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New York City Comptroller

John C. Liu

ManagingDebtService

FinancingEducationAdequately

Dealing

withFederal

Austerity

Adapting

toClimate

Change

FinancingAffordable

Housing

Mitigating

Income

Inequality

Impro

ving

MassTran

sit

TOP

10NEW YORK

CITY

FISCALCHALLENGES

FACING

DECEMBER 2013

IncreasingCollegeGraduation

ChangingCorporateIncentives

SettlingMunicipalUnionContracts

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New York City ComptrollerJohn C. Liu

About the New York CityComptrollers OfficeThe New York City Comptroller, an independently

elected official, is the Chief Financial Officer of

the City of New York. The mission of the office

is to ensure the financial health of New York Cityby advising the Mayor, the City Council, and

the public of the Citys financial condition. The

Comptroller also makes recommendations on

City programs and operations, fiscal policies, and

financial transactions. In addition, the Comptroller

manages the assets of the five New York City

Pension Funds, performs budgetary analysis,

keeps the Citys accounts, audits City agencies,

manages the Citys debt issuance, and registers

proposed contracts. His office employs a workforce

of more than 700 professional staff members.

These employees include accountants, attorneys,

computer analysts, economists, engineers, budget,

financial, and investment analysts, claim specialists,

and researchers, in addition to clerical and

administrative support staff.

Contents1 Introduction

2 Financing Education Adequately

5 Settling Municipal Union Contracts

7

Adapting to Climate Change10Improving Mass Transit

13Financing Affordable Housing

17Mitigating Income Inequality

19Increasing College Graduation

23Managing Debt Service

26Dealing with Federal Austerity

28Changing Corporate Incentives

30Conclusion

December 2013

Published by the New York City

Comptrollers Office

John C. LiuComptroller

First Deputy ComptrollerRicardo Morales

Deputy Comptrollerfor Public AffairsAri Hoffnung

Special Assistant for

Public AffairsJacqueline S. Gold

Chief Economist

Frank Braconi

Executive Director for Budget

Jonathan Rosenberg

Doug Giuliano

Tomas Hunt

Andrew McWilliam

Susan Scheer

TOP

10NEW YORK

CITY

FISCALCHALLENGES

FACING

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TOP 10 FISCAL CHALLENGES FACING NEW YORK CITY DECEMBER 2013


Introduction

The ending of a mayoralty that has stretched for more than a decade offers a unique opportunityto consider important fiscal challenges confronting the City of New York that have been avoided,exacerbated, or largely left to fester. These issues are not small or easy to resolve. They may requirelarge expenditures of money, a reordering of municipal priorities, and convincing political leadership.But it is our belief that these problems can no longer be ignored.

Our approach here is to delineate these challenges. Once defined and recognized for the magnitudeof their scope, we hope the City can map out a strategy for navigating them. We refrained fromproposing solutions because these challenges require the attention, guidance, and co-operation ofa wide variety of constituencies. We believe that as many voices as possible joining the debate willcreate the best results. In that vein, we hope to provide a jumping off point for a City-wide discussionabout strategies and solutions.

The issues we examine in this report are among those which will have the most significant revenue andexpenditure implications for the Citys budget going forward. Many of them have been written aboutbefore. Our decision to put them together here is predicated on the idea that their collectivity impliestheir interconnectedness, and perhaps the overlapping nature of some of their possible solutions.

We begin with a section on the adequate financing of education because it is our belief that investingproperly in New Yorks public school system would provide a foundation for mitigating many of theproblems confronting our City, fiscal and otherwise. Our discussion then turns to an issue that is animmediate and operational concern: the settlement of municipal employee contracts. Despite theballooning costs associated with the retroactive pay increases demanded by the unions, we believethat a negotiated settlement is possible and necessary.

Climate change is another critical fiscal challenge facing the City. Superstorm Sandys arrival in October2012 reminded us that we are a city of islands, with a significant harbor, and that despite New Yorksstrengths, we are not invincible. The protection of our coastline and the resilience of our infrastructureare prerequisites for New Yorks survival. Following climate change is our discussion of the needs ofmass transit, which is also vulnerable to extreme weather conditions, and serves as the lifeblood ofthe regions economy.

Next, we discuss the challenge of financing the creation and preservation of affordable housing in adensely-developed and increasingly expensive city. A related topic, arresting or reversing the trendtoward greater income inequality, follows. Connected to both of these topics and coming afterwardsis a section on the dearth of college degrees among the Citys adult population. It has been widelyacknowledged that educational attainment and poverty are intimately co-joined. Ensuring we cultivatea population of well-educated, well-skilled, job holding, tax payers is crucial to the Citys future.

Our trio of concluding sections dissects the Citys debt service, the effects of declining federal aid, andthe destructive competition that exists between states and localities seeking to attract commercialenterprises and jobs. These three issues have the potential to create budget constraints so severethat without their resolution investments in our earlier challenges may well be impossible.

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1. Financing Education Adequately

Local governments throughout the country face immensechallenges funding their school systems adequately. The challengesare especially formidable for districts encompassing large cities,where many students come from disadvantaged backgrounds. ForNew York City, meeting the challenge is even more urgent becauseits economy is driven by information and creativity. However, theCitys educational resources are lagging behind those of its chiefcompetitors.

The long-running, and ultimately successful, Campaign forFiscal Equity (CFE) case provides a benchmark for the minimally

adequate funding of the New York City school system. In June2003, the New York Court of Appeals found the State of New Yorkin violation of Article XI of its constitution, for failure to ensurethat New York Citys schools received the funding necessary to provide allNew York City students with the opportunity for a sound basic education. Subsequently, a Court-appointed panel of referees set out to determine the amount of money necessary to meet that basicconstitutional mandate. The referees reported their findings to the Court in November 2004.

In 2006, upon the States final appeal, the Court of Appeals determined a constitutional floor hadto be created to provide approximately $2 billion in additional operating aid to New York Citys publicschools. Soon after this ruling, Albany lawmakers enacted legislation, the Education Reform and

Budget Act of 2007, to remedy the problem and meet the constitutional requirements set forth in theCourt of Appeals decision and to establish funding increases for the City that exceeded the newly-established constitutional floor. In spring 2007, the State legislature adopted into the budget anEducational Investment Plan, a four-year program to increase State aid for schools by $7.2 billion,of which $3.2 billion would go to New York City schools

The promise of $3.2 billion more in State aid was considered a major victory for New York City publicschools, but was also widely believed to fall short of what was necessary (the special referees in theCFE case determined the increase needed for the City was $5.63 billion). Therefore, the City agreedto increase its funding by $2.3 billion above the FY 2007 baseline, to be phased-in over the same four-year time period, bringing the total City funding increase to $5.5 billion by FY 2011.

Over the first two years, the State funding was essentially on target, but the financial crisis of 2008created a budget emergency for the State. In FY 2010, the State legislature froze the phase-in for CFEfunding and with the help of federal stimulus avoided having to make cuts to the education budget.In FY 2011, what should have been the fourth and final year of the phase-in, the State extended theCFE funding freeze and through a Gap Elimination Program ended up cutting billions in State schoolaid (again, federal stimulus helped alleviate some of these cuts). Meanwhile, the City never met itsown CFE-targeted increases.

Fact:TheDepartmentofEducationsoperatingbudgetforFY2014fallsapproximately$2.4billionshort.

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The chart below shows how the actual Department of Education (DOE) operating budget comparedto the levels determined necessary by the Court-appointed referees. Our estimate of the CFE levelwas calculated by using the referees November 30, 2004 recommendations of spending levels andadjusting them for enrollment levels and inflation.

ACTUAL DOE BUDGET VS. CFE MANDATED LEVELS

0

5,000

10,000

15,000

20,000

25,000

30,000

FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

ExpenseBudgetin

($inm

illions)

CFE Mandated Level

Actual DOE Budget

Source: New York City Comptrollers Office.

According to our calculations, DOEs operating budget for FY 2014 falls approximately $2.4 billion shortof adequacy, based on the level determined by the original panel of referees in the CFE case. 1

The CFE referees recommended funding levels were determined on the basis of the constitutionalrequirement that all students be provided with the opportunity for a sound basic education.However, most parents aspire to more than a sound basic education for their children. Adequacy couldalso be defined as providing New York City students with an elementary and secondary educationcomparable to those received by students in more affluent suburban school districts, against whomthey will ultimately have to compete when as adults they enter the labor market.

1 For this purpose, the operating budget includes all school expenditures excluding transportation costs, capital facilities, and debt service.

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The table below shows average DOE funding compared to the average per-pupil spending of the tenhighest-spending large school districts in New York State.2The analysis shows that DOEs budget in FY2014 falls approximately $12.6 billion3short of the level needed to give New York City students the levelof educational resources provided to students in the more affluent suburban districts in the state.

