New York City budget has no rainy day deposit amid strong economy

New York City balanced its largest-ever budget in a weekend deal days before the July 1 deadline.

Better-than-expected revenues, a strong economy and savings on asylum seeker programs allowed the city to restore cuts to social services. But analysts warn the city’s bad budgeting habits remain.

“While the administration made modest inroads in funding chronically underbudgeted items and maintaining stimulus-funded programs, the financial plan continues the longstanding tradition of underfunding known expenses, underestimating fiscal gaps, and clouding the City’s financial picture,” New York City Comptroller Brad Lander said in a statement.

The biggest news story from the budget has been the restored funding to city libraries, which, due to cuts, had been closed on Sundays. The restored funding is only $53 million — hardly a big ticket item in the $112.4 billion budget.

But the initial cuts to libraries, parks and other cultural institutions were emblematic of Mayor Eric Adams’ budgeting philosophy. He began budget season with a very conservative economic forecast and his Office of Management and Budget pressured departments to find savings all year. 

The city was facing a $7 billion budget gap when Adams released his executive budget, and he credited his administration’s conservative projections and Programs to Eliminate the Gap, or PEGs, with the city’s ability to navigate emergencies and balance the budget. 

The City Council’s negotiations with the mayor played out in a predictable pattern, longtime observers said. 

“Just because the mayor is making cuts or underestimating revenues doesn’t mean the City Council is working with the same numbers,” Howard Cure, director of municipal bond research for Evercore Wealth Management, told The Bond Buyer in April. “And the City Council has been willing to fight the mayor on certain things. So this is going to be a negotiation process.”

The final budget is $1.3 billion larger than Adams’ proposal. In addition to funding for cultural programs, the budget added $100 million for early childhood education programs and restored some cuts to areas including senior services and the City University of New York. 

The early childhood education plan, which costs $293 million in total, is not the universal pre-kindergarten and age-three-to-kindergarten that advocates wanted. Instead, Adams will focus on reducing the thousands of vacancies within the city’s early childhood education system. 

The city will spend $600 million to fund various pandemic-era education programs for which federal funding has expired. NYC will also maintain its “hold harmless” formula, in which schools won’t lose funds for drops in enrollment. 

The biggest new item on the budget is $2 billion for affordable housing, part of the Adams administration’s “moonshot” goal to build 500,000 new homes by 2032. Including the $2.5 billion, the city has committed $26 billion to this plan so far. 

Lander argued in his statement that the budget still underfunds all of the aforementioned programs. 

“This budget also fails to restore the Adams administration’s cumulative cuts to CUNY—our greatest engine for upward social mobility for working-class young people,” Lander said. “Half of our new nurses and a third of public-school teachers graduate from CUNY, which means underinvesting in our public colleges will shortchange our workforce.”

City-funded spending is 7.5% higher in this budget than last year’s, according to Ana Champeny, vice president for research at the Citizens Budget Commission, a nonprofit budget watchdog organization. The growth comes from several factors, including covering funds from expired federal aid, raises for city employees, new state-mandated spending on education and the Metropolitan Transportation Authority, and programs for asylum seekers.

The final budget was possible because revenue exceeded projections and the city spent less than expected on services for asylum seekers. The mayor had limited the number of days migrants can stay in city-funded facilities and renegotiated contracts associated with the services earlier this year. 

Both Lander and the CBC complained about a lack of transparency in the budget process.

“Part of our concern is that there continue to be areas of the budget that understate the funding that would be necessary to maintain current service levels,” Champeny said. 

New York City chronically underestimates overtime expenses for city employees. The New York Police Department, for instance, overspent its budget for overtime by 93% in 2022, a city comptroller’s report said. 

Champeny estimates the city also underbudgeted for special education, shelter security and school nurses. The funding for public assistance is “a few hundred million short” of what the city is likely to spend this year, she added. 

Lander also criticized Adams’ approach to PEGs, describing “a budget dance of unnecessary cuts and last-minute restorations.” He called for “an oversight process to determine whether PEG savings and efficiencies are actually realized or just for show.”

When Adams announced “extremely painful” cuts in November, shrinking every department’s budget by 5%, he cited the influx of asylum seekers straining the city’s finances. The funding has been restored as it’s become clear the city navigated the crisis better than it expected. 

Adams has defended his reaction as conservative and prudent, but the cuts have been controversial.

“Across-the-board cuts, without doing the analysis of which departments are running efficiently and which are overstaffed, creates a problem,” Cure said. 

The city has left vacant positions open as a cost-saving measure, Cure added. It’s an “easier thing to do, because it doesn’t look like you’re making cuts. But … how productive are these positions?”

Over 90% of Adams’ PEG cuts are still in effect, Champeny said, but it’s difficult to track how much of those cuts actually reduced costs. 

“Years ago, there used to be a PEG monitoring effort where OMB would meet with the different fiscal monitors and review PEGs, especially higher dollar PEGs, and the extent to which they had actually been implemented by the agencies,” Champeny said. “The PEG book is a long list of initiatives and efforts by agencies, but there isn’t a systematic way that we go back and see if these things actually happened, and what was the effect.”

There was one procedural change in the budget that CBC applauded: much of the new spending was “baselined,” or guaranteed to have long-term funding. This makes future-year budget projections more accurate, Champeny said, and should be standard practice for any program the city doesn’t intend to cut.  

The city’s rainy day fund practices were criticized by the CBC, Lander, Cure, and even, in an April response to Adams’ budget proposal, the City Council. 

The last time New York City deposited money into its rainy day fund was 2022. The fund stands at $1.96 billion, and the city has $8.2 billion in total reserves. Analysts recommend reserves around 16% of tax revenues. 

New York City was not allowed to start a rainy day fund until 2020 and it’s only made three deposits since the fund began. Champeny and Lander said the city should set up mandatory deposits of surplus revenues similar to the systems in many states. 

Before the city was allowed a reserve fund, it would use its surplus revenue to pre-pay the next year’s expenses. 

The city never discontinued the practice. At the end of fiscal year 2023, the city paid $5.5 billion of FY2024 obligations; at the end of FY2024, the city paid $4.4 billion of FY2025 obligations.

“The surplus [prepayment] is kind of like an in-budget reserve that rolls from year to year to year. And they basically did spend $1.1 billion of it,” Champeny said. “Usually, what you see is that the surplus prepayment grows when your economy is expanding and then it shrinks during a recession, as you use it to shore up the budget. This was not the year that we should have been tapping it.”

New York City’s general obligation bonds are rated Aa2 by Moody’s Investors Service, AA by S&P Global Ratings, AA by Fitch Ratings and AA-plus by Kroll Bond Rating Agency.  

In April, New York State raised the city’s debt limit by $12 billion. The city’s outstanding GO debt was $40.7 billion as of the third quarter of fiscal 2024.