 35,000 fewer than in the the lower funding, the city has proposed reducing OST
summer of 2009 when enrollment topped 52,000. services on school holidays, from the previous 20
school holidays a year to 15 in 2011 and 14 in 2012
Youth Program Block Grant. The Governor’s Executive and later years.
Budget includes a proposal to create a block grant
called the Primary Prevention Incentive Program block Runaway and Homeless Youth. The department’s RHY
grant. This would combine nine existing youth services program protects runaway and homeless youth and
funding streams into one $34 million statewide block whenever possible works to reunite them with their
grant, an overall reduction in state funding for youth families. Services provided include: street outreach,
development programs of almost 60 percent. crisis shelters, drop-in centers, and transitional
independent living facilities.
Locally, the consolidation into a block grant would
affect services in two programs provided by DYCD: In 2011, the RHY program received $1.4 million in
Out-of-School Time and Runaway and Homeless Youth. state runaway and homeless youth funding to fund
Additionally, it would affect nonprofit providers who transitional independent living beds, accounting for

42 NYC Independent Budget Office March 2011

 EXPENDITURE / State & Federal Proposals Could Affect the City

11 percent of the RHY budget. Under the state budget released back into the community under the supervision
proposals, the state runaway and homeless youth of their legal guardian, sentenced to an alternative to
funding stream would also be subsumed under the placement program, or placed in an upstate facility for a
block grant, which is likely to result in a reduction in period of time. Alternative to detention programs divert
state RHY funding. The Preliminary Budget did not youth to community-based treatment programs instead
reflect this possible change. of detaining them in city detention facilities; alternative
to placement programs divert youth to similar programs
As with OST, this potential cut in state funds comes after court sentencing has come down and placement is
on top of Mayoral efforts to reduce city funding for being strongly considered.
the program. The November plan included a proposal
to reduce city funding for the five drop-in centers and Under the current funding structure, half of the
eliminate city funds for street outreach, beginning in costs that are not federally funded are reimbursed
2011. After negotiations with the City Council, this to localities by the state. Under the proposal in
year’s cuts were postponed. However, funding was not the Governor’s budget, the state would cover 50
restored for 2012 and beyond, and the Preliminary percent of the costs incurred by localities; however,
Budget assumes these service cutbacks will proceed. reimbursement is capped at $30 million annually
statewide. New York City would be eligible for about
Changes to State Juvenile Justice $19.5 million, or about $15 million less than in prior
Funding Could Increase City Costs years. As a result, the city’s funding share for detention
will increase from about 50 percent to 72 percent in
The Governor’s Executive Budget proposes several 2012. The Preliminary Budget includes an additional
changes in funding and programming for the state’s $15 million per year in city funds starting in 2012 to
juvenile justice system. Among those changes are a account for the reduction in state funds.
significant reduction in the amount the state reimburses
localities for their detention costs and additional funding Funding Changes for Placement Facilities. Over
for enhanced services for youth in upstate juvenile the years state officials have been unsuccessful
placement facilities. Both proposals would increase in addressing the problem of unnecessary costs
the cost to New York City for its care and treatment of associated with several upstate placement facilities
troubled youth who enter the justice system. that remain open but are no longer needed due to a
sustained decrease in the population of juveniles in
Decrease in State Detention Funding. The state budget placement. Previous proposals to close the empty or
proposal includes a new block grant of about $46 nearly empty facilities have failed largely due to political
million which will fund up to 62 percent of the total cost implications associated with the loss of jobs in these
to localities for alternative to detention and placement upstate facilities and a statutory 12-month notification
programs. Detention in this context refers to the period imposed on the state before a facility may be
temporary custody of a youth in a secure, limited secure, closed. Despite these obstacles that have stymied
or unsecure facility for a period of a few days to several previous efforts to aligning capacity, the Governor’s
weeks while a court case and sentencing decision is Executive Budget proposes to reduce youth facility
pending. Once a decision is made, a youth is either capacity from 1,209 beds to 833 beds and eliminate
the 12-month notification period—potentially saving
about $21.8 million for the state.
City-State Share of Detention Funding
Dollars in thousands As part of the state’s broader juvenile justice reform
2010 2011 plan, however, the current proposal also includes
Funding Share Funding Share 2012 Share additional funding of $26.2 million to enhance
City $33,329 47.4% $33,801 49.4% 72.2%
services for youth in placement. Therefore, despite
State $36,874 52.6% $34,659 50.6% 27.8%
SOURCES: IBO; New York City Office of Management and Budget
reducing costs through capacity reduction, the
NOTES: 2011 data is projected; 2012 estimate calculated by adjusting net impact to the system is an overall increase
2010 actual funding totals to reflect new detention funding cap. in state spending of $4.4 million. The Bloomberg

NYC Independent Budget Office March 2011 43

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Administration has added an additional $1.0 million Delay Basic Grant Increase. The bulk of welfare
in city funding for 2012 and an additional $1.3 expenditures are for the traditional cash assistance
million for 2013 and the out-years of the financial program, which provides eligible recipients with a
plan to cover the increase in rates attributable to the basic grant to cover general expenses such as food
enhanced services. and clothing, and specific grants to cover shelter and
utility costs.
New Funds for Alternative Programs. Diverting lower-
risk juveniles to less costly alternative to detention or A major factor contributing to increased public
placement programs is a central component of Mayor assistance spending over the last few years has been
Bloomberg and Governor Cuomo’s juvenile justice a state decision to increase the size of the basic grant.
reform proposals. Not only do alternative programs After the basic grant was frozen for nearly two decades,
cost less, but they have the potential to do a better job the state increased the grant by 10 percent in July
reducing the recidivism rate, which is 80 percent to 90 2009 and an additional 10 percent in July 2010. Under
percent for youth placed in upstate facilities. current law, a final 10 percent increase is scheduled for
July 2011. In order to limit the impact of this mandated
The state’s proposed Supervision and Treatment increase on local budgets, the state agreed to cover the
Services for Juveniles program provides a fiscal local share of the incremental costs through March 31,
incentive for localities to ramp up alternative programs 2012, using state and federal funds. After that point,
and prevent more low-risk youth from entering however, the city—and other counties across the state—
detention and placement. In theory, the city could will be responsible for its share of the costs, adding
offset the reduction in state detention funding by significantly to the city’s welfare expenditures.
increasing the number of low-risk youth it diverts into
the newly funded alternative to detention programs. The Governor’s budget now proposes delaying the
The challenge for New York City will be to get the final round of increases to the basic grant for one year,
programming in place quickly in order to begin diverting until July 2012. The city’s Preliminary Budget assumes
additional youth into alternative programs. In spite of implementation of this delay, reducing overall city grant
the fact that this state proposal is consistent with the spending by $40 million in 2012. City-funded savings
mayor’s proposal to increase the use of alternative would be limited to $4 million, however, because the
programs, the Preliminary Budget assumes no savings state had been expected to cover the incremental costs
from these efforts. for all but the final three months of the city’s fiscal
year. The proposed delay would have no new impact
Governor’s Budget Plan for Public Assistance: on the city’s budget for 2013, when city costs were
Some City Savings, Some Bigger Cuts already expected to rise as local governments become
responsible for their share of the basic grant increase.
The Preliminary Budget projects that total cash
assistance grant spending will be $1.6 billion in 2011, Full Family Sanction. Under current state law,
an increase of 9.0 percent over 2010. After falling benefit payments to public assistance cases in which
for many years, grant spending has risen in each of the head of household fails to comply with work
the last three years; the 2011 budget represents requirements are reduced by the portion of the grant
a 34 percent increase above 2007 outlays. The attributable to the head of household. For family
Mayor’s Preliminary Budget includes small savings cases, this means that the case remains open with
in city public assistance spending that would result the grant payment continuing at a reduced level
from three proposals in the Governor’s Executive providing some assistance for other members of the
Budget—delaying a scheduled increase in the basic household—in most cases the children. This system
grant, instituting full family sanctions, and a one-year varies from that of several other states where work
shift in funding sources. In addition, there are several rule violations by the head of household result in the
other changes to public assistance spending in the closure of the entire case. Past proposals to extend
Governor’s budget that could impact city spending, this type of full family sanction to New York have been
but are not acknowledged in the Preliminary Budget. rejected by the state Legislature.