2011 SPENDING PER STUDENT IN SELECTNY STATE SCHOOL DISTRICTS

New York State School District Spending Per Student

JERICHO $32,428

GREENBURGH $32,055

SOUTHAMPTON $31,791

LAWRENCE $30,583

LOCUST VALLEY $30,453

ONTEORA $30,011

HEWLETT / WOODMERE $28,829

LONG BEACH CITY $28,666

EAST HAMPTON $28,457

CARLE PLACE $28,319

AVERAGE $30,160

NEW YORK CITY $19,770

Source: U.S. Census Bureau Public School Finance Data.

The large gap in per-pupil spending between affluent suburban districts and the New York City schoolsystem actually understates the amount of resources that would be needed to create a level playingfield. Generally, those suburban school districts have fewer students with special needs and learningchallenges such as the lack of English proficiency, and they come from more affluent households thatcan afford private learning enrichment programs, such as sports, arts and music instruction, tutoring,and test preparation.

We acknowledge that not all of the problems facing the New York City public school system can be

solved through greater financial investment. However it is impossible to ignore the fact that accordingto an independent court-appointed panel and a district-level benchmarking analysis educationalspending in New York City falls far short.

2 Large school districts are considered to be those with 1,000 or more enrolled students. The ten used in this exercise are: Jericho Unified SchoolDistrict, Greenburgh Central School District, Southampton Union Free School District, Lawrence Union Free School District, Locust Valley CentralSchool District, Onteora Central School District, Hewlett/Woodmere Unified School District, Long Beach City School District, East Hampton UnifiedSchool District 1, and Carle Place Unified School District.

3 The figure is derived by subtracting DOEs actual funding level for FY 2014 from the total estimated if DOE was funded at the per-student level of theaverage of the top ten NYS school districts, adjusted to 2014 dollars.

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Raising an additional $2 billion to $12 billion annually to provide a minimally adequate education toNew York City schoolchildren may seem like an impossible fiscal challenge. Not doing so, however, isto concede that our public education system is a mechanism for perpetuating, rather than mitigating,the inequalities of economic and social class.

2. Settling Municipal Union Contracts

As of December 1, 2013, all of the approximately 300,000 New York City employees covered bycollective bargaining agreements were working under expired contracts. The next Administration, likethose before it, will need to determine how to handle its relationship with the Citys labor force. Thepotential magnitude of the cost of this decision alone could affect nearly all of the Administrations

other budgetary priorities.

Over the past five years, the City and the unions have been unableor unwilling to negotiate terms for new labor contracts. The unions,representing more than 140 collective bargaining units, have stated theirdesire for wage increases and retroactive pay going back to the end datesof their most recent contracts. The unions position as to the exact size ofany wage increase is uncertain. However, it is reasonable to assume thatthey will ask, at a minimum, for wages that meet or exceed the rate ofinflation, which is currently 1.95 percent. In addition, the unions are likelyto seek to keep wages on par with prior settlements, which included 4percent annual increases.

The Bloomberg Administrations negotiating position did not includeretroactive pay for any contract settlement. The Administration offereda five-year package in which the first three years would have no increases

followed by two years of 2 percent increases. Any additional wage increases would have to be offsetby productivity gains or other employee give-backs.

The Bloomberg Administration has included funding for its proposal in the City Budget. In FY 2013the Labor Reserve Fund included $21.7 million to cover this scenario. In FY 2014 the amount increasesto $127.8 million. As a result, the scenarios presented on the following page will be offset in FY 2013and 2014 by the $149.5 million already in the Labor Reserve Fund.

The cost estimate ranges provided in this discussion assume that all collective bargaining units willagree to the same contract terms, as has been the case in the past.

In FY 2010, the City removed funding for potential wage increases for employees belonging to theUnited Federation of Teachers (UFT) and the Council of School Supervisors & Administrators (CSA)from the Financial Plan. At the time, the Administration claimed that the unions had agreed to giveback these increases to offset the need for a large-scale headcount reduction to pedagogical staff inthe Department of Education.

Fact:

Settlingcontracts

withNYCteachers

andprincipalsinline

withthoseoftheother

municipalunions

wouldcosttheCity

$3billionin

retroactivepay.

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The UFT and CSA maintain that the contracts for 2008-2010 remain unsettled.4During the sametime period, the Citys other municipal unions settled for two-year contracts with wage increases of4 percent at the beginning of the first and second year of the contract.

The City has been unwilling to negotiate on the terms of a contract with the UFT and CSA, and thesetwo unions have appealed to the New York State Public Employment Relations Board (PERB) for a non-binding recommendation. At the time of this reports publication, no decision had been rendered.

Settling contracts with the UFT and the CSA in line with those of the other municipal unions wouldcost the City $3.05 billion in retroactive pay by January 1, 2014. In addition, such an agreement wouldincrease the base pay used for the calculation of all future wage increases.

The chart below summarizes the retroactive costs of potential wage increases under three differentscenarios. The first scenario assumes that pay increases are linked to inflation for the term of thecontract.5The second scenario presents what a 1 percent wage increase would cost. The 1 percentscenario offers a base by which other scenarios can be approximated.6The final scenario is the proposaloffered by the City which mirrors the contracts awarded to the States unions. This settlement providesa five-year contract in which there are no pay increases in the first three years followed by two years of2 percent increases.

MUNICIPAL UNION CONTRACT COSTS, ASSUMING UFT & CSA INCREASES

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 Total

Inflation $239,811,740 $744,541,464 $1,390,593,578 $2,045,061,177 $2,679,039,804 $7,099,047,763

1% Increase $238,947,658 $680,548,388 $1,092,042,432 $1,448,278,053 $1,750,657,028 $5,210,473,559

CitysProposal

$221,567,519 $578,268,812 $709,590,728 $744,343,638 $913,983,546 $3,167,754,244


4 The effective date for this round of UFT/CSA contracts is FY 2010.5 Inflation assumptions are 1.05 percent for 2010; 2.25 percent for 2011; 2.4 percent for 2012; 1.95 percent for 2013, and 1.95 percent for 2014.6 The cost of a 2 percent wage increase can be approximated by doubling the costs presented in the 1 percent scenario. However, the true increase

would be slightly greater because of the compounding effect of higher increases.

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If the UFT and CSA are not able to secure the wage increases that all other municipal unions wereawarded for their 2008-2010 contracts, the cost to the City would be much less than in the priorscenarios. The chart below summarizes the costs of the same three scenarios without including thecost of a settlement with the UFT and CSA for the prior round of contracts.

MUNICIPAL UNION CONTRACT COSTS, WITHOUT UFT & CSA INCREASES FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 Total

Inflation $18,244,221 $166,272,651 $575,236,759 $1,115,821,647 $1,724,867,459 $3,600,442,737

1% Increase $17,380,139 $102,279,575 $283,013,907 $533,411,604 $826,806,852 $1,762,892,077

CitysProposal

$0 $0 $0 $34,750,897 $204,390,804 $239,141,701


However the union contracts are dealt with, they will be costly and have major fiscal implications forthe Citys budget and its future financial plan.

3. Adapting to Climate Change

The maintenance of New York Citys position as the premierglobal city is dependent, among other things, on the extentto which it can deal with the consequences of climate change.

Mayor Bloomberg acknowledged this when, in 2007, hepresented PlaNYC: a Greener, Greater New York, the Citysfirst ever master plan for sustainability.The Plan was designedto improve the Citys water and air quality and reduce itscarbon emissions.

The initiatives set forth in PlaNYC range from narrowly definedshort-term projects such as planting one million new streettrees to longer-range efforts like cleaning up and redevelopingbrownfields. Nearly 400 projects were in motion by 2011,many of which are slated to be completed or to have reached

a pre-established milestone by December 2013. PlaNYC hasbeen the blueprint for the City in its efforts to address climate change, but the blueprint changed onOctober 29, 2012, when Superstorm Sandy hit New York.

Following the destruction caused by Sandy, the blueprint was amended to focus on coastal resilienceto extreme weather and to advancing the timetables for the City to become more energy-efficientand reduce its carbon footprint. The action-items associated with these efforts have been buoyed byan infusion of federal funding for relief and recovery from Sandy (known as the Sandy Supplemental)and by significant capital commitments made by the City. However, even with the new funding, sizablegaps remain and will need to be filled in sooner rather than later.

Fact:There is a $4.5billion shortfall inthe amount necessaryto make New YorkCity more resilient toclimate change.

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There are those who question the causal link between Superstorm Sandy and climate change. TheCity has wisely stayed out of this debateestablishing such a connection need not be a prerequisitefor action. Rather, the impact of Superstorm Sandy has driven home with new urgency the Citys needto not only provide relief and recovery to Sandys victims but also to make sure that the City is betterprepared for the next extreme weather event.

