Special Briefing on New York City: New Mayor, Federal Aid, Challenges to Recovery

While New York City’s coffers are currently flush amid $13 billion in federal emergency pandemic aid, the newly elected mayor of the nation’s biggest municipality faces daunting economic and fiscal challenges in emerging from the COVID-19 pandemic, municipal finance experts said at a February 17 Special Briefing hosted by the Volcker Alliance and Penn IUR.

"Things are getting better but they're not really where we need them to be," said Penn IUR Co-Director Eugénie Birch. Almost two years after New York became the epicenter of the pandemic, the city still faces persistent unemployment, a largely vacant office market, an underfinanced public transit system, the expiration of billions of dollars of federal COVID relief programs, and the risk that inflation will drive up the cost of labor contracts, panelists said. Mayor Eric Adams unveiled his $98.5 billion spending plan for Fiscal 2023 the day before the webinar.

The Special Briefing was moderated by Birch, who spearheaded a report on New York as part of Penn IUR’s Recovering Cities Project, and William Glasgall, Volcker Alliance director, Public Finance, and Penn IUR Fellow. It was the twenty-eighth in a series of sixty-minute online conversations featuring experts from the Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. The online discussion featured Ronnie Lowenstein, former Director of the New York City Independent Budget Office (IBO); Kathryn Wylde, president and CEO of the nonprofit Partnership for New York City; Richard Ravitch, former New York State Lieutenant Governor and Alliance director; and Ray McGuire, former Vice Chairman of Citigroup and former candidate for New York City mayor.

In January, the IBO forecast a "surprisingly strong" budget outlook, Lowenstein said. It projected a surplus for the current fiscal year, and budget gaps of only $1.4 billion for next year and $1.6 billion for the year after that, about 2 percent of New York's spending of city-generated revenue. That contrasts with earlier forecasts for deficits as high as $6 billion, Lowenstein said, or 8 percent of the city's own-source spending. She attributed the strength to faster-than-expected vaccine development, unprecedented federal aid, and strength in real estate tax revenue.

"One thing that didn't happen is a robust economic recovery," Lowenstein said. While the nation regained more than nine of ten jobs lost when the pandemic first hit, New York has recovered fewer than six of ten, leaving the city with an unemployment rate of 11 percent, more than double the national average. The city faces a "huge risk in terms of budget balance" from renewing labor contracts. Providing raises under the pattern set in the last round of union bargaining would cost the city $500 million this fiscal year, rising to $2.5 billion in fiscal 2025, Lowenstein said.

Panelists warned that the city will face political pressure to maintain some programs beyond the expiration of federal stimulus in 2016. Lowenstein cited a pre-kindergarten school program that would cost about $800 million a year to maintain.

"These are in many ways one-time events, so we shouldn't get so seduced by where we are in the immediate future," McGuire said. "We need to be careful not to create these zombie programs that will last into the future that we simply cannot finance."

Glasgall said 46 percent of city tax revenue comes from property levies, raising the specter of a sharp drop in coming years if owners of office buildings, which were only 29 percent occupied as of February 9, seek tax reductions. Wylde expressed confidence in the resiliency of the commercial real estate market, however, estimating office occupancy will rise to 50 percent by the end of March and continue to increase. Though demand for remote work will persist, she said, newly constructed office buildings are likely to succeed, while older buildings may be repurposed for residential use.

Still, workers’ willingness to commute may be undercut by doubts over public safety, she said, referring to recent reports of subway riders being pushed onto tracks by people with mental illness. The pandemic has created "a concentration on mortality in a way we usually don't do," Wylde said. Adams, who is proposing the first spending cut in years and a reduction in head count of ten thousand workers, represents a welcome change for the business community, after eight years under his predecessor, Bill de Blasio, "who specialized in dividing us," Wylde said.

"New York City will come back" Ravitch said. "The mayor's proposed budget is good step in right direction, but he still is going to have deficits." He added that the city is home to “several million very poor people who are in desperate need. We have more homeless than we've ever had before.” Moreover, the city’s low-income residents “are dependent in no small part on the education system. Providing them with the best is critically important to the future of New York."

Ravitch, former chairman of the Metropolitan Transportation Authority, the state agency that runs the city’s mass-transit network, also said he is concerned for the future of "our subway system and our bus system, which is inadequately financed.” The only way the MTA can meet its obligations and deal with returning ridership “is to get a revenue stream enacted by the legislature to create another source of borrowing."