44 NYC Independent Budget Office March 2011

 EXPENDITURE / State & Federal Proposals Could Affect the City

The Governor’s Executive Budget proposes a variation to pay for the federal share of Family Assistance
of a full family sanction; cases with heads of household grants, with the remainder available to pay for
who are out of compliance for a second time would be other programs aimed at helping low-income New
closed. The Mayor’s Preliminary Budget assumes that Yorkers. With the size of the block grant frozen at
this proposal will become law, and that the resulting its 1996 level, however, its inflation-adjusted value
case closures will save the city $9 million in 2012 and has decreased over the years by more than a third.
$12 million each year after that. As a result, these other TANF-funded programs are
competing for a shrinking pool of resources.
Public Assistance Funding Shift. Currently there
are different funding formulas for New York’s cash This year’s state Executive Budget includes only
assistance programs: the Family Assistance program two line item allocations in addition to the Family
for families with minor children is funded with 50 Assistance grants and other base commitments:
percent federal, 25 percent state and 25 percent local the Flexible Fund for Family Services block grant
funds, while the Safety Net programs for single adults to local governments, and the TANF contribution to
and families who have used up their five-year federal the Child Care Block Grant. Both of these would be
limit on assistance are both funded with 50 percent funded at current year levels. Among the programs
state and 50 percent local funds. The Governor’s left unfunded is the city’s Summer Youth Employment
budget proposes a one-year funding switch: Family Program. Over the years the city’s summer jobs
Assistance would be funded with 100 percent federal program has relied on TANF for a significant portion
funds, and Safety Net would be funded as 30 percent of its funding. The loss of TANF funds could result in a
state and 70 percent local. Because of the present far smaller youth employment program this summer
makeup of the caseload, state officials estimate that (see page 42 of this report for more details).
this switch would save money for both the state and
local governments. The Preliminary Budget assumes Medicaid Expenditures Are Rising, but
that this proposal will be enacted, saving the city $5 Some State and Federal Fiscal Relief
million in 2012.
Governor Cuomo’s Executive Budget proposes total
Eliminate Funding for Rent Subsidies. Another major statewide Medicaid spending (federal, state, and
factor driving public assistance cost increases over local shares) of $52.8 billion, which is a decrease of
the last few years is the Advantage rental assistance approximately 9 percent from the amount projected
program, which provides rent subsidies for up to two based on current law in January 2011. Specifically,
years to families and individuals moving out of the the Governor proposes to reduce state funds for
city’s shelter system. The program is administered Medicaid by $2.9 billion, which would trigger a
by the Department of Homeless Services, although reduction in matching federal funds. In future years,
the rent subsidies are paid from the cash assistance the Governor proposes to limit annual spending
budget at the Human Resources Administration. As growth to the 10-year rolling average of the medical
the shelter population has increased, the Advantage component of the consumer price index (currently
program has emerged as a key component of the city’s 4 percent). While changes of this magnitude would
strategy for reducing homelessness. have major implications for Medicaid service
delivery for many New Yorkers in the city and across
The continuation of the program, however, is threatened the state, it is unlikely that there would be a major
by a proposal in the Governor’s budget to eliminate all impact on the city’s budget. The impact on the city’s
state and federal funding for Advantage, a loss of about Health and Hospitals Corporation and its bottom
$140 million a year. (see page 39 for further details). line is more likely to be substantial as Medicaid
reimbursement revenue would decline under the
Limited Availability of TANF Funds. Under the 1996 Governor’s proposals.
federal welfare law, New York State receives $2.4
billion in Temporary Assistance for Needy Families Due to a change to the state’s Medicaid funding
block grant funds each year. These funds are used formula that was implemented five years ago,

NYC Independent Budget Office March 2011 45

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

New York City Projected Medicaid Expenditures, 2011 - 2015 payments to hospitals, the bulk of the
Dollars in millions spending is on services for Medicaid
February Plan enrollees. While state and federal
Projected City Funds 2011 2012 2013 2014 2015 policies have helped insulate the city
Total Medicaid Expenditures $5,697 $6,206 $6,224 $6,328 $6,508 from the financial consequences of
Federal Medical Assistance growth in Medicaid costs in recent years,
Percentage Savings (999) (199) (32) - - these expenditures have continued to
Medicaid Expenditures $4,698 $6,007 $6,192 $6,328 $6,508 rise rapidly, increasing the burden on the
SOURCES: IBO; Mayor's Office of Management and Budget other funders. Spending on Medicaid
services in the city totaled $27.1 billion
growth in the portion paid from the city’s budget has in 2010, a roughly 82 percent increase
been relatively modest. Prior to 2006, New York City over spending in 2000. During this 10-year period the
paid fixed shares of the costs associated with providing average yearly spending growth was 6.2 percent, notably
various Medicaid services to its residents. State-level higher than the 4.0 percent annual growth the Governor
legislation that went into effect that year capped most has proposed. (These increases cannot be explained by
of the city’s Medicaid costs at calendar year 2005 inflation alone—total spending grew 24 percent between
levels, plus a yearly inflation adjustment of about 3 2000 and 2010 in real dollars, with average real yearly
percent. This legislation has significantly reduced the spending growth of 2.3 percent.)
city’s Medicaid obligations below what they would have
been under the old financing formula, and the Mayor’s Total 2010 Spending on Medicaid Services. When
budget office does not anticipate spending falling below Medicaid spending in the city is examined in terms of
the capped amount. service categories, the largest component is long-term
care services for the elderly and disabled, as neither
Another source of fiscal relief for the city in recent Medicare nor private insurance provide significant
years has been an enhanced federal matching rate. benefits in this area. Total spending on long-term care
The Federal Medical Assistance Percentage (FMAP) services was $10.1 billion in 2010, or 37 percent of the
for Medicaid is determined by each state’s per capita total. Of this, the majority of spending—$7.2 billion—was
income relative to the nation’s and is normally 50 for traditional long-term care services, which include
percent for New York. Under several rounds of federal nursing homes and standard home health services
stimulus legislation, Congress temporarily has raised such as personal care and home nursing. Smaller,
each state’s FMAP beginning in October 2008 and but growing, shares of expenditures were devoted to
now running through June 2011. In New York, the specialized long-term care services ($1.8 billion)—which
federal share of Medicaid rose to between 59 and 62 include facility-based care for the developmentally
percent, an increase that is now being phased out. disabled and mentally ill as well as enhanced care
The state reports a total of $9.9 billion in savings from offered through various home- and community-based
the enhanced FMAP, some of which has been passed waiver programs—and to managed care premiums for
through to the city. Due to payment lags, the enhanced long-term care patients ($1.2 billion).
FMAP will continue to provide savings for the city until
2013. The Preliminary Budget includes FMAP savings The second largest component of Medicaid service
of $999 million in 2011, decreasing to $199 million in spending in 2010 was managed care premiums for
2012, and $32 million in 2013. As the enhanced FMAP acute care patients, as the state has now moved
is phased out and the nonfederal portion of Medicaid the majority of this population into managed care.
costs returns to its previous 50 percent share, the These payments accounted for 23 percent of service
city’s portion of Medicaid expenditures is projected to spending, or $6.1 billion, in 2010. Although managed
increase from $4.7 billion in 2011 to $6.0 billion in care spending has displaced some of the fee-for-
2012, and reach $6.5 billion in 2015. service spending on hospitals and other types of acute
care in recent years, the former still accounted for a
Although New York City’s total Medicaid expenditures relatively large amount of expenditures in 2010—$5.3
include administrative costs and supplemental billion (20 percent) of the total.