In June 2013, the mayors office released a storm resiliency and climate change compendium for NewYork City, PlaNYC: a Stronger, More Resilient New York, which includes 257 critical action-items. Theprice tag for the top priority projects (many of which are already underway) is about $19.5 billion. Thefederal government has committed approximately $10 billion and the City has identified an additional$5 billion, leaving a gap of about $4.5 billion.

$ in Billions19.5

TotalUses

ExistingSources

UnmetNeed

ExpectedSources

RemainingGap

10.0

9.5

5.0

4.5

Calculation of Estimated Funding Gap

CLIMATE CHANGE FUNDING GAP

Source: PlaNYC: A Stronger, More Resilient New York.

While many of the initiatives focus on relief and recovery, each one meets the specifications set forthby climate change modeling including 100-year and 500-year flood plain models. Should the $4.5billion gap not be filled, some combination of these efforts will be put off or eliminated altogether.

The City has presented several promising strategies to fill the gap, including: seeking additionalsupplemental appropriations from the federal government (which were granted to the Gulf States inthe wake of Hurricane Katrina); seeking federal funding that was promised but never delivered to theCity following the September 11 attacks, estimated at about $3 billion; and new insurance surcharges.

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While funding the $4.5 billion gap is important, much of the overall amount accounts for phase oneallocations and the incremental costs associated with full-build measures have yet to be calculated.The current breakdown of the $19.5 billion looks approximately like this:

INITIATIVEAMOUNT

SpecialRebuildingand Resiliency

Funds will primarily be used for water and waste water systems, coastal protection,existing building stock, and energy utility systems.

$14 billion

HousingRecovery

Funds will go toward the rebuilding and repair of homes with significant damageand where possible for homes with less than substantial damage.

$2.4 billion

NYCHA*Resiliency

Funds for repairs and resiliency enhancements for more than 400 buildings. $1.1 billion

BusinessRecovery

Primarily a grant program for repairs to damaged businesses and loss of inventory.$300million

City AgencyRecovery

City agencies, particularly HHC,* took many unexpected hits due to the storm.Agencies experienced damage and took on considerable personnel costs to maintainemergency functionality.

$1.2 billion

City AgencyResiliency

Funds would be used to prepare City agencies for climate change.$500million

*NYCHA=New York City Housing Authority; HHC=Health and Hospitals Corp.Sources:New York City Comptrollers Office analysis; PlaNYC: a Stronger, More Resilient New York.

Of the 257 action items (including studies, strategies, disbursements, re-builds, build-outs, etc.), 79

are slated to be completed by the end of FY 2014 and another 113 items are slated to begin by theend of FY 2014. Ostensibly, these will all take place in the midst of a monumental transition betweenthe outgoing and incoming administrations. Another 46 items are slated to be completed by FY 2020and there are numerous ongoing or undetermined items likely to extend past FY 2020. Currently,77 projects have no funding source associated with them including essential storm-hardening andflood protection projects in the Rockaways, Howard Beach, Hunts Point, Red Hook, Staten Island,East Harlem, and Lower Manhattan. Additionally, more than a billion dollars in waste water treatmentfacility protection projects have yet to be assigned a funding source.

The well-established facts about climate change are consistent: temperatures are increasing, sea levelsare rising, and storms are intensifying. Furthermore, the contexts in which these conditions impact

New York City or can be mitigated by the City are also consistent. There are 520 miles of remarkablyvaried coastline in the City and there is no one way to protect them.

Extreme weather can impact the Citys water supply, which comes from 19 reservoirs and 3 controlledlakes in a 2,000 square mile area, flowing through 6,200 miles of pipes. It can damage the 14wastewater treatment plants in New York City that together treat 1.3 billion gallons of wastewaterdaily. At the same time, the City must continue its efforts to reduce energy use, of which two-thirdscan be attributed to heating and supplying electricity to New York City buildings. In addition, the City

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must work to reduce its waste stream and improve the mechanisms for waste removal. New Yorkerscurrently produce 12,000 tons of residential waste every day.

Another challenge that Sandy placed front and center: the disproportionate impact on low- to

middle-income communities from extreme weather. These communities are often on the front linesof flood waters, toxic-waste exposure, extreme heat, and other climate change risks. They often lackinsurance to deal with the damage and have a harder time coping with storm-related income and jobloss. Indeed, in New York City, power outages caused by Superstorm Sandy left many of New YorkCitys low-income, elderly, and disabled residents stranded in public housing towers without backupgenerators or the means to secure alternative shelter.7

In all of these ways, adapting to climate change is a multi-faceted fiscal challenge, especially in theaftermath of Sandy, and one that must be met.

4. Improving Mass Transit

Without intervention, the Metropolitan Transportation Authority(MTA)s perilous fiscal standing will have a negative impact onthe quality of life, affordability, and economic condition of New

York City and the surrounding area. MTA ridership is at recordlevels, with some elements of the system operating abovecapacity. However, instead of necessary expansion, the MTAhas been forced to fund standard maintenance through an

increasing reliance on debt, which ultimately results in higherfares. As a foundational element of the New York City economy,it is essential that the MTA have the capital resources required toproperly modernize and expand New Yorks mass transit system.

According to the Global Economic Power Index, New York Cityanchors a metropolitan economy which, after Tokyos, is thelargest in the world.8Of the almost 4 million workers who powerthe New York City economy, more than half arrive at their job by public transportation. In Manhattan,more than 70 percent arrive to work by mass transit.9 In many ways, the density that mass transitenables makes New Yorks highly-efficient economy possible. Unfortunately, instead of fostering New

Yorks economic growth with an expansion of mass transit, the MTA is straining to meet demand whiletransportation costs increase for riders.

7 A. Bhattacharyya and C. Kelly, Storm-Ready Cities: How Climate Resilience Boosts Metro Areas and the Economy, Center for American Progress,October 2013.

8 Richard Florida, The 25 Most Economically Powerful Cities in the World, The Atlantic Cities, September 15, 2011, http://www.theatlanticcities.com/jobs-and-economy/2011/09/25-most-economically-powerful-cities-world/109/#slide2.

9 2000 Census Transportation Planning Package, U.S. Census, http://www.nyc.gov/html/dcp/html/census/journey_tables.shtml.

Fact:

Of the almost 4 millionworkers who power the

New York City economy,more than half arriveat their job by publictransportation.
http://www.nyc.gov/html/dcp/html/census/journey_tables.shtmlhttp://www.nyc.gov/html/dcp/html/census/journey_tables.shtml

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2002

40%

35%

30%

25%

20%

15%

10%

20%

33%

26%

32%

28%

35%

2003

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2004

MTA DEBT SERVICE AS A PERCENTAGEOF OPERATING REVENUES

NOTE: 2015-2017 does not include new debt service expected to finance the 2015-2019 Capital Plan as that plan has not beenfinalized. 2014 is actual. 2015-2017 are expected percentages.Source: MTA Consolidated Statements, 2003-2013.

In 2012, New York City subway ridership exceeded 1.65 billion trips, the highest in 62 years. Averageweekend ridership that year matched an all-time high set in 1946.10

In some places, capacity limits are straining economic development. In Williamsburg, Brooklyn arezoning helped spur residential and economic growth that has tripled ridership numbers on theL train and has contributed to over-capacity trains at rush hours. While access to transit initially

helped spur economic activity in the area, the transit system has not been able to keep up withsubsequent demand. In Midtown East, where a change in zoning to accommodate greater densitywas recently withdrawn, the capacity of the transit system to handle demand raised objections tofurther development in the area. In both cases, limited transit capacity is stifling economic expansion.

The MTA is struggling to meet growing ridership and increasingly relies on debt to fund itself. In 2015,MTAs outstanding debt is expected to reach $39 billion, a 170 percent increase from the $14 billionlevel in 2000.11Debt service payments in the MTA operating budget have risen correspondingly. Debtservice payments in 2012 were $2.3 billion, an increase of 149 percent from $922 million in 2002.12In 2012, debt service will consume 32 percent of MTA revenues, up nine points from a 23 percentshare of operating revenues in 2002. Projected budgets show debt service increasing without even

accounting for the additional debt necessary to pay for the next capital plan.13

10 MTA Ridership Report, March 11, 2013, http://new.mta.info/press-release/mta-headquarters/mta-ridership-rises-again-2012-despite-historic-disruptions-hurrica-0.

