The Independent Budget Office (IBO) today released its Analysis of the Mayor's Executive Budget for 2001, which shows that continued economic strength will help generate a record $3.1 billion budget surplus this year and provide sufficient resources to drive a surplus in 2001, assuming the current year surplus is used to prepay 2001 expenses.
Beyond 2001, however, IBO projects that adopting the Mayor's budget would drive significant budget gaps that grow to $2.0 billion in 2003 and to $2.2 billion in 2004, or 5.2 percent of revenues. These gaps arise for two reasons. First, assuming that economic growth slows to a moderate rate, the city will no longer have surpluses to help balance the budget. Second, spending will grow 3.5 percent annually, outstripping the 1.9 percent annual growth in revenues.
IBO forecasts considerably higher tax revenues than the Administration-$156 million in 2000, $541 million more in 2001, $835 million in 2002, $921 million in 2003, and $885 million in 2004. Despite this, IBO's projected 2004 gap exceeds the Mayor's by $339 million. IBO's higher tax revenue forecast is more than offset by higher estimates of spending-primarily due to including four years of employee salary increases instead of the two included by the Mayor, as well as higher spending for Medicaid, public assistance, education and overtime.
IBO finds that the Mayor's substantial proposed tax cuts, which grow to $1.1 billion in 2004, represent a large portion of future budget gaps. Absent these reductions, the 2004 gap would be cut in half-from $2.2 billion (5.2 percent of revenues) to $1.1 billion (2.5 percent of revenues).
"The economy continues to provide us with good news," said Ronnie Lowenstein, IBO Deputy Director. "By taking advantage of the currently strong economic growth, the city would be better prepared to weather future difficulties. The city's fiscal outlook would improve if it used surpluses to pay for a larger share of its capital spending, reduce debt or create a rainy day fund."
Among the issues highlighted in the report are:
- Strategy. The preliminary budget relies on a surplus and surging tax revenues, thus relieving the pressure to take significant actions to control long-run spending growth and allowing for tax cuts.
- Leveraging Economic Strength. The 2001 budget gap was closed with $1.3 billion of the 2000 surplus and $1.7 billion in higher-than-projected 2001 tax revenues.
- Spending Growth. City-funded spending would grow 6.8 percent from 2000 to 2001, and at an average annual rate of 3.7 percent from 2001 through 2004, after including TFA debt service and adjusting for debt service prepayments.
- Tax Revenue Forecast. Primarily as a result of higher estimates of personal income growth, securities industry profits, and growth in the assessed value of property, IBO's estimates of tax revenues are higher than the financial plan-$541 million in 2001, $835 million in 2002, $921 million in 2003, and $885 million in 2004. Most of the differences are attributable to higher personal income tax, business income tax and property tax revenue.
- Cost of the Proposed Tax Reduction Program. IBO estimates that the tax reduction program will grow from $380 million in 2001 to $1.1 billion in 2004.
- Comparison of Executive and Preliminary Budgets' Proposed Tax Reductions. The executive budget's tax reduction program is roughly half the size of the preliminary budget proposal. The impact in 2004 of the executive budget's tax cut program is $939 million smaller than the preliminary budget's-in large measure explaining why the projected 2004 gap is now $1.2 billion lower than we estimated in March.
- Impact of the Proposed Tax Cuts on the Gaps and Revenue Growth. The cuts reduce the annual growth in tax revenues from 3.8 percent to 2.7 percent.
- Drivers of Spending Growth. Over half of the $5.8 billion spending growth between 2000 and 2004 is attributable to the Board of Education ($1.7 billion) and debt service ($1.2 billion, adjusted for prepayments).
- Collective Bargaining. Assuming four years of salary increases roughly equal to the rate of inflation, city-funded labor costs will increase $1.4 billion by 2004. For each percentage point the actual agreements exceed (or fall short of) inflation annually, city-funded spending would rise (or fall) over $550 million by 2004.
- Debt Service. Debt service spending grows at an average annual rate of 8 percent from 2000 to 2004. As a percent of tax revenues it grows from 15.8% in 2000 to 19.2% in 2004.
The IBO is an independent city agency whose mission is to provide non-partisan budgetary, economic and policy analysis for the residents of New York City, and to increase New Yorkers' understanding of and participation in the budget process.