The annual cost of servicing New York City’s long-term debt and pension obligations continues to consume an increasing share of its budget, with more than $1 of every $5 in the operations budget being spent on these legacy costs, according to an analysis by the Citizens Budget Commission, a non-profit fiscally conservative think tank.
In fiscal year 2019, the expenditure on items like debt service for capital construction will account for 21.1 percent of the city’s annual operating budget. “By fiscal year 2022, legacy costs are projected to reach $21.9 billion or 22.7 percent of total expenditures,” the CBC reported. “These liabilities totaled $252.5 billion at the end of fiscal year 2017—approximately $81,100 per household.”
Where Money’s Owed
That quarter of a trillion dollars in debt and liabilities for 2017 can be found in three buckets: $107.8 billion in bonded debt; $88.4 billion for “other post-employment benefits” (OPEB), primarily for retiree health benefits; and $56.2 billion for pension benefits.
The CBC analysis noted that following the 2008 recession “a thriving economy and growing tax base” made it possible to simultaneously support these rising costs and increase spending on other priorities. “From fiscal years 2014 to 2017, tax revenues have grown 13.0 percent…But the City has not used the opportunity presented by robust tax revenue growth to…reduce meaningfully” these obligations.
Maria Doulis, one of the report’s co-authors, said in a phone interview that the city would find itself squeezed when there’s an economic slowdown. “These liabilities are not going away; they are locked in. But long term it’s much easier to manage them if you take action to try and bring them down when times are good and your revenues are still expanding,” she said.
Governments are supposed to use long-term bonded debt for capital construction and infrastructure improvements. The city’s bonded debt increased by $3.7 billion between fiscal years 2014 and 2017. The CBC stated that in coming years “to support a record level of capital spending…bonded debt is expected to grow 22 percent.
“Unlike some large state governments with significant capital improvement plans, the City finances capital spending exclusively through borrowing,” according to the CBC. “Between fiscal years 2014 and 2017, the City committed $30.4 billion in City funds to capital projects. Commitments grew 73 percent, from $5.7 billion in fiscal year 2014 to $9.9 billion in fiscal year 2017. Between fiscal years 2019 to 2022 the City projects an additional $59.3 billion in City-funded capital commitments, which will increase debt outstanding to $135.8 billion by fiscal year 2022.”
The issue has been on City Comptroller Scott Stringer’s radar as well. Last December he issued a report that found that debt for the city had “grown from $4,923 per capita in FY 2000 to $10,113 in FY 2017, an increase of 105 percent. Over the same period, the NYC area Consumer Price Index (CPI) grew by 48 percent.”
As both the CBC and Mr. Stringer concede in their analysis, it’s hard to compare the city’s capital-construction costs with other large American cities where the responsibility for the physical plant is more evenly shared by other entitles like the state, county, unified school districts and independent public authorities.
As a consequence, Mr. Stringer reported the city’s 2016 debt burden was $9,782 per resident, compared to an average of $4,687 for 11 other cities, ranging from $2,096 in Boston to $6,894 in Chicago. "On two other metrics of bonded debt burden—outstanding debt as a share of the value of real property and per capita bonded debt as a share of per capita personal income—New York City was also the highest,” the CBC noted.
Price-Tag on Promises
Almost a third of the legacy liability carried on the city’s books is tied up in Other Post Employment Benefits, which include covering retiree health-care costs.
“The City’s total OPEB liability in fiscal year 2017 is $93.1 billion; only 5 percent of this liability has been funded, yielding an unfunded liability of $88.4 billion,” the CBC stated. “OPEB liability is actuarially calculated using assumptions about service, retirement age, mortality, and health insurance premium growth, among other factors.”
The report continued, “The City Actuary also calculates the annual payment necessary to keep up with the growth in liability, but the City does not make payments on this basis. Rather, retiree health bills are paid as they come due; in fiscal year 2017, this amounted to $2.3 billion from the City’s annual budget—far lower than the $6.9 billion the actuary determined was needed that year to meet commitments to both current and future retirees.”
The de Blasio administration has made strides in that direction, beginning with an April 2014 agreement with the Municipal Labor Committee that by this year exceeded the target of “$3.4 billion in guaranteed health care savings through FY2018 and $1.3 billion recurring every year after."
The CBC said that initiative shoved progress but was not bold enough. “Just looking around the country at other municipal contracts it’s unheard of that if you worked for the city for just ten years you and your spouse get health care coverage for the rest of your life after you retire,” said Ms. Doulis.
CBC praised the city’s handling of its long-term pension liability, saying it “has been making payments on an actuarial basis for decades, and as a result, this liability is 71.2 percent funded, leaving an unfunded liability of $56.2 billion.”
Even There, a Caveat
Even with the regular payments, however, the city is still shy of the 80-percent-funded threshold that is the benchmark for a well-funded pension, and nowhere near the top-tier status that the state enjoys, with “a funding ratio of 94.7 percent for the [State] Employees’ Retirement System and 93.5 percent for the Police and Fire Retirement System,” according to the CBC.
“The highest rating Fitch assigns is AAA, followed by AA and then A,” the report stated. “Overall, the City’s General Obligation debt is rated AA by Fitch, but the City’s measures on long-term liabilities fall into the A range.”
“The City’s long-term liabilities are substantial, and paying the associated legacy costs is crowding out programmatic spending,” concluded Ms. Doulis and co-author Ana Champeny. “Much like New Yorkers who trim their expenditures and establish plans to get out of debt, the City needs to develop a strategy to reduce long-term liabilities and keep legacy costs a manageable portion of the annual operating budget.”
A Dissenting Analysis
James Parrott, the director of Economic and Fiscal Policies at the Center for New York City Affairs at The New School, said the CBC analysis doesn’t give sufficient credit to the de Blasio administration and public-employee unions. “There has been real progress on the labor-related issues,” he said in a phone interview. “And on the pension side there is a timeline for bringing the liability down to zero.”
“NYC’s long-term liabilities relative to the city budget have come down over the past four years, mainly due to pension and retiree health liabilities,” he said. “Pension and retiree health liabilities have declined in both absolute terms and relative to the city budget," Mr. Parrott continued.
“Also, it’s always curious to single out retiree health benefits as a long-term liability that the city will need to fund in the future without applying the same yardstick to projected amounts the city will spend on its schools, police, fire protection, sanitation, parks or any other essential city service that will be funded in future budgets,” he said.
“Now, where there has been an increase is in the long-term debt, but that wouldn’t be growing as fast if the city reconsidered the unjustifiable and excessive tax breaks to the real-estate developers benefiting from the Hudson Yards boondoggle that allows billionaires to shirk their responsibility to contribute to the city’s multi-billion Hudson Yards infrastructure investment.”
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