11 A Better Way to Pay for the MTA, Citizens Budget Commission, October 2012,http://www.cbcny.org/sites/default/files/REPORT_MTA_10102012.pdf.12 MTA Consolidated Statements, 2003-2013.13 MTA Consolidated Statements, 2003-2013.
http://new.mta.info/press-release/mta-headquarters/mta-ridership-rises-again-2012-despite-historic-disruptions-hurrica-0http://new.mta.info/press-release/mta-headquarters/mta-ridership-rises-again-2012-despite-historic-disruptions-hurrica-0http://www.cbcny.org/sites/default/files/REPORT_MTA_10102012.pdfhttp://www.cbcny.org/sites/default/files/REPORT_MTA_10102012.pdfhttp://new.mta.info/press-release/mta-headquarters/mta-ridership-rises-again-2012-despite-historic-disruptions-hurrica-0http://new.mta.info/press-release/mta-headquarters/mta-ridership-rises-again-2012-despite-historic-disruptions-hurrica-0

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In addition, the MTAs budget is reeling under other liabilities. Health care costs for its employees areprojected to increase 42 percent over the next five years.14All of its labor agreements with unionizedworkers have expired and any raises negotiated will likely increase personnel costs. Meanwhile,Superstorm Sandy has made it abundantly clear that the transit system needs storm-hardening. All ofthese potential liabilities will further burden an already strained budget.15

To manage rising expenses, the MTA has increased fares four times in the past five years, with otherincreases scheduled for 2015 and 2017.Since 2008, a 30-day Metro Card has gone up in price almost 50percent, compared to a jump in inflation of less than 9 percent. These fare increases hit low-income peopleand the working poor especially hard, displacing a disproportionate share of their meager earnings.

The good news is that the MTA is currently working on significant projects that will expand service.When the first phase of the 2ndAvenue subway is completed in 2016 it will add capacity to the eastside of Manhattan and relieve crowding on the Lexington Line. East Side Access will bring the LongIsland Railroad to Grand Central Terminal and the extension of the 7 train will bring subway access toHudson Yards on the far west side of midtown Manhattan.

While significant, these projects are the first substantial expansions of New Yorks transit system sincethe 1950s. However, the 2nd Avenue subway extension is only funded through its first phase. Thenext three phases, that would bring the subway line to lower Manhattan, have no existing capitalcommitments. The extension of the 7 train does not include a planned station at 10thAvenue, or anextension to New Jersey that has been called for by many transit experts. While there seems to besome support for moving Madison Square Garden to increase capacity at Penn Station, there is still nofunding available for a renovation there. Many crucial capacity-expanding projects remain unfunded.

MTA BASE FARE INCREASES

NOTE: 2015 and 2017 projected from scheduled 4% increases.Sources: MTA, Independent Budget Office.

14 Nicole Gelinas, Two Looming Risks for Future Budgets, The New York Times, October 7, 2013,http://www.nytimes.com/roomfordebate/2013/10/07/is-there-any-hope-for-new-york-city-transit/two-looming-risks-for-future-mta-budgets.15 Borrowing to fund the transit system has largely been a consequence of declining contributions from traditional subsidizers, i.e., the city, state, and

federal governments. A 2008 report from the Independent Budget Office (IBO) showed that in inflation-adjusted dollars, state and local contributionshad remained flat since 1990. An update for FY 2012 showed that the trend remains. The Citys contributions to the MTA did grow from $339 millionin 2007 to $435 million in 2012. But almost all of that increase was due to the Citys share of costs for the Access-a-Ride program.
http://www.nytimes.com/roomfordebate/2013/10/07/is-there-any-hope-for-new-york-city-transit/two-looming-risks-for-future-mta-budgetshttp://www.nytimes.com/roomfordebate/2013/10/07/is-there-any-hope-for-new-york-city-transit/two-looming-risks-for-future-mta-budgets

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A 2010 Center for an Urban Future (CUF) report demonstrated that transit has not been able to keep upwith outer borough demands. A disproportionate share of recent job growth, transit ridership increases,and population expansion have occurred outside of Manhattan where transit options are limited. CUFpoints out that these new commuting patterns disproportionally affect low-income New Yorkers: Ofthose residents with an hour or longer commute, two-thirds earn less than $35,000 per year. 16

An MTA long-term planning document confirms the growth in outer borough trips as well as more off-peak and weekend trips. With proper funding, the MTA could accommodate growing demand andbuild a more flexible and responsive system for the future. It could upgrade signals, add entrances tosubway stations, and expand bus service, among other projects.17These improvements would openup new business districts, expand working hours, and get people around the City faster.

Mass transit is the lifeblood of New York Citys regional economy. Relying on debt to fund transit overthe long-term is an increasingly unsustainable option. Resources must be identified for the MTA, sothat it can expand its capacity and create a transit system suitable for growing demand and changingneeds. If mass transit in New York City is not properly funded, the local economy, and those living andworking within it, will suffer.

5. Financing Affordable Housing

By the end of its third term, the Bloomberg Administrationsten-year New Housing Marketplace Plan (NHMP) is expected tohave created or preserved 165,000 units of affordable housing.18

Despite this achievement, housing affordability in New York Cityremains a critical issue. New Yorkers are paying an increasingshare of their income for housing, and homelessness is growing.Economic conditions, competing budget priorities, and the stateof the housing market suggest that this challenge will becomemore acute over the next few years.

To maintain the pace set by the Bloomberg Administration, thenext mayor will need to create or preserve 66,000 units in a firstfour-year term.19The sheer scale of that will be a challenge initself, which the new mayor will have to meet in an increasingly

difficult fiscal environment. The per-unit cost of affordable housing is likely to rise, suitable land isscarce, and resources available to supplement the Citys capital budget are diminishing.

16 Behind the Curb, Center for an Urban Future, February 2011.17 Looking Ahead: A Context for the Next Twenty-Year Needs Assessment, MTA, July 2013, http://www.mta.info/mta/news/books/docs/TYN_

Vision_7-22-13.pdf.18 As of the end of FY 2011, approximately 35% of units financed were new construction and 65% were preserved. New York City Independent Budget

Office, The Mayors New Housing Marketplace Plan, June 2012, http://www.ibo.nyc.ny.us/iboreports/nhmp2012.html.19 NHMP was a ten-year plan launched in 2004. If its goal is reached entirely, an average of 16,500 units will have been created or preserved per year.

Fact:

Almost one-third ofrenting New York Cityhouseholds pay halftheir income in rent.
http://www.mta.info/mta/news/books/docs/TYN_Vision_7-22-13.pdfhttp://www.mta.info/mta/news/books/docs/TYN_Vision_7-22-13.pdfhttp://www.mta.info/mta/news/books/docs/TYN_Vision_7-22-13.pdfhttp://www.mta.info/mta/news/books/docs/TYN_Vision_7-22-13.pdf

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More and more New Yorkers are spending a fiscally unhealthy percentage of their income on housing.A 2012 report by the NYC Comptrollers Office found that almost half of all renting households nowpay unaffordable rents,20and almost a third of renting households pay half of their income in rent. 21The chart below shows the change in the percentage of New York households paying unaffordablerents over the past thirty years. Almost all of the ten-point increase since 1980 has occurred over thepast ten years.

PERCENT OF NEW YORK CITY RENTING HOUSEHOLDSPAYING UNAFFORDABLE RENTS

39% 39% 41%

49%

0%

10%

20%

30%

40%

50%

60%

1980 1990 2000 2010

Source: U.S. Census Bureau 1980-2010.

Homelessness is one of the obvious outcomes of unaffordable rents. Despite the NHMP, during theBloomberg Administration, the number of homeless people in City shelters increased 59 percent,from 31,603 in January 2002, to 50,135 in January of 2013.22The chart on the following page showsthe increase in the number of homeless families in City shelters, from an average of 7,111 families inFY 2002, to an average of 12,075 during the current fiscal year. Meanwhile, general fund expendituresby the Department of Homeless Services rose from $503 million in FY 2002 to $977 million in FY 2013.

While housing economics and the causes of homelessness are complex, virtually all plausible policyresponses include increasing or preserving the supply of affordable housing. Unfortunately, newhousing development is extremely expensive and even existing housing requires periodic infusionsof new capital for maintenance and repair, to refinance mortgages, and to incentivize continued

participation in affordable housing programs. To even maintain the scale of the Citys existing housingefforts will be a challenge, and many observers would like to see them expanded further.

20 The U.S. Department of Housing and Urban Development considers rent unaffordable when it consumes greater than 30 percent of householdincome.

21 Selected Initial Findings of the 2011 New York City Housing and Vacancy Survey, New York City Department of Housing Preservation andDevelopment, February 9, 2012, http://www.nyc.gov/html/hpd/downloads/pdf/HPD-2011-HVS-Selected-Findings-Tables.pdf.

22 State of the Homeless 2013, Coalition for the Homeless, March 5, 2013, http://www.coalitionforthehomeless.org/pages/state-of-the-homeless-2013.
http://www.nyc.gov/html/hpd/downloads/pdf/HPD-2011-HVS-Selected-Findings-Tables.pdfhttp://www.coalitionforthehomeless.org/pages/state-of-the-homeless-2013http://www.coalitionforthehomeless.org/pages/state-of-the-homeless-2013http://www.coalitionforthehomeless.org/pages/state-of-the-homeless-2013http://www.coalitionforthehomeless.org/pages/state-of-the-homeless-2013http://www.nyc.gov/html/hpd/downloads/pdf/HPD-2011-HVS-Selected-Findings-Tables.pdf

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The construction and preservation of affordable housing units incurs significant capital costs thatwill compete with other pressing needs, such as storm resiliency and transportation infrastructure.The Independent Budget Office projects that the public cost of the NHMP will be $8.3 billion. 23Tomaintain the pace of NHMP at similar per-unit costs, the next mayor would need to identify more than$3.3 billion of capital in its four-year capital commitment plan.