46 NYC Independent Budget Office March 2011

 EXPENDITURE / State & Federal Proposals Could Affect the City

While the dollars spent on long-term care services are proposal was enacted as is, the public hospital system
substantial, they do not represent the full costs of the would lose $52 million in revenue during the coming
populations using these services, as patients enrolled state fiscal year, an amount equal to approximately
in long-term care may also use acute care services 1 percent of total revenue received in 2010. HHC’s
such as hospitals and pharmacies. When Medicaid affiliated Medicaid Managed Care health plan,
spending is parsed in terms of eligibility groups, the MetroPlus, would lose an additional $66 million. If
role of long-term care-eligible populations in driving the Governor’s proposed Medicaid cuts were instead
expenditures is even more apparent. The elderly and enacted through an across-the-board reimbursement
the disabled accounted for 59 percent ($15.8 billion) rate cut of 9.0 percent, HHC alone would lose $200
of Medicaid spending in 2010. However, the two million in revenue. Although such a draconian scenario
groups combined make up only 22 percent of Medicaid is extremely unlikely, some level of Medicaid cuts is all
enrollees in New York City. but guaranteed given the state’s budget difficulties.

Due to both recent economic conditions and statewide As IBO reported last year, HHC’s expenses continue
policy initiatives such as the launch of Family Health to outstrip revenues, leading to growing deficits. While
Plus, nondisabled, non-elderly adults are now the the hospitals corporation has undertaken a number of
largest group of Medicaid enrollees in New York City steps since then to address the shortfalls, including an
(39 percent of the total), followed closely by children ongoing restructuring initiative and staff reductions,
(38 percent). However, spending per adult and child recent projections show a closing cash balance of
enrollee in 2010 (roughly $5,400 and $3,200, $832.5 million in 2011 declining to just $31.1 million
respectively) is dwarfed by per enrollee spending for in 2015. These forecasts, which include a number of
the elderly and disabled (approximately $24,500). undefined cost savings initiatives, will likely worsen
once the state Medicaid budget is finalized due to
Proposed State Medicaid Cuts Threaten the outsized share of HHC’s revenue coming from
HHC’s Already Strained Finances Medicaid. Medicaid fee-for-service and managed care
payments have consistently been HHC’s single largest
In conjunction with his Executive Budget, Governor funding stream, providing more than 40 percent of
Cuomo appointed a Medicaid Redesign Team tasked revenue in recent years; in absolute terms these
with reforming the statewide program and more payments have barely increased, rising a total of 5.4
specifically with identifying initiatives to reduce state percent from 2007 through 2010, largely due to several
funded Medicaid spending by $2.85 billion in state previous rounds of rate cuts at the state level. HHC’s
fiscal year 2011-2012. The team’s proposal, accepted reported revenues from state-run indigent care and
by the Governor in late February, contains a mixture other pools and from grants and city subsidies and
of savings through spending shifts and reestimates; service payments have also declined since 2007.
across-the-board rate cuts; and short-term reforms
geared at reducing spending or costs in specific These changes have coincided with an increased
areas. The proposal would also impose an overall reliance on Disproportionate Share Hospital (DSH)
spending cap on Medicaid, limit annual spending and Upper Payment Limit (UPL) funds. DSH and UPL
growth to approximately 4 percent, and grant the state are federal programs that provide supplementary
Department of Health discretion to implement further payments to hospitals serving a disproportionate share
cuts if this is exceeded. of uninsured and Medicaid patients. These programs
are paid for solely with city and federal funds, so they
Although the Legislature has yet to approve the should not be greatly affected by state-level Medicaid
Executive Budget, it is clear that a funding reduction of cuts. However, the public hospitals’ DSH and UPL
the magnitude proposed by the Governor would have revenues are vulnerable in the future for several
consequences for the already-strained finances of the reasons. First, the city had previously been able to
city’s Health and Hospitals Corporation (HHC). While increase the size of these payments by leveraging the
the overall impact on its finances is still uncertain, HHC enhanced federal matching rate for UPL funds under
has estimated that if the Medicaid Redesign Team’s the American Recovery and Reinvestment Act, which

NYC Independent Budget Office March 2011 47

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

Health and Hospitals Corporation Revenues, 2007-2010

Dollars in millions

2007 2008 2009 2010

HHC Cash Receipts - Actuals Amount Share Amount Share Amount Share Amount Share
Medicaid Fee-for-Service & Managed Care $2,255 45% $2,291 42% $2,320 47% $2,376 41%
Disproportionate Share Hospital &
Upper Payment Limit Payments* 634 13% 1,099 20% 416 8% 1,379 24%
Medicare Fee-for-Service & Managed Care 556 11% 782 14% 851 17% 907 16%
Indigent Care and Other Pools 487 10% 453 8% 470 9% 454 8%
Grants, City Funds 350 7% 301 6% 296 6% 253 4%
All Other Revenue 728 15% 485 9% 627 13% 429 7%
Total Revenue $5,011 100% $5,412 100% $4,980 100% $5,798 100%
SOURCES: IBO; Health and Hospitals Corporation
NOTE: *2010 includes three years of nonrecurring retroactive payments.

expires on June 30, 2011. Second, federal funding for streams—which combined account for 60 percent of
the DSH program is scheduled to be reduced under the the hospital system’s revenue in 2007 through 2010—
Affordable Care Act starting in 2014. The end result are both vulnerable to some extent in the coming
is that HHC’s Medicaid and DSH and UPL funding fiscal year.

48 NYC Independent Budget Office March 2011

 EXPENDITURE / City Budget Initiatives

City Budget Initiatives

Fire and Police Staffing Continues to Shrink Proposed Police Officer Staffing To Fall Again Slightly,
Civilian Positions Also To Be Cut. Under the Mayor’s
Under the Preliminary Budget, fire and police staffing Preliminary Budget for 2012, New York City Police
would decline in the coming year. The main impact Department (NYPD) uniformed staffing would decline
within the fire department would be a reduction in the through attrition to 34,413 by June 30, 2012, which
number of firefighting units in service. Reductions in would represent the smallest size force since 1992.
uniformed staffing in the police department could be
amplified by additional cuts in civilian police staffing. Likely exacerbating the impact of the drop in uniformed
police staffing will be a concurrent decrease in
Fewer Firefighters, Fewer Response Units. Fire NYPD civilian staffing. In November 2010, the Mayor
Department of New York firefighter staffing in 2012 announced plans to eliminate 350 civilian positions
would decline through attrition to 10,282, lower than within the agency, thereby saving $29.8 million in
any year since at least 1980. The department’s staffing 2012. In combination with other actions, full-time
needs are lower in part because the city proposes to civilian staffing within the agency is now scheduled to
take 20 firefighting companies out of service beginning fall to 14,172 by the close of next year, a drop of about
in 2012, representing about 6 percent of the total 2.6 percent as compared with the current year.
number of engine and ladder companies currently in
operation. The particular companies to be taken out of Observers of NYPD operations often raise concerns
service have not yet been publicly identified. Because that the loss of civilian staff positions may result in
fire companies often operate out of dual houses police officers being called upon to perform additional
that contain separate engine and ladder companies administrative or other support functions, thereby taking
under one roof, it is not clear at this point whether any away from their availability for direct law enforcement
firehouses would be entirely closed. This initiative would activities. The police department acknowledged in
allow firefighter staffing to decline through attrition by September 2010 that there were already 621 “full duty”
505 positions—about 25 firefighters are required to staff police officers performing tasks that could instead be
each fire company on an around-the-clock basis. Total performed by less costly civilian personnel.
savings for 2012 due to closing the 20 fire companies
would be $40.9 million. Taken in combination with other “Extreme” Weather Hits Budget
planned reductions, firefighter staffing is to fall by a total
of 629 positions in the coming year. Like much of the rest of the nation, New York City has
experienced unusually
harsh weather
Proposed Firefighter Staffing to Fall to Lowest Level Since 1980
conditions during the
Actual Firefighter Staffing Proposed Staffing
past year. In 2010, the
1980 1985 1990 1995 2000 2005 2009 2010 2011 2012
average temperature
11,374 12,356 11,571 11,186 11,521 11,488 11,459 11,080 10,911 10,282 for the months June
Proposed Police Staffing to Fall to Lowest Since 1992 through August was
Actual Police Staffing Proposed Staffing 77.3 degrees, the
1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 highest ever recorded.
31,985 36,429 40,285 35,489 35,773 35,548 35,405 35,641 34,636 34,420 34,413 This was followed by a
SOURCES: IBO; Mayor’s Office of Management and Budget
tornado in September,
NOTE: Figures above are either actual or proposed end-of-year (June 30) staffing levels. “Police staffing” and
and the third snowiest
"firefighter staffing" refers to uniformed police and fire personnel of all ranks.

