While the national economy has recovered substantially from the depth of the pandemic, economic growth is expected to slow in 2022. Growth in real gross domestic product slowed to an annualized negative 0.6 percent in the second quarter of 2022 after dropping 1.6 percent in the first quarter of 2022. The economy faces several headwinds, mainly inflation. To combat inflation, the Federal Reserve embarked on an aggressive monetary tightening policy increasing the target federal fund rate by a total 2.25 percentage points since March with further increases expected by the end of 2022. The Fed’s ability to tame inflation, and at the same time avoid a recession, is uncertain. There is concern the Fed may have been late in its rate increases and that aggressive actions to catch up could tip the economy into a recession.
Similarly, the city’s economic growth appears poised for a slowdown in 2022. Economic indicators in the city are mixed. On the one hand, the local unemployment rate is falling, total payroll employment is rising, tourism continues to improve, and building permits are rising. On the other hand, the metro area inflation rate is at record level and the Manhattan office vacancy rate is the highest on record.
Since the June 2021 modification, city-funded revenues in FY 2022 are higher than projected by more than $7 billion, fueled predominantly by a record level of Wall Street activity in 2021. Securities industry profits totaled $58 billion in 2021, the second highest year on record, surpassing profits in 2020 of $51 billion. This level of activity in the securities sector propelled personal income and general corporation tax collections upward helping the city to add surplus funds in FY 2022 and increase reserves. However, Wall Street profitability is expected to wane substantially in 2022 contributing to an estimated drop of more than $2.31 billion in the combined personal income and business tax revenues in FY 2023. In the first half of 2022, Wall Street profits were lower by 56.3 percent compared to last year. Facing an environment of tightening monetary policy by the Fed, real estate transaction tax revenues are projected to drop in FY 2023, and while they are forecasted to rebound beginning in FY 2024, they are not expected to recover to the FY 2022 level by the end of the plan period. Commercial rent tax revenues are expected to remain relatively flat over the plan period, a reflection of the commercial rental market. Although the average office occupancy in the city has improved, demand in the office space market remains low and vacancy rates stay high. Many private sector office workers continue to telework, slowing the need for firms to lease office space, particularly for less desirable properties. Overall, city-funded revenues are projected to drop by $1 billion to about $73 billion in FY 2023 before rebounding to almost $77 billion in FY 2026.
Total-funded revenues in the current plan are projected to decline by more than $10 billion from FY 2022 to FY 2023 driven by the $1 billion reduction in city funds and an almost $10 billion drop in federal categorical grants, due to the winding down of federal COVID-19 relief funds. In FYs 2023-26, total-funded revenues are projected to grow from $101 billion to nearly $103 billion, an increase of approximately $1.6 billion, or 1.6 percent, due entirely to the growth in tax revenues. Nontax city-funds revenues and categorical grants are projected to decline by $235 million and $1.9 billion, respectively.
The June modification assumes total-funded expenditures of almost $112 billion in FY 2022, up by $2.6 billion from the April modification partially due to deposits of $750 million to each of the rainy day fund and Retiree Health Benefits Trust. We urge the city to maintain a budget practice of making annual contributions to the RHBT. The city uses more than $6.1 billion of surplus funds built up in FY 2022 to prepay FY 2023 debt service and retiree healthcare expenses, lowering FY 2023 total-funded expenditures to $101 billion from $107 billion. In FYs 2024-26, projected total-funded expenditures are $105 billion, $106 billion, and $107 billion, respectively, with budget gaps of $4.2 billion, $3.7 billion, and $4 billion, respectively. Based on our risk analysis, the budget gaps could be higher at $5.4 billion, $6 billion, and $7.2 billion over FYs 2024-26, driven mainly by higher pension contributions in the outyears. As a result of considerable declining market conditions, we estimate an aggregate negative return of nine percent, equating to a shortfall of 16 percent against the actuarial interest rate assumption of seven percent. For 2022 we estimate a loss of about $36 billion, which we project would increase pension costs by $890 million in FY 2024, $2 billion in FY 2025, and $3.1 billion in FY 2026.
Prudently, the city has added $3 billion over FYs 2022-26 to the labor reserve to fund assumed wage increases in the next round of collective bargaining. The city had previously assumed 0.5 percent increases in each of the first two years of the next round of collective bargaining and one percent annually thereafter. The plan now assumes wage increases of 1.25 percent annually. The city has also increased the general reserve by $500 million in FY 2023 and by $200 million in each of FYs 2024-26. It also provides a one-time property tax rebate to city homeowners totaling $90 million in FY 2022. Nevertheless, the city has yet to allocate funding to pay for recurring programs and initiatives financed with federal pandemic aid beyond FY 2025. Additionally, we urge the city to continue to generate substantial Programs to Eliminate the Gap, similar to the savings program released in the February modification.
The city’s five-year capital plan for FYs 2022-26 amounts to $95 billion in total-funded authorized commitments, representing a $5 billion decrease from the level of commitments projected in the February modification. The city projects 81 percent of the capital plan to be funded with tax-supported debt, with the assumed debt service expense as a percentage of tax revenues expected to remain below the affordability threshold of 15 percent throughout FYs 2022-26 based on current tax revenue projections and assumptions of the local economy. Even though commitments in the five-year capital plan have been reduced, we are doubtful that the current amount of commitments will be attainable based on the city’s past achievement levels. Consequently, we urge the city to undertake a critical review of its capital program and give more consideration to establishing a realistic capital plan that can be practically undertaken and managed.