An analysis by New York Universitys Furman Center for Real Estate demonstrates how difficultfinancing more affordable housing will be.24 The Citys capital budget, the source of most of theexisting financing, has grown by 86 percent over the past decade. Further investment would requiredisplacing money from other capital areas or taking on greater debt, which will impact an already-strained expense budget.

AVERAGE DAILY NUMBER OF FAMILIES IN CITY SHELTERS

FY 2002-2014

2002

7,111

2003

9,165

2004

9,347

2005

8,778

2006

7,989

2007

9,020

2008

8,877

2009

9,224

2010

9,938

2011

9,480

2012

9,895

2013

11,564

2014

12,075

Source: Department of Homeless Services.

Further impacting the capital environment are decreases in federal contributions.25 The federalHOME Investment Partnership program, which made up 30 percent of the capital budget for housingdevelopment from 2004 to 2011, was cut by 45 percent in 2012. On the expense side, CommunityDevelopment Block Grant money, accounting for 71 percent of NHMPs funding, was cut by 16percent in 2011, and 8 percent in 2012.26

While capital will be more difficult to identify, it is also likely that the per-unit cost of subsidies will

increase. One of the frequent criticisms of NHMP is that the units created or preserved targetedhouseholds at the upper end of the low-income spectrum. In other words, the depth of affordabilityhas been rather shallow. An analysis by the Association for Neighborhood and Housing Developmentfound that over the past three years of NHMP, only 7.9 percent of units created were for householdsearning less than 40 percent of the Area Median Income (AMI), a cohort which represents nearly

23 The Mayors New Housing Marketplace Plan: Recession, Funding Shifts, and Changing Goals Mean Fewer New Apartments Likely to Be Built, NewYork City Independent Budget Office, June 2012, http://www.ibo.nyc.ny.us/iboreports/nhmp2012.html.

24 10 Issues for NYCs Next Mayor, Furman Center for Real Estate & Urban Policy, August 2013.25 For further discussion of the impact of federal austerity on the New York City budget, see pp. 28-31 of this report.26 Op. Cit., Furman Center for Real Estate & Urban Policy.
http://www.ibo.nyc.ny.us/iboreports/nhmp2012.htmlhttp://www.ibo.nyc.ny.us/iboreports/nhmp2012.html

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one-third of all New York City households.27If future affordablehousing efforts are to be targeted at lower-income families, theper-unit cost to the Citys budget will be greater, as there is aninverse relationship between the lower rent levels offered to themand the amount of subsidy provided.

Other capital challenges concern the maintenance of an integralcomponent of the Citys affordable housing. The New York CityHousing Authority (NYCHA) is the countrys largest public housingauthority with 175,000 affordable units under its management.Unfortunately, cuts in federal contributions have put NYCHAsbudget in jeopardy. Federal capital funding to NYCHA decreasedfrom $420 million in 2001 to $256 million in 2013a cutback ofnearly 40 percent. In an ominous indication of future intentions,in June of this year, NYCHA was subject to another $205 millionreduction as part of the federal budget sequester.28

Some 75 percent of NYCHAs buildings are more than forty yearsold and require much-needed maintenance and modernization.Without adequate federal funding, NYCHA faces a dire future asfederal funding accounts for 63 percent of NYCHAs total revenues. It will be extremely difficult, if notimpossible, for the City to fill gaps created by federal cutbacks. Currently, through 2016, unmet needsin the NYCHA Capital Plan have grown to $14 billion.29

Beyond the capital maintenance of existing affordable units, the next administration will have tonegotiate with real estate owners to preserve subsidized units. By the end of 2017, almost 16,000 unitsthat are currently affordable will have their Low-Income Housing Tax Credit expire.30Unfortunately,through tax reform plans, the U.S. Congress may effectively reduce the value of these tax credits,meaning that either a portion of these units will be taken out of the affordable housing market, or theCity will be forced to fill the budget gap to preserve them. Similar challenges will be faced concerningMitchell-Lama units31and units created through the Department of Housing and Urban Development.

27 An Evaluation of the Bloomberg Housing Program and Recommendations to Strengthen Affordable Housing Policy, Association for Neighborhoodand Housing Development, Inc., February 2013, http://www.anhd.org/wp-content/uploads/2011/07/ANHD-Real-Affordability-in-Housing-2-13-131.pdf.

28 Five-Year Capital Plan, Calendar Years 2013-2017, New York City Housing Authority, May 2013.29 Ibid.30 Op. Cit., Furman Center for Real Estate & Urban Policy.31 The Mitchell-Lama program was created in 1955 to provide affordable rental and cooperative housing to moderate- and middle-income families.

There are 132 City-sponsored, moderate- and middle-income rental and limited-equity Mitchell-Lama developments in New York City, which containapproximately 54,000 units.

This September 2012 report by theComptrollers Office found that almosthalf of all renting households in NYCpay unaffordable rents.
http://www.anhd.org/wp-content/uploads/2011/07/ANHD-Real-Affordability-in-Housing-2-13-131.pdfhttp://www.anhd.org/wp-content/uploads/2011/07/ANHD-Real-Affordability-in-Housing-2-13-131.pdf

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The next mayor may not have the capital to simply build or preserve affordable housing and mayhave to develop ways to add to affordable stock that do not require public capital funds. Expandeduse of inclusionary zoning32is one approach that has been proposed to conserve City capital funds,buy many observers question whether it can ever be a large contributor to the Citys affordablehousing production. Since 1998, less than 4,471 units of affordable housing have been created in New

York City through inclusionary zoning.33Furthermore, the City is running out of land to rezone. Fortypercent of the Citys land will have been rezoned during the Bloomberg Administration. 34Much ofthat rezoned land has been in prime developable areas. With fewer areas to rezone and a dwindlingsupply of City-owned land to leverage, it will be difficult to have a significant impact on affordablehousing solely through inclusionary zoning.

By all accounts, the next administration will need to create more affordable housing with fewerresources and diminishing tools. The challenges here are complex, frustrating, and far-reaching, butthey involve a foundational needhousing. With half of New Yorkers already paying unaffordablerents, it will be essential for the next mayor to be ambitious when it comes to addressing this challenge.

6. Mitigating Income Inequality

It is often forgotten that a widening disparity of household incomeshas fiscal as well as social repercussions. With the polarization ofincomes and the thinning of the middle class, New York Cityspersonal income tax (PIT) revenues are becoming dangerously

dependent on relatively few wealthy taxpayers. In 2011, nearly 40percent of the Citys personal income taxes were collected fromonly 19,634 taxpayers, representing half a percent of the 3.6 milliontaxpayers who filed PIT forms. Moreover, only 2,708 taxpayersaccounted for more than 23 percent of all PIT collections. Thereliance on a small number of taxpayers, who derive most of theirincome from capital gains and other investment returns, makesthe Citys tax revenues unduly volatile and vulnerable to privatelocational decisions over which it may have little influence.

The concentration of the Citys PIT collections among a small group of taxpayers is not due to a highly

progressive tax system which extracts from them an unusual portion of their income. The Citys taxsystem is relatively flat, with middle-income filers with federal adjusted gross incomes (AGI) in the$120,000 to $140,000 range paying an effective City tax rate of 2.62 percent. By contrast, taxpayerswith a federal AGI of $5 million or more pay an effective rate of 3.62 percent, or about 1 percentagepoint more of their income.

32 Inclusionary zoning requires that a given share of any new construction include a certain percentage of units be designated for low- and moderate-income tenants.

33 Op. Cit., Furman Center for Real Estate & Urban Policy.34 Julie Satow, Amanda Burden Wants to Remake New York. She has 19 Months Left, The New York Times, May 18, 2012.

Fact:

Nearly40percentof

theCityspersonalincometaxescame

fromahalfapercent

ofthe3.6million

taxpayersin2011.

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RATIO OF AVERAGE INCOME OF TOP 1% TOAVERAGE INCOME OF BOTTOM 99%

2000

90

80

70

60

50

40

30

20

10

0

53x

2001

42x

2002

37x

2003

40x

2004

49x

2005

55x

2006

61x

2007

78x

2008

59x

2009

48x

2010

53x

2011

51x

Source: New York City Comptrollers Office from NYS Department of Taxation and Finance microdata.