NYC Independent Budget Office March 2011 49

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

winter in the city’s history, with 60.9 inches of snow The December 26, 2010 blizzard left much of the
recorded at Central Park through the end of February city’s street network unplowed for several days. Staten
2011. The city has already added almost $100 million Island (Richmond County) received a federal disaster
to the 2011 budget to deal with these extreme events, declaration for the December blizzard, making it
and the city may still see additional disaster funding as possible for the city to apply for additional federal and
a result of the December blizzard. state aid to pay for storm clean-up in that borough.
Federal disaster declarations are done by county rather
September 2010 Storm. On September 16, 2010 a than municipality, and none of the city’s other boroughs
powerful storm ripped through Staten Island, Brooklyn, were covered by the declaration. Thus clean-up costs in
and Queens, causing what the city’s Office of Emergency the other boroughs are not eligible for the extra funds.
Management referred to as the city’s worst storm (Neighboring Nassau and Suffolk counties did receive a
damage in decades. The storm toppled a large number disaster declaration.)
of trees and inflicted heavy damage on sidewalks. After
the storm was a declared a major disaster, the Federal In response to the season’s near-record snowfall, $76.6
Emergency Management Agency (FEMA) made federal million was added to the sanitation department’s
aid available to supplement state and local funds. snow removal budget for 2011 and brings the total
amount budgeted for this year to $115.5 million.
In total, the city, state, and federal government The Preliminary Budget for 2012 also upped the
have provided $21.2 million to repair damage from department’s snow removal budget for 2012, by $4.5
September’s storm. The November 2010 Financial million, in anticipation of an adjustment that will be
Plan included $10.8 million in FEMA funding for required by the time of the Executive Budget to meet
sidewalk repair, together with a $1.8 million state a mandate in the City Charter. (Section 103 of the
match. The city’s match of $1.8 million was added in City Charter stipulates that funding for snow removal
the Preliminary Budget for 2012. Additionally, as the contained in the Executive Budget be the average of
storm caused falling trees and other damage in city snow removal expenditures during each of the five
parks, $6.8 million in city funds was added to the parks preceding fiscal years, excluding work completed by
department budget. employees on regular non-weekend shifts and the
purchase of equipment.)
Snow-Related Expenses. Snow removal costs in 2011
are projected to total $115.5 million, with the city The need to conduct critical street repairs, including
having seen almost 61 inches of snow. This year’s fixing potholes and other conditions brought about by
spending is well ahead of the $63.5 million spent in the severe winter, has prompted the transportation
2010, which brought 51.4 inches of snow to the city. department to add $2.0 million in overtime for its
The extreme winter weather has led to an increase in roadway repair and maintenance division. The need
the Department of Sanitation’s snow removal budget, to add overtime money was in part the consequence
as well as additional Department of Transportation of a DOT savings initiative introduced in the November
(DOT) funding for street repair. 2010 Financial Plan. The department assumed it could
save about $1.1 million annually by furloughing repair
workers the equivalent of
Weather-Related Expenses Grow Since 2011 Budget Adopted one week in winter. DOT
Dollars in millions estimated at the time that
Agency Description 2011 2012 Funding the furlough would result in
DOT FEMA Funds for September 2010 Storm Damage $10.8 Federal 9,000 fewer potholes being
DOT State Match for FEMA Funding- Sidewalk Repair 1.8 State
filled each year, but that
DSNY Increase for Snow Removal 76.6 $4.5 City
even with this reduction, city
DPR September Storm Damage 6.8 City
DOT Roadway Repair and Maintenance 2.0 City streets could be maintained
DOT City Match for FEMA Funding- Sidewalk Repair 1.8 City in acceptable condition.
TOTAL $99.8 $4.5 However, when this year’s
SOURCES: IBO; Mayor's Office of Management and Budget severe storms took their

50 NYC Independent Budget Office March 2011

 EXPENDITURE / City Budget Initiatives

additional toll on the city’s roadways, the amount of Program that was instituted last year. This program
repairs deemed necessary by DOT exceeded what could allowed parks employees to voluntarily leave full-
be handled without adding overtime. time positions in exchange for a guarantee of several
months of seasonal work the following fiscal year.
Parks Department Restores City The agency initiated this one-time program in 2010
Funding for Personnel Costs to reduce spending, yet only about half of the attrition
target was achieved. As a result of these restorations,
Limited success in implementing previously planned the current year’s budget for personnel has already
reductions in city-funded spending by the Department reached $187 million, an increase of 7.5 percent above
of Parks and Recreation has forced the city to restore the adopted budget for 2011.
about $12 million a year in the parks budget for higher
than expected personnel costs. Ongoing challenges in The city-funded parks department budget for personnel
decreasing the number of city-funded positions and costs is projected to be $159 million next year, 14.8
uncertainty over the timeline of a collective bargaining percent less than this year. In November 2010, the
agreement to reduce the work year for half of the agency’s city proposed reducing the work year by three months
full-time staff may require additional restoration of city for 1,467 parks department staff, roughly half of the
funding for parks department staff for 2012 and beyond. agency’s full-time personnel. This initiative, which is
projected to save the city $17.5 million a year, requires
Since January 2008, the department has seen eight collective bargaining and is currently under negotiation
rounds of budget reductions, including hiring freezes and with the union. Given the department’s challenges with
delays, elimination of vacant positions, and reductions implementation of hiring freezes and attrition programs
in the seasonal workforce. The hiring freezes and vacant in recent years as well as the need to negotiate the work
positions were projected to save $17 million in 2010, $37 year reduction, it is possible that the city will need to
million in 2011 and $61 million in 2012, with a significant restore more funds for personnel for 2012 and beyond.
portion of the savings coming from maintenance and
operations staffing. To date, the parks department has City Increases Local Support for Job Seekers
only partially implemented these programs and savings
have been less than the budgeted. According to the One service area in which the city, despite its budget
Mayor’s Office of Management and Budget, a combination constraints, is increasing its contribution is workforce
of factors, such as lower than expected attrition, and development. The final $6.5 million of federal stimulus
differences between the anticipated and actual salaries funding for workforce development, which totaled
and positions of individuals leaving city service, led $25.8 million, will be exhausted in 2011. With the
savings to fall short of the levels planned. The agency’s stimulus money running out this year, total funding for
staffing level has declined by 9.6 percent from 2008- workforce development has declined from a peak of
2010, 5.7 percentage points less than was budgeted. As $80.8 million in 2010 to $62.3 million in 2011, even
a result, city funding for personnel has continued to grow, as the city has increased its contribution from $13.9
albeit at a slower pace. million to $17.1 million. The city is also adding significant
resources for a new initiative beginning later this year—
Challenges in the implementation of hiring freezes and Express Workforce Centers. The new centers—initial
attrition programs have led the city to restore funds funding starts in 2011 with full funding in place for 2012
for parks positions over the last two years. In 2010, through 2014—are aimed specifically at addressing the
following restorations, city spending on parks staffing problem of stubbornly high unemployment, much of it
reached $209 million, a 9.3 percent increase above the concentrated in specific city neighborhoods.
adopted budget for that year. The Preliminary Budget
for 2012 restores $9.3 million to fund 160 positions in The stimulus funds provided only a brief reprieve from
2011 and $8.9 million to fund 153 positions in 2012. a trend of declining federal support for workforce
The city also restored $3.1 million in 2011 and $2.8 development. Federal monies are provided through a
million in 2012 to fund 74 positions that had not been variety of programs under the umbrella of the Workforce
eliminated through the voluntary Accelerated Attrition Investment Act of 1998. The act funds two main initiatives—

