Syzygy in Budgets
The reality of budgets often pits the practical in opposition to the aspirational objectives. The federal government continues to present this dilemma but now New York City and the new mayor are grappling with the facts comprising a large gap.
First, we turn to the national stage and macro implications. It is quite pathetic that we cannot even accomplish a federal budget in toto for this year before commencing the necessary process for next year. There does not appear to be much hope for a compromise of some sort on the DHS budget. FEMA, TSA, and other critical areas will continue to be affected by the delay. Travel for Spring Break may be a bust unless the TSA gets some unconditional support.
What better time to start a war to distract from all the other topics swirling about? We hope that leaders take the sensible path of negotiating, but this outcome is far from certain. The ten-year Treasury hit a low of 4.0% and has now backed off at 4.09%. The dollar is a tad stronger. But the tenuous outlook could change instantaneously if some kind of attack begins. A flight to quality could ensue.
If it is preliminary budget time, the talk of budget gaps in NYC fills media time. The gap that has emerged is now pegged at $7.54 B. As has been widely reported on, there is a proposal on the table to raise the property tax by 9.5% for the first time in many years. Such an increase would make a rent freeze a lot harder to accomplish over time. But the proposal is targeted at raising $3.7 B or about half of the gap. Other steps include drawing down the Rainy Day Fund by $980 million and taking $229 million from retiree health reserves.
It is far from certain that the entire 9.5% hike would be approved by the City Council. However much the increase is trimmed, the shortfall would need to be offset by other measures. Drawing on reserves is acceptable given the circumstances. But there would be questions about how those amounts would be replenished. According to the plan, the City would still have $6.3 B of reserves in FY 2026 and $6.1B in FY 2027.
The remaining gap would be covered by the recent offer from the State to provide $1.5 B as a salve to not raising the income tax and to $1.77B of cuts over two years. The latter will be viewed as one of the weaker parts of the plan. Cuts are difficult to realize. Just look at how well with have done with public safety overtime over the years.
The intent is to have Chief Savings Officers assigned to each of the agencies. It has been stated in the plan that this is brand new. Over previous years it has been the agency heads who were tasked with preparing a list of cuts. The cuts were arranged in ordinal fashion in case some were eliminated. We will see if the CSOs will do any better. But producing that many cuts will be quite challenging. The last step other than a hiring freeze and not filling vacant positions would be employee layoffs. There is no suggestion herein that such a step should be taken at this point.
Outyear gaps are forecast to build from ($6.6B) in 2028 to ($7.1B) in 2030. Essentially, financial pressure will persist. These kinds of projections have a long history. The City has been diligent about eliminating gaps since the fiscal crisis. Other measures would come to bear if there was no success here.
There was a provision included in the budget of $662 million to provide for 3,200 affordable housing units. There is real conviction behind this proposal. It is simply a matter of can it be afforded at this time.
The good news is that the economy in the City is doing relatively well. Wall Street profitability is at an all-time high. Personal income and retail sales are holding in good ranges. There are still too many empty storefronts around town. Leasing up with new tenants is happening but it is on the slow side. Many have returned to offices, and their presence will have more positive effects.
Turning to the municipal side, there is nothing like a sewer line failure anywhere but in this case in the DC region to focus the mind. Infrastructure is always taken for granted until it fails. According to reports, the pipe affected is 60+ years old. A regular replacement cycle is preferred by consulting engineers. Finding the dollars to do so is always a goal.
The volatility in markets continues and is quite hard to predict. Sector rotation in equities has been top of mind. Municipals have been stable in comparison. Inflows and strong appetite for paper have been ever present. If volume spikes, we may see a change, but this is far from forming so far.
The State of the Union next week should provide some clues about future direction for the markets.
John Hallacy
John Hallacy Consulting LLC
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