New York City building projects are on the chopping block (photo: Michael Appleton/Mayor's Office)
The coronavirus fallout has created a severe cash crunch for New York City, forcing Mayor Bill de Blasio to slash his proposed operating budget for the next fiscal year by $6 billion, with more cuts likely before adoption. At the same time, the city’s cash flow problems mean that its capital plan, a four-year, $67.2 billion agenda that pays for crucial, long-term infrastructure like schools and roads, will also need modification and could mean some major changes to how the city will build for its needs over the next several years.
Over this and next fiscal years, the city intends to spend far fewer funds – about $3.1 billion in fiscal year 2020 and $1 billion in fiscal year 2021 – on building new schools, replacing Rikers Island facilities with borough-based jails, affordable housing preservation and development, new police facilities and equipment, and energy efficiency infrastructure. These cuts to planned spending change the timelines for major infrastructure projects, meaning additional leeway for de Blasio’s successor to shape the city’s capital plan when a new mayor takes office in 2022.
There are several aspects to the complicated capital budgeting process, including the ten-year capital strategy that assesses infrastructure needs for the next decade; the capital budget itself, which includes funding that cannot be exceeded for the coming fiscal year and the three years after it; and the capital commitment plan, which details the actual amount that will be spent on agency projects. Updated commitment plans are released with each iteration of the mayor’s budget.
Most capital spending is financed with long-term borrowing through the sale of bonds, which requires regular payment of debt service (paying back the borrowing and interest incurred), which is included in the annual expense budget. The city’s debt service for the current fiscal year was roughly 11.5% of annual revenue, which is well below the 15% limit that fiscal watchdogs and the comptroller believe should not be exceeded in any given year.
In de Blasio’s executive budget proposal released earlier this month, the administration did not make significant reductions in capital commitments for the current and next fiscal year. Mostly, the administration moved several capital projects into the out-years of the ten-year capital program, between fiscal years 2024 and 2029.
Some of the changes follow the general pattern of capital budget planning. The city will often move funds to subsequent years if a project does not get off the ground as intended. The city also had a habit of front-loading projects into the first two years of the capital program even though most took several more years to complete, something the City Council pushed back against, achieving some adjustments in this year’s versions.
Nonetheless, there were some notable changes to capital spending in the executive budget such as on affordable housing, as first reported by Politico New York, and changes to expected spending on the borough-based jails plan.
Planned capital spending was reduced for the Department of Correction, which was intended to be used for the construction of four new borough-based jails facilities to replace Rikers Island jails. The $140 million budgeted in the current fiscal year was zeroed out, and in the next fiscal year (FY21), the city expects to spend only $196 million, as opposed to $392 million that was allocated earlier.
The capital budget for the Department of Housing Preservation and Development (HPD) -- which runs the city’s housing programs, including the mayor’s 12-year, 300,000-unit affordable housing program -- was shrunk from $1.48 billion to $902 million in the current fiscal year (FY20) and from $1.19 billion to $741 million next fiscal year. This funding goes toward subsidizing affordable housing, both newly-built and preservation of rent-regulated deals that are close to expiring, as well as supportive housing and more.
On Tuesday de Blasio called the changes to the housing plan “sad” and “horrible” but necessary, and promised that the housing plan would still be completed down the road.
The Department of Environmental Protection capital budget is seeing some fluctuation, but an overall increase in the short-term, falling from $2.3 billion to $2.27 billion in the current fiscal year and increasing from $2.37 billion to $2.72 billion in the 2021 fiscal year. The Department of Sanitation saw a drop from $463 million to $264 million in its capital budget for the current fiscal year, but will see its FY21 allocation increase from $522 million to $690 million.
The Department of Education will also see a substantial cut this year and next, from about $4.4 billion to $3.9 billion in the current fiscal and then again from $3.6 billion to $3.22 billion in the next fiscal year. Among the things on the chopping block was planned building of new schools, which reduced from $683 million to $458 million in FY20 and $1.28 billion to $1.05 billion in FY21; spending on “rehabilitation of school components” was also reduced from $926 million to $751 million in FY20 and from $510 million to $379 million in FY21.
Even the NYPD, which has never struggled for funds under the mayor, was not spared. Its FY20 capital spending projection fell from $540 million to $264 million, while its FY21 spending increased from $339 million to $420 million. The shifts include less planned spending on facilities and vehicles.
One of the bigger capital plan cuts is in planned courts spending. The city will only spend $18.2 million this fiscal year, a drastic cut from the $288 million it had planned largely to reconstruct and renovate court facilities. In FY21, spending is also slated to decrease from $539 million in the preliminary budget to $406 million in the executive budget.
Under Speaker Corey Johnson, the Council has taken a particular interest in the capital budget and has pushed the administration to make more realistic projections for the actual amounts of money that will go into projects each year. Johnson created a subcommittee dedicated to the capital budget, which is chaired by Council Member Vanessa Gibson of the Bronx.
“Due to the COVID pandemic, the current priority is to provide support for New Yorkers and continue city services as millions are now relying on social safety net programs to support themselves and their families during the COVID crisis,” Gibson said in a statement. “The capital process will be delayed to focus on health and safety projects to provide relief for residents, but I will be working with Speaker Corey Johnson and Finance Chair, Daniel Dromm to monitor the situation and ensure that our City Council priority capital projects remain at the forefront of our negotiations.”