NYC Independent Budget Office March 2011 51

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

one-stop centers and Individual Training Account vouchers. compared with 17,000 in 2008), the Express Centers
New York City has nine one-stop centers, known locally as are intended to serve large numbers of job seekers.
Workforce 1 Career Centers, which are required to provide
a mix of training, career counseling, and job placement The five primary one-stop centers have annual budgets
services. The vouchers allow job seekers to access training ranging from $2.2 million to $3.3 million. The Express
from eligible outside training providers. These two programs Centers’ budgets will average $500,000 a year. They
will receive $17.0 and $12.7 million, respectively, in 2011. will focus solely on placement, and will not offer the
This, however, is down from their recent peak of $21.0 career counseling and training services that the one-
million each in 2006. stop centers do. While it is possible that funding will be
renewed should there continue to be strong demand
With federal contributions lower after 2006, the in 2014, the Express Centers are expected to be a
city began contributing local funds to workforce temporary measure for dealing with very high local
development. The stimulus funds that became unemployment that has persisted even though the city
available for 2010 allowed the city to cut back its has been adding jobs for over a year.
contribution, even as the overall budget for workforce
development grew. With the stimulus backstop gone, The Department of Small Business Services (SBS) is
the city has once again increased its contribution for working to identify high-need communities in which to
this year and budgeted a similar amount for 2012. locate the centers. SBS staff is currently reviewing data
from the state labor department to identify appropriate
In 2011, the bulk of city funds will be directed toward neighborhoods, and are considering opportunities
City Council workforce initiatives and a handful of to locate them within existing community resources
Center for Economic Opportunity programs, notably like public libraries and City University of New York
three sector-specific Workforce 1 Centers serving campuses. The agency expects to identify neighborhoods
job seekers in health care, manufacturing, and by the end of March, select exact locations shortly
transportation. There will also be $700,000 in city thereafter, and begin openings in May or June.
funds to begin establishing 10 new Express Workforce
Centers. As the program ramps up, funding is expected The identification of and focus on high-need
to grow to $5.5 million a year in 2012 and 2013, and communities is an important component of the
then decline to $2.8 million in 2014. With traffic at the program given the large differences in economic
nine existing Workforce 1 Centers (a primary one for opportunities across the city. The citywide
each borough, one in Hunts Point, and the three sector- unemployment rate is 8.9 percent for January 2011,
specific centers) still 30 percent to 40 percent above but in Brooklyn and the Bronx are substantially higher.
prerecession levels (and placements at 31,000 in 2010 Specific communities within the boroughs have fared
even worse. And these numbers do not
reflect the underemployed and those out
Shares of Workforce Development Funding
Dollars in millions of the labor force; as the local economy
City Federal improves, many of these underemployed
$100 and discouraged workers are expected
to begin searching for jobs, keeping the
80
unemployment rate high.
60
Labor Costs and Proposed Savings
40
Labor costs including salaries and wages,
20
pensions, and fringe benefits (primarily
0 health insurance) for municipal workers
20
20

20
20

20

20
20

20
20

20

make up the majority of city expenditures

13

14
09

10

11

12
07

08
05

06

SOURCES: IBO; Mayor’s Office of Management and Budget

each year. The Mayor’s Preliminary Budget
NOTE: 2011-2014 numbers are projected. for 2012 proposes personal services

52 NYC Independent Budget Office March 2011

 EXPENDITURE / City Budget Initiatives

expenditures of $37.0 billion, about 55 percent of total changes to existing VSF benefits will save the city $200
planned expenditures and an increase of $612 million million in 2012. This $200 million in turn is part of the
(1.7 percent) from this year. This spending level depends $600 million in state actions the Mayor is counting on
on some key assumptions, including wage increases in order to bring his proposed 2012 budget in balance—
largely funded only through increases in productivity and as with regular pension matters, virtually all changes to
reductions in pension costs. the city’s retirement benefits require state legislation.

Minimal Funding for City Worker Pay Increases. Labor Second, the current financial plan also reflects savings
contracts between the majority of city workers and their associated with the Bloomberg Administration’s
respective unions have already expired and the remainder proposal to change the pension system for new
will do so by the end of the upcoming fiscal year. The city’s employees. The financial plan assumes that enabling
financial plan provides no funds for raises during the first state legislation would cover employees hired beginning
two years of new contracts negotiated during the current in 2012. Because of lags in adjusting the city’s
round of collective bargaining and funding for 1.25 required pension contribution, savings would not begin
percent raises for each of the subsequent two years. until 2014. Under the proposal, all new employees
except police and correction officers, firefighters, and
Adding to the challenge is the fact that the teachers’ uniformed sanitation workers, would be required to
contract—which the city considers part of the prior round contribute to their pensions for their entire working
of bargaining—expired in October 2009. Funds that had careers and wait until age 65 before receiving a full
been budgeted for wage increases for teachers, as well as pension. The Mayor is also proposing that overtime
for school supervisors and administrators, were removed pay no longer count in the pension calculation for
last year. Without funds budgeted for new contracts, new employees, including uniformed personnel. In
the city is assuming that any wage increases for school addition, the Mayor is proposing to eliminate the
personnel will be funded through increases in productivity. guaranteed fixed return on tax deferred annuities
offered to teachers and certain other employees
While the Mayor has stated that additional raises will of the Department of Education. The Bloomberg
have to be offset with increases in productivity (often Administration estimates that adopting the proposal
called “givebacks”), similar efforts in the past to obtain would save $131 million in 2014 and $252 million in
savings have been difficult to achieve—particularly 2015, with greater savings over time.
because it is hard to extract productivity savings
retroactively. Each 1 percent wage increase costs the city It should be noted that the pension modifications now
about $290 million annually, including pension costs. being sought are in addition to changes in the teachers’
pension plan enacted in Albany in 2009 which applied
Pension Savings Assumed in Financial Plan. The Mayor’s only to new teachers in New York City. The current
Preliminary Budget for 2012 and updated five-year proposal, which includes more extensive changes to
financial plan includes two key assumptions regarding the city’s pension system, would cover all new city
savings from changes to the city’s pension plans. First, the employees, including teachers.
Mayor’s proposed budget assumes that Albany will enact
modifications to the Variable Supplement Fund (VSF) A Billion Dollars in Pension Reserves. Following
plans which pay $12,000 each year to members of the completion of a required biennial review of the
police and fire pension funds with 20 years of service. VSF pension system by an independent auditor, the city’s
payments are not technically pension benefits, but instead Chief Actuary is expected to recommend changes
supplement pension benefits. A recent analysis prepared in actuarial assumptions and methods this spring.
by the city’s Chief Actuary estimated that complete repeal These changes are expected to lead to a sharp,
of VSF benefits, if made effective July 1, 2011, would but as yet undetermined, increase in city pension
generate $970.1 million in city pension savings in 2012. contributions in 2012 and beyond. The Preliminary
Budget includes a reserve of $1 billion a year from
Rather than proposing complete elimination of VSFs, 2012 through 2015 in anticipation of the need for
the Preliminary Budget assumes that unspecified additional contributions.