This skewed distribution of tax revenues is primarily a result of askewed distribution of income. Nearly two-thirds, or 2.4 milliontax filers, reported federal AGI of less than $50,000 in 2011. Those

taxpayers realized only 18.2 percent of the Citys total personalincome and accounted for only 6.7 percent of total PIT collections.At the other end of the income spectrum, filers with incomes of$1 million or more realized nearly 30 percent of the total personalincome. Even this disproportionate share was relatively low byrecent historical standardsin 2007, filers earning $1 million ormore realized 40.8 percent of the Citys AGI. In that year, filersearning $5 million or more realized 28 percent of all reported AGIin the City.

Reliable figures on the concentration of the Citys personal

income at the very top of the income scale do not go back muchbeyond the turn of the century. However, an analysis prepared bythe Comptrollers Office in 2012 indicates that the Citys incomedistribution is becoming more skewed over time. The nationalincome distribution has been becoming more concentratedamong the top 1 percent and top .1 percent for several decades, and it appears that that trend hasbeen similar in New York City.

This May 2012 report by theComptrollers Office found that in NYCthe top 10% of earners accounted fora much higher percentage of totalincome than is true in the nation asa whole.

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Because the incomes of the top 1 percent of tax filers are generated largely from returns on financialassets, in the form of capital gains, dividends, interest, rents and royalties, it tends to be morevolatile than income from wages. That, in turn, makes the Citys tax revenues more volatile thanif they were based on wages or other stable sources of income. Furthermore, being concentratedamong a small proportion of households, the Citys tax revenues are vulnerable to changes in theeconomic environment over which it may have little or no control. For example, elimination of thetax deductability of state and local taxes for federal tax purposes could alter the locational choicesof very high-income households, causing an erosion of the Citys tax base if some of them choose torelocate to low-cost states.

7. Increasing College Graduation

The belief that educational attainment affects futureemployment and earnings is foundational to the requirementof compulsory education in New York City and elsewhere.Indeed, policymakers know with as much certainty as it ispossible to know in social science that the more schoolingone has, the higher income one has. Thus, the pursuitand completion of a post-secondary degree carries withit a substantial income premium, which not only benefitsthe individual, but society as a whole through increasedlocal tax revenues. By mitigating growing inequality, thisincome premium can also contribute to containing City

government expenditures. Accordingly, any spending onimproved educational attainment must be viewed as a soundinvestment, and not simply an expense.

As is the case throughout the country, New York City residents with more educational attainment aremore likely to work, and those with bachelors and graduate degrees are more likely to have better-paying jobs. For example, the average holder of a bachelors degree in New York City between the agesof 20 and 65 earned $54,904 in 2010, compared to $21,441 for a high school graduate, and $28,212for those who attended college but didnt obtain a degree. The chart on the following page shows themean annual earnings of New York City residents in 2010, by highest level of education attained.

Fact:

Four out of ve New

York City public schoolstudents fail to get acollege degree of anykind.

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MEAN ANNUAL EARNINGS OF NYC RESIDENTS

BY EDUCATIONAL ATTAINMENT

H.S.Dropout

$13,385

H.S.Diploma

$21,441

CollegeDropout

$28,212

Associates

$31,768

Bachelors

$54,904

Masters

$70,134

MBA/JD/MD

$120,541

Ph.D.

$82,011

Source: Compiled by the New York City Comptrollers Office from New York State Department of Taxation and Finance microdata files.

The lifetime earnings of the college educated are associatedwith greater benefits to the City as a whole. The difference inexpected income tax payments of a bachelors degree holder,

versus a high school graduate, is about $25,210 over a workinglife, discounted to present value.35

There are more than 4.5 million working-age (between 24 and65) New Yorkers, of which 1.9 million (42 percent) are collegeeducated. The percent of working-age New Yorkers with at leasta bachelors degree is lower at approximately 36 percent.36

The educational attainment of the five most-educated cities(Washington D.C., Boston, San Francisco, Seattle, andMinneapolis) is significantly higher than that of New York.37 It

would take nearly 630,000 additional college degree-holdersamong its resident college-age population for New York City tocatch up.

In order to close an education gap that large, New York City willneed to enhance the three basic sources of its human capital

35 Beyond High School: Higher Education as a Growth and Fiscal Strategy for New York City, New York City Comptrollers Office, September 2012.36 Ibid.37 Ibid.

This September 2012 report by theComptrollers Office found that theaverage holder of a bachelors degreepays more than twice as muchover$90,000in New York City taxes overthe course of their lifetime than theaverage holder of only a high schooldegree ($43,000).

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flow: the education of children born and raised locally, the attraction of educated migrants from therest of the U.S., and the attraction of educated immigrants from abroad. However, the source overwhich it has the most control (and the greatest moral obligation to address) is its native population.Consequently, it is imperative that the City dramatically improve the educational outcomes of childrenwho are raised and schooled in the five boroughs. In a City where a paltry 21 percent of public schoolstudents (or one in five) go on to finish college after six years38there is clearly considerable ground tobe made up.

The would-be tax revenue generated from adding an additional 630,000 college degree holders tothe working-age population in the City is staggering. The chart below shows the estimated presentvalue of New York City income, sales, and property taxes by level of educational attainment.

ESTIMATED PRESENT VALUE OF NYC INCOME, SALES, AND

PROPERTY TAXES BY LEVEL OF EDUCATIONAL ATTAINMENT H.S. Dropout H.S. Diploma Associates Bachelors

Income Tax $3,509 $8,200 $11,995 $33,410

Sales Tax $7,724 $10,272 $13,466 $15,492

Property Tax $21,112 $24,919 $33,393 $43,835

Total Tax $32,345 $43,391 $61,854.5 $92,737

NOTE: Tax payments estimated from ages 28-70, discounted at 9% rate.Source: NYC Comptrollers Office.

If New York City were to increase its overall number of workers with associates or bachelors degreesto rates on par with more educated cities, these better-educated residents would add billionsin additional tax revenue over the course of their working lifetimes. Additionally, the City wouldsignificantly reduce its expenditures on social services.

38 Ibid.

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PERCENT OF WORKING-AGE POPULATION WITH COLLEGE DEGREE, 2010

LARGEST METROPOLITAN AREAS AND CORRESPONDING CENTRAL CITIES

Location Metro Area Central City

% with college education AD+ BA+ AD+ BA+

Washington 54.6% 48.7% 56.4% 52.9%

Boston 55.4% 48.2% 52.3% 48.4%

San Francisco-Oakland 50.6% 43.1% 61.3% 55.8%

Seattle 51.5% 42.2% 64.7% 57.0%

Minneapolis-St Paul 51.3% 41.0% 52.5% 44.6%

New York 45.7% 38.7% 42.2% 35.7%

Chicago 43.9% 36.9% 41.9% 36.3%

Philadelphia 42.8% 36.1% 29.0% 24.3%

Atlanta 43.5% 35.9% NA NA

Dallas-Ft Worth 39.2% 32.4% NA NA

Houston 35.2% 29.3% NA NA

Detroit 38.5% 29.7% 19.6% 12.8%

Phoenix 38.1% 29.2% NA NA

Los Angeles-Riverside 36.3% 29.0% 36.7% 30.8%

Miami 37.1% 27.6% NA NA

Source: New York City Comptrollers Office from American Community Survey microdata.

Recognizing the vast potential benefit of increasing educational attainment is a wake-up call foraction and investment. Educational attainment and income inequality are strong reciprocal correlatesof one another. While poverty alone does not necessarily place a childs educational attainment atrisk, poor children are relatively more likely to be exposed to poverty-related factors such as familyunemployment, depression, food and home insecurity, among other adversities that significantlyinterfere with a childs schooling. As with most education-related challenges, increasing educationalattainment demands wide-reaching, comprehensive solutions. This is profoundly complex work and itis critically important to remain big-hearted in policy prescriptions.

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8. Managing Debt Service

New York City, unsurprisingly, has a complex, varied, and aginginfrastructure. As the largest city in the U.S., it has more school buildings,firehouses, health facilities, community colleges, roads, bridges, libraries,and police precincts than any other city in the country. Moreover, theCity has responsibilities that in other cities are distributed more broadlyamong states, counties, unified school districts, and public authorities. Tofinance the maintenance and construction of this infrastructure, New YorkCity must issue huge amounts of debt.

Undoubtedly, the next administration will be faced with challengesrelated to outstanding debt and its costs. As of June 2013, the totaloutstanding debt was $79.25 billion, excluding $29.5 billion of NewYork Water Authority debt. When comparing levels of debt with other

jurisdictions, it is important to adjust the data to establish a comparable measure amongand between jurisdictions. Using debt per capita data to compare debt burden among municipalitiesprovides such an adjustment. New York Citys current debt per capita is approximately $9,378 ornearly twice the average of ten large cities across the country.