That also echoes budget experts from the Citizens Budget Commission and the Manhattan Institute who have repeatedly urged the mayor to streamline and reform the capital budgeting process. There has been some progress over the last few years but not nearly enough, they say.
“CBC has been saying for a while that the capital budget is too large, and the timing of it is unrealistic, and we've urged them to make sure that it's better targeted,” said Sean Campion, senior research associate at Citizens Budget Commission.
Part of the issues around capital investments currently stem from uncertainty that the coronavirus has caused in the construction industry and for interest rates for government bonds. The city also has no clarity on whether it will be able to meet its debt service obligations – debt incurred by issuing bonds that is paid on the operating budget side of the ledger – as the federal tax deadline was pushed and revenues coming into the city are delayed. Officials in the city and state are waiting with bated breath (and aggressive advocacy) for the next round of federal stimulus funds that they hope will replace many billions in lost revenue.
When de Blasio was asked by a reporter on Tuesday specifically about the cuts to HPD, he insisted as much. “This is about slowing down some investments and postponing some things,” he said at his daily coronavirus briefing.
He added, “[W]hen you think about the budget dynamics, we were dealing with suddenly a massive budget gap. We were dealing with a cash flow crisis on top of that. Anytime that you book a capital project, it has ramifications for the budget. Obviously for the expense side of the budget too because of debt service. We had to slow down a lot of capital investments just to be able to make sure we could pay the bills now. And it's really a horrible situation, but that's what we had to do. But the plan is intact and it will be implemented in the future.”
The federal stimulus, he said, would determine the city’s fiscal future. “There'll be tough choices any way you slice it, but the stimulus, if it actually takes into account what has happened here, all the costs, human and otherwise that have been inflicted on New York City and all that's been lost – and including first and foremost the human loss but then, of course, the horrible impact on the budget that's used to provide services to people – if it's really, really heard and understood and acted on, that stimulus could be a lifesaver for us. And if it's not, we're going to be in an even tougher situation, but that's going to then really govern everything else we have to decide in June.”
Campion and Nicole Gelinas, senior fellow at the Manhattan Institute, said the city needs to focus on routine maintenance work, ensuring that the infrastructure that undergirds the city – its bridges, tunnels, streets, and sewers – do not degrade. They also noted that the city is not close to its debt limit yet, so it should be able to cover capital costs through borrowing. “There's no immediate crunch,” Campion said.
“It could present an opportunity to focus on priority investments, things that need to get done in the short-term, before focusing on longer term resiliency or rebuilding,” he added.
Gelinas said the city’s debt could rise out of control in the out-years if interest rates on long-term bonds go up, though the rates are in flux as the Federal Reserve announced that it is buying up to $500 billion in municipal bonds. Nevertheless, Gelinas said the situation should prompt some introspection from the administration about whether there are more cost-effective options for big infrastructure investments.
For instance, on the jails plan, with its cost reaching as high as $889 million in fiscal year 2022 and $2.1 billion in 2023. “I think they're really going to have to rethink whether they can do this or whether they're going to have to build new jails more cheaply at Rikers Island,” she said. “At least compare the costs of the two and then decide.”
“As we go into deeper rounds of cuts, we just have to protect core tax-generating infrastructure,” she insisted, pointing to the rebuilding of the Brooklyn-Queens Expressway (BQE) as a project that shouldn’t be abandoned. The city will have to push non-essential projects to later years, she said, holding out hope on a federal infrastructure package that could come to the rescue and spur job creation and economic growth.
Council Member Brad Lander, a Democrat who is running for comptroller in 2021, took that point further, saying the city should take advantage of the fact that it can receive federal stimulus money and should make sure key capital investments are not reduced, particularly if they can boost jobs in the short-term. “When you're doing that, you are investing in the future. You are saying, ‘In order to make investments that are critical at this moment, we're going to incur debt that will have to be paid back in the future,’” he said. If the city commits to investing in affordable housing, it would also build confidence in the market, Lander said.
Lander insisted that what the city should not do is borrow funds to balance the operational budget, which would require permission from the state Legislature. The mayor has suggested that measure as a last resort. “That's like taking out a loan to buy your groceries,” said Lander. “It's not good to take out a loan to buy your groceries because you’re still going to need to buy groceries next month or next year, and then you're going to be paying for your groceries twice.”
Council Member Helen Rosenthal, a Manhattan Democrat and also a comptroller candidate, expressed a different opinion. Rosenthal said the city should be seeking that borrowing authority from Albany right now. “The fundamental problem right now is we don't have any cash,” she said. “The right thing to do is to borrow money and continue to push Congress and the federal government to get local aid.”
As someone who previously worked at the city’s budget office, Rosenthal noted that the changes to the capital budget are simply routine, with lump sum funding being shifted from one fiscal year to the next, and that it’s too soon to tell if specific projects are going to be left on the cutting floor, and said that’s not really what the focus should be right now.
“If we can’t feed people today, we should be borrowing money to make sure we’re feeding people,” she said.