NYC Independent Budget Office March 2011 53

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

54 NYC Independent Budget Office March 2011

 EXPENDITURE / Capital Spending, Financing, & Debt Service

Capital Spending, Financing,

& Debt Service
Four-Year Capital Commitment Plan percent) from September. More than 40 percent
of the total reduction is within the Departments of
The February 2011 Capital Commitment Plan that was Transportation and Education, approximately $450
released with the Mayor’s Preliminary Budget provides million each or 25.3 percent and 18.5 percent,
$33.2 billion for the city’s capital program, covering respectively. The 2011 capital program of 21 other
the period 2011 through 2014. The total represents a agencies was also scaled back. Only six agencies did
decrease of $1.9 billion or 5.5 percent from the level of not see a reduction in their capital programs in 2011:
capital funding planned in September 2010. the Department of Environmental Protection (DEP),
the Health and Hospitals Corporation, New York City
Although the capital program is primarily city-financed, Transit, the MTA Bus Company, Staten Island Railway,
in recent years more than 20 percent of its total funding and the Department of Information Technology and
has been comprised of state, federal, and private grants. Telecommunications.
The February plan reflects a reduction in noncity funding
of nearly 25 percent compared with the September Examples of current year projects affected by the
2010 Capital Commitment Plan. Total funding from proposed reduction in capital commitments include:
state, federal, and private sources is down by $1.8 • $88.2 million for protection against marine
billion, from $7.3 billion to $5.6 billion in the latest plan. borers (aquatic organisms that feed on wood
This decline is largely due to a reduction of $2.2 billion pilings) was moved from 2011 to 2012;
or 48.1 percent in state grants for the Department of $27.5 million for design and construction of
Education’s capital program in 2011 through 2014. pedestrian bridges was cut from 2011, with
about half of the total cut restored in 2014;
The commitment plan provides $13.8
billion for 2011 and the Mayor’s Office of New York City Revises Four-Year Capital Commitment Plan
Management and Budget (OMB) expects Authorized commitments, dollars in millions
agencies to actually commit (register 2011 2012 2013 2014 TOTAL
contracts for) $10.6 billion or 76.5 percent February 2011 Plan
of the amount authorized. In recognition City Funds $11,525 $5,936 $5,581 $4,593 $27,635
that projects are subject to changes and Noncity Funds 2,283 1,422 1,018 829 5,552
Total $13,808 $7,358 $6,599 $5,422 $33,187
delays due to unforeseen events, the
September 2010 Plan
commitment target tends to be less than
City Funds $13,310 $4,628 $4,962 $4,906 $27,806
the authorized total for the year. When
Noncity Funds 2,621 1,742 1,331 1,633 7,327
the February 2011 plan was scaled back,
Total $15,931 $6,370 $6,293 $6,539 $35,133
the commitment target for 2011 was also Change
lowered by $1.5 billion. City Funds $(1,785) $1,308 $619 $(313) $(171)
Noncity Funds (338) (320) (313) (804) (1,775)
For the remaining years of the February Total $(2,123) $988 $306 $(1,117) $(1,946)
2011 plan—2012 through 2014—the Percent Change
authorized totals are $7.4 billion, $6.6 City Funds -13.4% 28.3% 12.5% -6.4% -0.6%
billion, and $5.4 billion, respectively. Noncity Funds -12.9% -18.4% -23.5% -49.2% -24.2%
Total -13.3% 15.5% 4.9% -17.1% -5.5%
Total capital commitments for 2011 SOURCES: IBO; February 2011 and September 2010 Capital Commitment Plans
NOTE: Plan figures exclude interfund agreements, contingency amounts, and the
were reduced by $2.1 billion (13.3
reserve for unattained commitments.

NYC Independent Budget Office March 2011 55

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

$26.0 million for reconstruction of Broadway In 2012 and 2013 the commitment plan authorizes
was moved from 2011 to 2012; and $22.0 an additional $1.9 billion in city funds for agency
million for reconstruction of West 33rd Street capital programs. Most of the total city-funded increase
was moved from 2011 to 2014. Highway represents a shift in planned commitments to 2012
bridges and highway projects account for 46.7 and 2013 from the current year. In addition, nearly
percent and 25.8 percent, respectively, of the 50 percent of the combined increase for 2012 and
$450.1 million reduction to transportation 2013 occurs within the Department of Environmental
department’s capital program in 2011. Protection; environmental department commitments
• $79.7 million for citywide information technology that were originally planned for 2015-2021 will now
projects was eliminated in 2011 although be moved up into the 2011-2014 Capital Commitment
in 2012-2014 the funding was increased by Plan. Overall total funds increased by 15.5 percent in
roughly the same amount; $35.3 million and 2012 and 4.9 percent in 2013. In 2014 the plan is
$13.3 million set aside for the capital needs reduced by $1.1 billion (17.1 percent) due to a nearly
of the Board of Elections and court facilities, 50 percent decline in noncity sources of funding for
respectively, was also eliminated in 2011 and agency capital programs.
from the entire 10-year strategy (see next column
for discussion of the 10-year capital spending Ten-Year Capital Strategy
strategy). Combined, these three projects account
for 44.9 percent of the $285.9 million reduction As required by the City Charter, the Department of
to the Department of Citywide Administrative City Planning and Office of Management and Budget
Services’ capital program in 2011. prepared the Preliminary Ten-Year Capital Strategy
• $233.9 million for construction of two waste for 2012-2021 which accompanied the Mayor’s
management facilities—the Marine Transfer Preliminary Budget for 2012. The upcoming strategy
Station at East 91 Street and the Southwest would invest a total of $47.0 billion over the next 10
Brooklyn export facility—was deferred to 2016. years—$14.7 billion or 23.8 percent less, compared
The combined projects explain more than 90 with the strategy presented in May 2009.
percent of the $256.5 million reduction to the
sanitation department’s capital program in 2011. The new long-term capital plan would also rely less on
• $83.1 million to convert the James A. Thomas state and federal grants than the May 2009 strategy.
Center on Rikers Island into administrative State and federal grants are now expected to make
offices was eliminated from 2011 and up $5.5 billion (11.7 percent) and $2.8 billion (6.0
the entire 10-year strategy. This reduction percent), respectively, of the total funding. An additional
explains 57.6 percent of the $144.3 million $280 million (0.6 percent) is expected to come from
reduction to correction department’s capital private sources. Nearly 82 percent or $38.4 billion will
program in 2011. come from the city. A final version of the upcoming
• $11.4 million for construction of a new police strategy is expected to be released with the Mayor’s
academy training facility was eliminated in Executive Budget in April 2011.
2011 and $10.3 million for a radio system in
the subways was deferred to 2012 and 2013. In December 2010 the Bloomberg Administration asked
The combined projects explain 32.7 percent agencies, except environmental protection, to identify a
of the $66.4 million reduction to the police 20 percent reduction in capital commitments for 2011
department’s capital program in 2011. and 2012-2021 (the period covered by the upcoming
• $11.4 million for the Fort Washington Armory strategy). Instead a reduction of $4.1 billion or 10 percent
to stabilize the building exterior and correct in city funds was achieved. The capital cut reduces the
existing code violations was eliminated city’s capital investment to $35.8 billion over the 11-year
from 2011 and the entire 10-year strategy. period, excluding environmental protection.
This reduction explains 46.7 percent of the
$24.4 million reduction to the Department of About 35 percent of the total $4.1 billion city-
Homeless Services’ capital program in 2011. fund reduction occurs over 2011-2014, with the