DEBT PER CAPITA COMPARISONS FOR SELECTED CITIES2000 AND 2012

Debt per Capita Debt per Capita Percentage Change

City 2000 2012 20002012

Boston $1,376 $1,765 28.3%

Seattle $1,674 $2,377 40.3%

Philadelphia $3,241 $4,693 44.8%

Houston $2,187 $4,499 105.7%

Chicago $2,863 $6,327 121.0%

Phoenix $2,041 $4,665 128.6%

San Antonio $1,929 $5,511 185.7%

San Francisco $1,139 $3,262 186.4%

Los Angeles $1,464 $4,423 202.1%

Dallas $1,273 $4,210 230.7%

San Jose $943 $3,623 284.2%

Average of All Other Cities $1,974 $4,584 132.2%

New York City $4,923 $9,378 90.5%

Source: Comprehensive Annual Financial Reports for each city.

Fact:

NewYorkCityscurrent

debtpercapitais

approximately$9,378or

nearlytwicetheaverage

oftenlargecitiesacross

thecountry.

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New York Citys debt per capita is demonstratively high but what about affordability? For this question,one turns to the measure of debt service as a percent of local tax revenues. In FY 2013, New YorkCitys debt service as a percent of tax revenue was 12.8 percent. This ratio is forecast to rise to 13.9percent in FY 2014, 14.9 percent in FY 2015, 15.1 percent in FY 2016, and 15 percent in FY 2017.

NYC DEBT SERVICE AS A PERCENTAGE OF TAX REVENUES

Fiscal Year

10%

11%

12%

13%

14%

15%

16%

17%

18%

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Actuals

Projected

FYs 2014-2023

NOTE: Debt service is adjusted for prepayments.Sources:City of New York Comprehensive Annual Financial Reports, FYs 19822013; New York City Office of Management andBudget, FY 2014 Adopted Financial Plan, June 2013.

Even as debt service costs have increased, without the refunding savings accrued through refinancingand retiring of higher interest debt, the Citys debt service costs would be even more unmanageable.The Bloomberg Administration forecasts interest rates of 7 percent in FY 2014 and beyond, which areobviously much higher than current interest rate levels of less than 4 percent.39

Fortunately, the Citys debt service as a percent of local tax revenues has remained stable over thepast 11 years, averaging 13.2 percent, with one aberration of 17 percent in FY 2002 due to the impactof the World Trade Center attack. While there is no one generally accepted measure of municipal debtaffordability, rating firm Standard & Poors does offer a benchmark for debt affordability suggestingthat a citys annual debt service burden is high if it exceeds 15 percent of general fund expenditures.

New York Citys debt service as a percent of total City-funds expenditures in FY 2013 was 11.6 percent,but this ratio is expected to rise to 13.4 percent by FY 2017. Although encouraging at first glance,

the City will face challenges related to the sustainability of its infrastructure from aging and potentialclimate change issues. The City is responsible for the upkeep of thousands of fixed capital assets.Many of these assets are in dire need of upkeep. Generally, an asset is considered in a state of goodrepair if it is safe, reliable, and provides a satisfactory level of service to its user.

The Citys Office of Management and Budget (OMB), working in concert with each City agency, maintainsa database of each of the Citys major fixed assets and its state of repair. According to the database,New York Citys major fixed assets would require an additional investment of $6.36 billion by FY 2017 to

39 The most recent City General Obligation (GO) transaction had an all-in true interest cost of 3.98 percent.

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reach a state of good repair. Few, if any, comprehensive analyses of New York Citys infrastructure needshave been undertaken by outside entities.40Yet there is plenty of anecdotal evidence that suggeststhat the numbers presented by OMB are severely underestimating actual needs. The American Societyof Civil Engineers has said that in New York State, 60 percent of major roads are of poor or mediocrequality.41The U.S. Department of Transportation National Bridge Inventory found that of New York

Citys 1,441 bridges, 1,215, or 84.3 percent, are structurally deficient or functionally obsolete.42A 2008study of the nations schools found that in order to bring New York States school infrastructure intogood repair would require an additional $21.2 billion.43In addition to the Citys existing infrastructureneeds, there is much concern about new capital requirements going forward, particularly as it relates toclimate change. A recent report by the Bloomberg Administration cited $19.5 billion of potential capitalcosts for rebuilding and resiliency related to climate change issues. While approximately $15 billion ofthis cost is assumed to be funded it still leaves a $4.5 billion shortfall.44

If the shortfall of $4.5 billion were wholly City-financed, it would most likely occur over a ten-year ormore timeframe. Assuming $450 million of City-financed annual borrowing over a ten-year periodat current budgeted rates, this would increase debt service costs by approximately $16 million in FY

2016, growing to a high of $330 million by FY 2025; remaining flat for 20 years, before decreasingeach year until FY 2052. This would increase the debt service to local tax revenue ratio by three-tenthsof 1 percent by FY 2018, from 14.8 percent to 15.1 percent.

Analyzing four recent Adopted Commitment Plan conditions, (usually called the September Plan) itwas observed that, on average over a four-year forecast period, expenditures were underestimated by$1.2 billion, or about 4 percent of the four-year total. In simple terms, this means for every $25 billionof estimated capital expenditures, and therefore anticipated capital borrowing,45there would be, onaverage, a $26 billion need, and thus a $1 billion shortfall. Therefore, one can cautiously conclude thatcurrent forecasts will somewhat understate the future borrowing need.46

In the recently released FY 2014 Adopted Commitment Plan, projected City capital expenditures forFYs 2014-2017, including those for the Citys Department of Environmental Protection (DEP), totaled$27.34 billion. Adding an additional 4 percent to this total would produce a potential borrowing riskof $1.09 billion.

This underestimation of out-year capital expenditures artificially deflates out-year debt serviceestimates. It would be reasonable to assume that as a result of this underestimate, compounded bythe cost of unforeseen capital needs, such as climate change-related expenditures, the debt serviceas a percent of tax revenue forecasts presented earlier are optimistic.

40 In 1998, then-City Comptroller Alan Hevesis office issued a report entitled Dilemma of the Millenium, which found that the City would have tospend more than $90 billion over the next ten years to bring its infrastructure into a state of good repair.

41 2013 Report Card for Americas Infrastructure, State Facts: New York, American Society of Civil Engineers, http://www.infrastructurereportcard.org/a/#p/state-facts/new-york.

42 Bridges by States and County, U.S. Department of Transportation, Federal Highway Administration, Bridges & Structures, http://www.fhwa.dot.gov/bridge/nbi/no10/county.cfm.

43 Faith E. Crampton and David C. Thompson, Building Minds, Minding Buildings: School Infrastructure Funding Need, A State-by-State Assessmentand Analysis of Recent Court Cases, American Federation of Teachers, December 2008, p. 13, http://www.aft.org/pdfs/psrp/bmmbfunding1208.pdf.

44 For a more detailed discussion of this gap, see the Adapting to Climate Change section of this report on pp. 8-12.45 Capital borrowing is synonymous with bond issuance. In New York City, this includes General Obligation (GO), Transitional Finance Authority

(NYCTFA), and New York City Water Authority bonds.46 Note that these figures are capital expenditure estimates, not capital commitments. Data for capital expenditures is limited, with a breakout for

Department of Environmental Protection and the remaining balance for the general capital program financed by GO and NYCTFA bonds.

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The next administration will have to balance the need to finance the necessary capital improvementsto keep New York Citys infrastructure safe and modern, against the associated costs that will burdengenerations of New Yorkers to come.

9. Dealing with Federal Austerity

During the 35 years from 1978 to 2013, the expenditures ofgeneral New York City government increased at a 4.9 percentaverage annual rate. Since the Citys budget must by law bebalanced, its total revenues increased at approximately the samerate. However, during that time the composition of its revenueschanged substantially: the City was forced to rely more heavilyon its own resources and less on state and federal funding. As

the chart below shows, there was a long-term decline in the sharederived from federal categorical grantsfrom 19.3 percent inFY 1978 to only 9.2 percent in FY 2008. Although the declinein federal funding was tempered in recent years by assistanceprovided through the American Recovery and Reinvestment Act(ARRA), that upsurge in federal assistance was temporary.

FEDERAL DOLLARS AS A PERCENT OF TOTAL CITY

OPERATING REVENUES, 1978-2013

FY 1978

19%

FY 1983

14%

FY 1988

11%

FY 1993

12%

FY 1998

12%

FY 2003

13%

FY 2008

9%

FY 2013

13%

25%

20%

15%

10%

5%

0%


Fact:

Thefederalgovernments

contributiontotheNew

YorkCitybudgetdeclined

froma19.3%shareinFY

1978to9.2%byFY2008.

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The federal government provides funding to New York and other municipalities for a variety ofpurposes. Much of the funding is provided to City government but is passed through directly toresidents as income support. Important forms of such payments to individuals are Medicaid, Section8 housing subsidies, and Temporary Assistance for Needy Families (TANF). Although these incomesupport programs do not directly fund the operations of City government, they are instrumental inlessening the costs of housing, health care, and other public needs that would fall on City governmentin their absence.

