Don’t look now, but New York City is likely to face bigger challenges than Mayor Eric Adams bargained for in his first financial plan.

Less than a month after the mayor celebrated an early budget deal with City Council leaders, the city’s long-term outlook is dimmed by two emerging clouds:

Pension fund losses. The nearly 21 percent decline in the S&P 500 index from January 1 to June 30 was Wall Street’s worst first half of a calendar year since 1970. That period also represented the second half of an exceptionally bad July-June fiscal year for public pension funds across the country, including New York City’s. As explained below, pension costs from 2024 through 2026 are likely to be $4 billion higher than Adams had projected.

A bigger-than-expected income tax drop. Lower stock prices will translate into reduced capital gains realizations among the high earners who pay a disproportionately large share of city (and state) income tax. This is already filtering through to quarterly estimated payments—which dropped more sharply in June. Adams’ revenue estimate anticipated some of this, but may not have been conservative enough—especially if a full-blown recession hits.

As recently noted here, Wall Street plays an outsized role in the economy and finances of New York City and New York State.  Like Governor Hochul at the state level, Adams had boasted of putting aside a record sum in reserves — more than $8 billion, in the city’s case. However, unless the stock market rebounds and economy grows more strongly, that cushion could go up in smoke more rapidly than the mayor has anticipated over the next few years.  Weaker-than-forecast tax revenues would force some belt-tightening in the current fiscal year, while rising pension expenses will be a major drag starting in fiscal 2024, as explained below.

The pension picture

In calculating tax-funded contributions to public pension funds, the discount rate is a crucial variable: the lower the rate of assumed earnings on money set aside to pay promised future benefits, the larger the employer contributions required to hit funding targets. New York City estimates its current and future pension expenses based on the assumption that its pension fund investments will earn an average of 7 percent a year. That matches the median for all U.S. pension funds, although Mayor Michael Bloomberg once compared the 7 percent return assumption to a promise from Bernie Madoff.

The stronger-than-expected rebound in stock prices following the pandemic contributed to a bumper year for pension funds across the country during fiscal years ending June 30, 2021, including a near-record 25.8 percent return for New York City’s funds.  On the heels of that performance, Mayor Adams’ financial plan as of June projected that pensions costs would decrease from $9.7 billion in 2022 to $9.4 billion in fiscal year 2023, and then continue descending more rapidly to their lowest levels in more than a decade—all the way down to $6.9 billion in 2024.

After nearly two decades of steadily rising pension expenses—which skyrocketed from $615 million in 2000 to a peak of nearly $10 billion in 2019—the mayor’s budget forecast looked almost too good to be true.  Turns out it was.

The FY 2023 financial plan was based, as always, on the assumption that pension investments would earn 7 percent in fiscal 2022. But as of May 23, weeks before the mayor reached his budget deal with the City Council, the city already was estimating its funds had lost an average of 8 percent, according to a report from state Comptroller Thomas DiNapoli’s office. That report ominously added:

If these results hold through June 30, 2022, OMB estimates the City could be required to increase its pension contributions by $675 million in FY 2024, $1.3 billion in FY 2025, and by $2 billion in FY 2026. 

For those keeping score at home, those numbers add up to higher pension expenses totaling $3.975 billion across the financial plan’s three “out years.”

It only got worse from there, however, with the S&P 500 dropping another 4.7 percent between May 23 and June 30.

The official number won’t be available for a few weeks to come, but based on the usual relationship between stock prices and the equity-heavy pension fund portfolio, the actual average return for the city funds probably ended up closer to a 10 percent loss.  In that case, next year’s pension contribution will be more than $700 million higher than Adams’ April estimate, at least slightly exceeding the FY 2023 outlay. Total pension contributions from fiscal 2024 through fiscal 2026 will need to rise by more than $4 billion—enough to drain away fully half of Adams’ projected reserves over the last three years of the long-term financial plan.

** See note at end of post on the experience of other public pension funds in New York State.

Tumbling taxes

Adams’ budget projected that quarterly estimated income tax payments—a category dominated by income millionaires, based largely on their outlook for capital gains—will decline by about 17 percent next year, on the heels of an early-estimated 12 percent decline in fiscal 2022.

However, this month’s economic and fiscal newsletter from city Comptroller Brad Lander reported that the estimated payments received as of June 15 were down a whopping 31 percent from the same month in 2021, falling to the lowest levels since 2017. Total income taxes were 5.1 percent above the prior year, “boosted by employment and nominal wage gains.” Lander’s report said, but “[t]hese gains are likely to dissipate with economic growth slowing and a forecast decline in Wall Street bonuses.”

Adams’ budget forecast that estimated income taxes will be down 17 percent across the full fiscal year. If the decrease is closer to the June level, revenues could fall another $500 million below estimates for the current fiscal year. Unlike higher pension costs, which will affect financial outlook starting next year, weakening tax receipts will require adjustments in the current year.

The mayor will be obliged to personally present his financial plan to the state Financial Control Board (which is chaired by Governor Hochul) at the board’s as-yet unscheduled annual meeting sometime in early August. The FCB staff is certain to point out the increase in pension expenses, as well as the early weakness in tax receipts and the heightened risk of recession. The state comptroller and city comptroller can be expected to chime in with warnings of their own.

Nearly all of the city’s major labor contracts expired last year, and Adams’ budget has set aside a reserve to cover wage hikes of just 0.50 percent in each of the first two years of the next labor settlement, followed by annual 1 percent increases thereafter. With another round of negotiations starting and unions pushing for much more, at much higher cost, the control board meeting gives Adams an opportunity to tamp down expectations—not a moment too soon.


** The New York State and Local Retirement System (NYSLRS) is the only major public pension fund in the country with an April 1 to March 31 fiscal calendar, matching the state government’s budget year. Thanks to this difference in timing, NYSLRS—which covers all New York state and local government employees outside New York City, except professional educators—probably escaped the worst of the past year’s financial market decline and came close to achieving its lower assumed 5.9 percent rate of return. The New York State Teachers’ Retirement System (NYSTRS), which covers public school educators outside New York City, has a July-June fiscal year and is more likely to have experienced an investment loss akin to the city funds’.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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