56 NYC Independent Budget Office March 2011

 EXPENDITURE / Capital Spending, Financing, & Debt Service

remaining reduction implemented over the 2015- Ten-Year Strategy Includes $732 Million for Green
2021 period. Education projects accounted for the Infrastructure to Reduce Combined Sewer Overflows
largest reduction—$1.3 billion or 10.1 percent in city
funding over the 11-year period. This is followed by In September 2010, the city announced its Green
transportation department highway and bridge projects Infrastructure Plan that outlines initiatives to improve
which were cut by $567 million and $600 million, the water quality of New York Harbor and reduce
respectively (roughly 20 percent) and Department of combined sewer overflows (CSOs) by investing in
Housing Preservation and Development projects which alternatives to the traditional approach of adding
were cut by $493 million (14.5 percent). storage capacity to the sewer system. CSOs are
discharges of untreated sewage that occur during
storms when the
Capital Commitment Plan Changes for Fiscal Year 2011 volume of storm water
Authorized commitments, dollars in millions flows exceeds the
Feb. 2011 Sept. 2010 Percent treatment capacity
Operating Agency Plan Plan Change Change of a combined sewer
Dept. of Transportation $1,331.4 $1,781.5 $(450.1) -25.3% system. Basically, the
Dept. of Education 1,974.9 2,421.9 (447.0) -18.5% wastewater treatment
Dept. of Citywide Administrative Services 1,008.4 1,294.3 (285.9) -22.1% plants cannot handle
Dept. of Sanitation 583.0 839.5 (256.5) -30.6% the flow volume and
Dept. of Small Business Services 965.1 1,127.4 (162.3) -14.4% untreated sewage and
Dept. of Parks and Recreation 1,145.6 1,294.1 (148.5) -11.5% storm water are simply
Dept. of Correction 256.4 400.7 (144.3) -36.0% allowed to enter the
Dept. of Housing Preservation and Dev. 730.2 822.9 (92.8) -11.3%
surrounding waters
Dept. of Health and Mental Hygiene 368.5 455.3 (86.8) -19.1%
until the flow returns
to more normal levels.
Police Department 256.3 322.7 (66.4) -20.6%
The city’s preliminary
Dept. of Cultural Affairs 446.3 503.9 (57.6) -11.4%
ten-year capital
Fire Department 193.7 231.6 (37.9) -16.4%
strategy adds $732
Dept. of Homeless Services 56.2 80.6 (24.4) -30.3%
million, primarily in
Administration for Children's Services 87.3 103.7 (16.5) -15.9%
2018-2020, for green
City University of New York 261.4 275.5 (14.0) -5.1%
infrastructure.
Dept. of Social Services 78.4 91.7 (13.3) -14.5%
NY Public Library 116.8 125.1 (8.3) -6.6%
The Green
Queens Borough Public Library 100.6 107.4 (6.8) -6.3% Infrastructure plan
Dept. for the Aging 30.7 35.0 (4.2) -12.1% aims to capture and
Housing Authority 92.8 96.8 (4.0) -4.1% retain storm water
NY Research Library 13.0 14.1 (1.1) -7.7% before it enters and
Dept. of Juvenile Justice 4.3 5.3 (1.1) -20.0% overwhelms the sewer
Brooklyn Public Library 49.1 49.3 (0.2) -0.5% system by increasing
Dept. of Information Tech. and Telecom. 643.4 643.4 0.0 0.0% the area of natural,
MTA Bus Company 39.9 36.7 3.2 8.7% permeable surfaces
Staten Island Railway 3.3 2.3 1.0 42.7% that can absorb the
New York City Transit 222.8 212.8 10.0 4.7% water. Examples of
Health and Hospitals Corporation 295.5 225.5 70.0 31.0% such infrastructure
Dept. of Environmental Protection 2,452.9 2,330.2 122.7 5.3% include street side
TOTAL $13,808.2 $15,931.3 $(2,123.1) -13.3% swales (areas
SOURCES: IBO; February 2011 and September 2010 Capital Commitment Plans along the curb with
NOTE: Plan figures exclude interfund agreements, contingency amounts, and the reserve for unattained specific type of soils
commitments. and native plants

NYC Independent Budget Office March 2011 57

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

that absorb water), enlarged tree pits, and rooftop and Municipal Water Finance Authority (NYW). GO and
surfaces, such as green roofs, that are designed to TFA debt are backed by property taxes and personal
retain water. The plan calls for investing $1.5 billion in income taxes, respectively. NYW debt is backed by
green infrastructure over the next 20 years, in addition fees and charges levied on users of the New York City
to utilizing traditional CSO reduction infrastructure, water and sewer systems. The proceeds of NYW new
such as holding tanks and tunnels. The plan has to be money debt are pledged exclusively to environmental
approved by the state’s Department of Environmental protection capital projects. GO and TFA debt proceeds
Conservation in order to be considered part of the CSO fund the remainder of the city-funded capital program.
abatement program required under a consent order
negotiated between the city and state. City Debt Issuance Trends. With the Capital Commitment
Plan cut back (see page 55), the city has revised its
The preliminary 10-year strategy includes new capital projected GO and TFA bond issuance for the years 2011
funding for the implementation of the initial phase of through 2015 downward by $820 million. The $6.1
the NYC Green Infrastructure plan. Although most city billion projected new money borrowing in 2011, $200
agencies are reducing their capital plans as a result of million less than projected in November, would still be
the 10 percent cut announced by the Mayor in February a record annual issuance. The projected issuance for
2011, capital work performed by the Department 2012 has been revised downward by $200 million as
of Environmental Protection is not subject to the well, to $5.3 billion. The city plans to issue $4.8 billion
reduction. DEP projects are financed separately from in both 2013 and 2014 and $4.4 billion in 2015,
other city capital improvements, with bonds backed by downward revisions from November of $160 million,
payments for use of the water system. $120 million, and $140 million, respectively.

The 10-year strategy allocates $732 million of new The reductions in GO and TFA borrowing follow a
funds to DEP for installation of green infrastructure more consistent pattern than the changes expected
throughout the city, with 74 percent of the funding in capital commitments (excluding environmental
planned for 2018-2020. In addition to green protection), which have been reduced from 2011
infrastructure, the strategy continues to improve the through 2014 with the exception of 2012, when
existing capacity of the storm water retention system planned commitments increased by $1.1 billion.
through installation of new devices at waste treatment The relatively consistent annual reductions in
plants, such as gates and inflatable dams, to store debt issuance are driven by projected cash needs.
wastewater until peak flow decreases. Planned funding Debt issuance for a project begins in the year the
for traditional storm water retention system
infrastructure is $1.1 billion from 2012-2021, Selected City Bond Issues
bringing the total planned investment in CSO Dollars in billions

reduction work to $1.9 billion over the 10-year Actual Projected

period. In addition, $202 million was committed $8

in 2010 and $90 million is planned for 2011. The
increased level of investment for CSO reduction 6
work from 2012-2021 represents a 52 percent
increase over the level of investment from 2001- 4
2011 and is expected to improve the water quality
of New York’s harbor. 2

Paying for the Capital Program 0

20

20

20

20
20

20
20
20

20

20
20
20

11

12
13

14
15
05

07

10
04

06

08
09

Borrowing. To finance the city’s 2011–2014

SOURCES: IBO; Mayor's Office of Management and Budget
Capital Commitment Plan, the city will borrow NOTES: Includes GO and TFA new money bond issues. Excludes refunding
money by issuing three types of debt: general bonds, TFA Recovery Bonds, TFA Building Aid Revenue Bonds and
obligation (GO), Transitional Finance Authority (TFA), Muncipal Water FInance Authority Bonds.