The federal government provides categorical grants that help the City fund mandatory anddiscretionary programs in the areas of health, housing, education, and public safety. Certain typesof capital infrastructure programs have also been financed in part with federal funds, includingenvironmental projects, highways and bridges, and mass transit.

Federal grants to states and localities expanded rapidly during the 1960s and 1970s, an era that saw theestablishment or expansion of notable programs such as Medicaid, Model Cities, the ComprehensiveEmployment and Training Act (CETA), Section 8, and many others. Between 1960 and 1980, federalgrants to states and localities grew at an 8.4 percent annual rate in real terms. By the time RonaldRegan was elected President in 1980, however, there was a growing conservative backlash againstprograms to aid the poor and to aid cities in general. While overall federal spending increased by26 percent in real terms during the 1980s, grants to states and localities were cut back sharply,decreasing by 13 percent from 1980 to 1990. The trend reversed during the 1990s and 2000s, withgrants to states and localities increasing at a real annual rate of 3.8 percent under President Clinton,and even faster under President George W. Bush.47Federal aid to states and localities jumped furtherafter the 2008 financial crisis, with the ARRA providing an additional $255 billion in aid. Through theebb and flow of federal aid policies, however, inflation-adjusted aid to New York City grew at only a0.1 percent annual rate in the 35 years ending in 2013, compared to an average annual growth rateof 2.3 percent in the Citys own tax revenues.

The squeeze on the Citys budget due to stagnant federal aid can be expected to intensify in comingyears. With the policy focus in Washington shifting to deficit reduction, the likelihood is that federalaid will continue to decline as a share of the Citys operating budget. The current baseline for federalspending is set by the Budget Control Act of 2011 (BCA), which limits discretionary non-defenseprogramsthe category in which most aid to states and localities is containedto a nominal averageannual rate of growth of only 1.1 percent between FY 2013 and FY 2023. President Obamas budgetproposal for FY 2014, which stands little chance of being adopted as is, actually calls for an even lowerrate of long-term spending growth in discretionary non-defense programs.48Even worse, the long-termbudget proposed by Congressman Paul Ryan and adopted by the House of Representatives wouldslash federal discretionary grants to states and localities by about 21 percent by 2023, compared toexpected spending under the BCA, according to an analysis prepared by the Center on Budget andPolicy Priorities.49

47 Budget of the United States Government, Fiscal Year 2014, United States Office of Management and Budget.48 Ibid.49 Ryan Budget Would Shift Substantial Costs to States and Localities, Center on Budget and Policy Priorities, March 27, 2013.

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10. Changing Corporate Incentives

Select New York City businesses receive billions of dollars in tax benefits annually. The largest NewYork City tax breaks convey more than $1.7 billion in tax breaks each year, revenue that is unavailablefor investing in the Citys infrastructure and its people.

Large New York City Corporate Tax Breaks ($ millions)

Industrial & Commercial Incentive Program $681.6

Industrial Development Agency $241.5

Business and Investment Capital Tax Limitation $377.0

Insurance Company Non-Taxation $310.0

Foreign Bank Alternative Tax on Capital Stock $137.0

ANNUAL NEW YORK CITY TOTAL $1,747.1

Source: New York City Comptrollers Ofce.According to the New York City Department of Finances2012 Report on Tax Expenditures, in 2012 New York Cityprovided $681.6 million in tax incentives through its Industrial &Commercial Incentive Program, which granted 6,607 exemptionsand abatements to encourage commercial development.

Exemptions granted by New York Citys Industrial DevelopmentAgency amounted to another $241.5 million in forgone propertytax, some of this going to Fresh Direct for its facility in the Bronx.

Tax breaks granted by New York City are not limited to propertytax. In 1974, New York City exempted insurance companies, withthe exception of out-of-state providers of fire insurance, frompaying income tax on their income from both insurance andnon-insurance services. New York Citys Department of Financeestimates this exemption reduced income tax collected by New York City by $310 million in 2012.

Elections can focus political attention on the short term, but New York City has a long tradition ofgranting tax breaks that last much longer. The fiscal crisis of the 1970s brought legitimate fearsthat business would abandon the city. In 1992 Mayor Dinkins granted more than $100 million in taxincentives to keep Prudential Insurance in New York.50

Over the last 20 years, Mayors Giuliani and Bloomberg have been generous. In 1997, the Giuliani

50 David W. Dunlap, Enticed by Tax Breaks, Prudential Will Stay in New York,The New York Times, August 6, 1992, http://www.nytimes.com/1992/08/06/nyregion/enticed-by-tax-breaks-prudential-will-stay-in-new-york.html.

Fact:

Goldman Sachs alone

has received more than

$100 million in taxincentives from states

including New Jersey

and Utah.

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Administration granted Bear Stearns a $75 million tax break to stay in the City for 50 years. 51Theylasted eleven.

As a result, New York Citys tax base is undermined by a mix of recent tax breaks, such as those givento Fresh Direct, and much older tax breaks that persist although the circumstances which broughtthem into being are unclear (who can explain why insurance companies are exempt from incometaxation in New York City?) or no longer exist (Madison Square Garden has not paid property tax since1982, when the Rangers and Knicks threatened to leave town).52

New Jersey Governor Chris Christies aggressive efforts to court New York City businesses, as well assimilar efforts by other states, represent an ongoing challenge to New York Citys economy.

New York Citys prosperity depends on the businesses that provide jobs, write paychecks, and paytaxes. While service establishments such as restaurants and plumbers are closely tied to their localcustomers, many businesses have flexibility in their choice of location, and New York City mustcompete with other cities as a good place to do business. In this competition, New York has manyadvantages. When other states attempt to lure New York City businesses away with tax incentives,New York City and New York State must decide how to respond.

NYC COMPANIES RECEIVING TAX INCENTIVESFROM OTHER STATES

$105.8

$80.0

$58.6 $56.0

$28.6 $24.0$12.6

$25.0

$157.0

$34.3$49.4 $50.4

$58.7

$34.5

Other State Incentives NY Incentives

($ in millions)

Source: The New York Times,12/1/2012.

51 Charles V. Bagli, Pledge to Stay in City Wins Bear Stearns a Tax Break, The New York Times, August 28, 1997, http://www.nytimes.com/1997/08/28/nyregion/pledge-to-stay-in-city-wins-bear-stearns-a-tax-break.html.

52 Joyce Purnick, Metro Matters; No Taxes, No Foul At the Garden, The New York Times, November 21, 2002, http://www.nytimes.com/2002/11/21/nyregion/metro-matters-no-taxes-no-foul-at-the-garden.html.

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Other states seeking to attract New York City businesses have focused their efforts primarily onfinancial services firms. Goldman Sachs alone has received more than $100 million in tax incentivesfrom states including New Jersey and Utah. As a result Goldman Sachs now employs almost 1,800workers in Salt Lake City, up from fewer than 300 in 2007, and perhaps 4,000 in New Jersey. While the

financial services jobs lured away are typically back office jobs that command more modest salariesthan one may associate with investment banking, the departure of good middle class jobs exacerbatesincome inequality in New York City.

If the tax incentives provided by New Jersey and other states are strategically targeted to help domesticindustries grow and compete in world-wide markets, they may be beneficial to all Americans; if theymerely cannibalize jobs from other states, they contribute to a destructive race to the bottom thatultimately starves the nations public services and public infrastructure.

Conclusion

Our description of the top ten fiscal challenges facing New York City is not an attempt to overwhelm,depress, or paralyze readers. It is grounded in a firm belief that the first step toward creative solutionsis a clear analysis of the problems at hand. While some of these issues may be managed by discretemeasuresa pact between New York and New Jersey, for example, to avoid commercial enterprisepoachingmost of these problems are interconnected so that the resolution of one can often helplead to the amelioration of another.

If resources can be found to fill the gaps left by federal austerity, perhaps affordable housing can be

constructed to relieve homelessness. Moving children from the shelter system into permanent housingcan increase educational attainment. Investment in the hiring of school counselors and teachers, aswell as in the building of schools, can reduce the number of students per classroom, leading to betteroutcomes in college and career readiness, which in turn can engender higher salaries at graduationthat help fill the Citys tax coffers.

We call these types of activities the necessary constituents of a virtuous circle, which together canhelp move New York City into a prosperous, healthy, and secure future. As New Yorkers, we do notdoubt our collective ability to come together and surmount difficult or seemingly impossible tasks.We remember that New York City pulled itself out of near-bankruptcy during the 1970s. It rose fromthe ashes of the September 11th2001 terrorist attacks to recreate downtown, and the City is still in

the process of rebuilding in the wake of Superstorm Sandy.

The resiliency of the people of this City and its leaders is unquestionably sound. Together, relying onthe inherent strength of the City, we will conquer what only at first appears to be unsolvable to createthe promise of a better tomorrow.

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Comptroller of the City of New York

1 Centre Street, New York, NY 10007

comptroller.nyc.gov

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