Today is the first day of fiscal year 2015. New York City’s $75 billion budget is the first to be crafted by Mayor Bill de Blasio and adopted by the City Council under Speaker Melissa Mark-Viverito’s leadership.  This blog post examines what’s new in the fiscal year 2015 budget and makes recommendations for steering the City’s finances over the next four years.

The FY 2015 Budget: What’s New?

1. The 2015 budget adds substantial spending to prior years. Since the fiscal year 2014 budget was adopted in June 2013, expenses grew by $1.9 billion in fiscal year 2014 and by $2.3 billion in fiscal year 2015.[1]  The new spending is mostly attributable to labor costs from the settlement of expired contracts with the municipal workforce, as well as new services and Council initiatives funded starting in fiscal year 2015. Approximately $500 million in new State education aid will be used to expand prekindergarten and after school programs. The Council added $287 million for new services, in addition to $500 million for programs previously subject to the so-called “budget dance.” [2]  These programs are now part of the budget baseline.

   After accounting for prepayments, the fiscal year 2015 budget is 2 percent greater than the fiscal year 2014 budget and 6.7 percent greater than fiscal year 2013.[3]  The projected rate of total spending growth, 2.7 percent per year between fiscal years 2014 and 2018, will exceed projected revenues (1.8 percent annually, on average) and inflation (2.0 percent annually, on average). This creates projected budget gaps in later years.

2. Two labor settlements have established a wage pattern for the municipal workforce, and the affordability of rising personnel costs rests upon yet-to-be-determined savings in the municipal health insurance program. The labor reserve set aside by the prior administration did not contain any funding for wage increases for municipal employees prior to fiscal year 2013 and set aside funds equivalent to 1.25 percent wage hikes for subsequent years.

   The de Blasio Administration has negotiated new contracts with the United Federation of Teachers (UFT) and with 1199 SEIU United Healthcare Workers East and the New York State Nurses Association.  Employees in these unions had not received two 4 percent wage increases negotiated by the Bloomberg Administration with the rest of the workforce for the 2008 to 2010 period. Under the new labor agreements, raises to make up for the forgone increases will be restructured as four 2 percent raises beginning in 2015, along with full retroactive pay for continuing employees provided in lump sum payments to be made between 2015 and 2021.[4]

   The contracts also established a pattern of raises for the entire municipal workforce: a $1,000 signing bonus, followed by wage increases of 0%, 1%, 1%, 1%, 1.5%, 2.5% and 3% over a seven-year period. The gross cost of negotiating labor agreements with the entire workforce in accordance with this pattern is projected to be $13.6 billion between fiscal years 2014 and 2018. The Administration and the Municipal Labor Committee (MLC) have agreed to offset some of the cost by drawing $1 billion from the off-budget Health Insurance Stabilization Fund and by taking actions, yet to be specified, to save $3.4 billion in health care costs and $1.3 billion in recurring savings thereafter.  Without these savings, health care costs will grow by 39 percent by the end of the financial plan in 2018.

3. The 2015 budget increases the City’s support of the New York City Housing Authority (NYCHA) and Health and Hospitals Corporation (HHC).  NYCHA and HHC are distinct legal entities with close fiscal ties to the City; both face budget deficits and have large capital needs.[5]  The City Council added $71 million to the fiscal year 2014 budget to prevent layoffs and closures of NYCHA-based community and senior centers. Mayor de Blasio and the City Council continue to provide NYCHA with support in this budget: relieving NYCHA of $53 million and $70 million  payments for police services in fiscal years 2014 and 2015, respectively; providing $70 million for capital repairs and security cameras; and adding $36 million to the fiscal year 2015 budget for community and senior centers and enhanced security measures.

   More importantly, the financial plan contains reserves to pay for the cost of settling expired labor contracts with workers at NYCHA, HHC and other related public authorities—an important change of policy that shifts costs to the City.

4. The financial plan does not include a program to eliminate the gap (PEG). A PEG requires agency commissioners to identify and implement actions to raise revenues, find efficiencies, and reduce agency expenses. No PEG program has been instituted for fiscal year 2015 or subsequent years, for which budget gaps are projected to be $2.6 billion in fiscal year 2016, $1.9 billion in fiscal year 2017, and $3.1 billion in fiscal year 2018.

5. The 2015 budget increases reserves and replenishes the Retiree Health Benefits Trust (RHBT) fund. During the late 2000s, some surplus funds were used to reduce liabilities on the city’s balance sheet. More than $2 billion in debt was retired and $2.5 billion was placed in a newly created RHBT fund to begin to tackle the City’s $90 billion unfunded liability for future health insurance benefits for retirees, known as other post-employment benefits (OPEB). Since 2010, however, the trust was drained to close budget deficits, and the last $1 billion from the fund was scheduled to be used in fiscal year 2014. Under Mayor de Blasio, the scheduled withdrawal was canceled, and $864 million was added, bringing the fund’s balance to approximately $2 billion. In addition, the general operating budget reserve was increased from $300 million to $750 million, approximately 1 percent of total expenditures.

What Now? The Next Four Years

The 2015 budget resolved the uncertainty surrounding the long-expired UFT contract, incorporated new priorities, and increased reserves—but also added to out-year gaps. To ensure the City stays on the right fiscal course, the Mayor and the Council should reduce expenses and continue to enhance the City’s reserves.

Expenditures can be reduced in three ways. First, the Administration and the MLC should agree to changes that provide recurring savings on rapidly-growing health care costs.  The last labor-management health care agreement, signed in 2009, provided $1 billion in savings over six years, but did not fundamentally “bend the cost curve.”[6]  CBC has recommended that only changes that make the system operate more efficiently, reduce utilization of services, or reduce the city’s costs, through premium-sharing or lower payments to providers, be adopted. To date, most of the options being considered would provide only one-time savings.

Second, the unsettled contracts present an opportunity to make city operations more efficient by eliminating archaic work rules, adopting new technologies, and reinventing service delivery.  For example, CBC’s examination of solid waste collection identified several ways, including single stream recycling, semi- or fully-automated trucks, night time collections, and more flexible refuse collection and shift scheduling requirements, to improve the Department of Sanitation’s operations. To the extent the necessary changes need to be collectively bargained, part of the ensuing savings could be used to fund larger wage increases or productivity bonuses.

Third, there should be restraint in adding new spending. The fiscal year 2015 budget creates new programs and expands current services, and also assumes some costs from NYCHA and HHC.  Both entities face deficits that may place even greater demands on the City in coming years; city leaders should analyze the finances of these organizations and work with their leaders to develop plans to improve their financial viability.

Implementing new priorities in the budget should be coupled with a renewed emphasis on finding efficiencies within agency operations through a PEG program. The City needs to prepare for fiscal risks from an economic slowdown or downturn, higher-than-expected labor settlements with uniformed unions, or reduced federal aid.  The Bloomberg Administration whittled down out-year budget gaps by implementing 12 rounds of PEGs since fiscal year 2008, saving up to $6.6 billion in fiscal year 2014.  Most of these savings were generated through expense reductions.[7]  Without a PEG program, it will be difficult to build the large surpluses that helped the city’s finances weather the last recession relatively well. 

Finally, the de Blasio Administration should develop guidelines for regular deposits to and potential withdrawals from the RHBT in order to prevent future raids on the fund.