58 NYC Independent Budget Office March 2011

 EXPENDITURE / Capital Spending, Financing, & Debt Service

commitment is made but is typically spread over but benefited from a federal subsidy to compensate
several years. Projected borrowing in 2012 and later for their taxable status. The subsidy is delivered in one
years reflects the increased commitments in 2012. of two ways. Either the issuer receives funds from the
But in each subsequent year, lower borrowing needs federal government equal to 35 percent of the interest
associated with the reduction in new commitments payments (direct payment BABs) or the buyer of the
offset the increase from 2012. bonds receives a federal tax credit equal to 35 percent
of the interest (tax credit BABs).
With capital improvements to the city’s water and sewer
system not subject to the 10 percent reduction, and with BABs were very popular with issuers and investors, and
some DEP projects proceeding faster than previously many analysts believe that they played a significant role in
anticipated, the Municipal Water Finance Authority’s the stabilization and eventual recovery of municipal credit
projected new money bond issuance in 2011 has markets. Part of the reason municipal debt issuance has
increased slightly. Borrowing is up over the remainder slowed is likely due to the expiration of BABs.
of the financial plan as well, largely a result of moving
up the beginning of repairs to the Delaware-Rondout New York City made extensive use of BABs. The bonds
Aqueduct from 2016 to 2013 and initiating DEP’s Green have accounted for $7.5 billion of the $11.7 billion in
Infrastructure Plan. The water authority has issued GO and TFA new money debt issued to-date for fiscal
$2.4 billion in new money bonds already in 2011, and years 2010 and 2011. The water authority issued an
anticipates issuing another $800 million before the end additional $3.7 billion of BABs. OMB estimates that
of the fiscal year. NYW projects new money borrowing of the city reaped savings of 10 basis points to 100 basis
$2.0 billion, $1.7 billion, $1.5 billion, and $1.2 billion in points on the use of BABs over the tax-exempt financing
2012 through 2015, respectively. that would otherwise have been used.

Credit Market Overview. Although municipal credit Few stimulus benefits for municipal borrowing remain.
markets experienced severe disruptions at the depths There is discussion at the federal level of potentially
of the financial crisis, the city and its various financing reestablishing BABs, although prospects appear
entities continued to have market access on reasonable uncertain as Washington focuses on deficit reduction. If
terms and the city is not expected to have difficulty BABs are reauthorized, it will almost certainly be with a
accessing credit markets in the next few years. The city’s lower federal interest rate subsidy than the original 35
highly rated general obligation debt allowed issuances percent. The city also plans to use its remaining $1.0
to continue in the absence of municipal insurers, billion allocation of another, smaller stimulus bonding
and received a bump in 2010, as “recalibrations” by program, qualified school construction bonds. Barring
Moody’s and Fitch raised the city’s ratings to Aa2 and AA a new program, the city expects to rely primarily on
respectively; Standard & Poor’s maintained its AA rating traditional tax-exempt financing for its borrowing needs
on general city credits. New York will benefit from going going forward.
to market for new money while interest rates remain
at historic lows, as well as from continuing to refinance Debt Service. Debt service—the cost of repaying
some of its $10.7 billion in variable rate debt to fixed principal and/or interest on outstanding bonds—is a
rate, locking in the favorable rates. function of the amount of outstanding debt and the
terms that were obtained when the debt was issued.
Heavily Used Stimulus Bonding Program Expires. The Debt service in the city budget and financial plan
city took advantage of a new type of bond created by reflects GO and TFA borrowing, as well as several
the 2009 American Recovery and Reinvestment Act smaller obligations. Because NYW borrowing is repaid
legislation designed to facilitate funding of capital from water and sewer fees rather than the city’s
improvements by state and local governments and to general fund, debt service in the Preliminary Budget
provide stimulus to the economy. The bonds, which does not reflect NYW borrowing.
as of January 1, 2011 can no longer be issued, were
known as Build America Bonds (BABs). Unlike most In the Preliminary Budget, OMB has recognized
municipal debt, which is tax exempt, BABs were taxable significant savings to debt service in 2011 and 2012

NYC Independent Budget Office March 2011 59

 ANALYSIS OF THE MAYOR’S PRELIMINARY BUDGET FOR 2012

more than $300 million, according to OMB.

Debt Service and Debt Service as Share of Tax Revenue
The new rates are still conservative, with the
Actual and Projected Debt Service as Percent
Debt Service of Tax Revenue city currently paying on average 0.25 percent
for short-term, tax-exempt floating rate debt
Debt Service as Percent of Tax Revenue Debt Service, in billions
20% $8
and 0.4 percent for short-term, taxable floating
18% rate debt thus far in 2011. As a result, there
7
16% are likely to be more savings realized in the
6
14% Executive Budget. And while interest rates
12% 5
on variable rate debt will most likely rise over
10% 4
the next several years, they may not reach
8% 3 the 4.25 percent OMB has maintained as its
6%
4% 2 assumption for 2013 and beyond as quickly,
2% 1 potentially resulting in yet more savings down
0% 0 the road.
20
20
20 7
20 8
20
20
20
20 3
20 4

20 0
20
20
20 3
20 4
1
06
0
0
09
02
0
0
05

11
12
1
1
15
Debt Service Trends. Debt service, adjusted
SOURCES: IBO; Mayor's Office of Management and Budget
NOTES: Fiscal years 2011 to 2015 are projected. Adjusted for prepayment of for prepayments and defeasances, is expected
debt service. Projection based on IBO tax revenue forecast. to total $5.0 billion in 2011, down slightly
from $5.1 billion in 2010—the first year-over-
due to historically low interest rates, especially with year decline since 2007. The $5.0 billion
regards to the city’s substantial outstanding variable would represent 12.9 percent of IBO’s forecast of city
rate debt. Although the decline in future borrowing tax revenues, the lowest percentage since 2007 and
needs resulting from reductions in the city’s Capital 2008, both years of extraordinarily high receipts. (Prior
Commitment Plan also contributes to lower debt service to 2007, one has to go back to 1990 to find as low of a
costs, the annual savings are relatively modest when ratio). This results from the combination of low interest
spread out over the long time horizons of the bonds. rates and growing tax revenues.

Savings on Variable Rate Debt. The city’s projections The Mayor’s budget office projects debt service growth
of interest expenses are conservative and revisions to will resume in 2012, rising to $5.9 billion (14.2 percent
reflect low interest rates have been done very slowly. of tax revenues), and to $7.3 billion in 2015 (15.2
The city is only now revising its 2011 interest rate percent). By comparison, debt service as a percentage
assumptions for variable rate debt from 3.75 percent of tax revenue averaged 13.8 percent from 2002
to 1.0 percent and its 2012 assumptions from 4.25 through 2010.
percent to 2.0 percent—resulting in annual savings of

60 NYC Independent Budget Office March 2011

Contributors
Eric Anderson Debt, small business services

David Belkin Business income taxes, local economic outlook

Elizabeth Brown Housing, buildings, homeless services

Yevgeniya Bukshpun Parks and recreation, sanitation,

environmental protection

Ana Champeny Property tax

Theresa Devine Economic outlook

Chirstina Fiorentini Health, public hospitals

Michael Jacobs Personal income tax

Andrew Liebowitz Hotel, sales, and excise taxes

Paul Lopatto Public assistance

Kathleen Maher Child welfare, juvenile justice, child Care, libraries

Bernard O’Brien Police, fire, labor, Civilian Complaint Review Board

Nashla Rivas-Salas Youth, seniors, corrections

Yolanda Smith Education, City University of New York

Sarita Subramanian School construction

Alan Treffeisen Property transfer, mortgage recording taxes,

transportation

Ana Maria Ventura Capital plan

NYC Independent Budget Office March 2011 61

 DRAFT: Do Not Distribute Outside of Office

IBO
New York City

Independent Budget Office

Ronnie Lowenstein, Director

110 William St., 14th Floor • New York, NY 10038
Tel. (212) 442-0632 • Fax (212) 442-0350
iboenews@ibo.nyc.ny.us • www.ibo.nyc.ny.us
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