New York City Faces Potential Fiscal Crisis as $10 Billion Deficit Looms

New York City, battered by economic headwinds and mired in a stubborn pandemic-driven downturn afflicting employment, tourism and tax revenue, is teetering on the brink of a severe budget crisis.

For the first time in six years, city officials expect that business tax revenue will decline. Personal income and related tax revenue is expected to fall by 7.7 percent, the largest drop in a dozen years.

And Wall Street’s struggles may require the city to fork over billions of dollars to its workers’ pension funds, to meet its obligation to provide guaranteed minimum returns.

The city’s commercial office market is on the precipice of a potential work-from-home abyss. The transit system’s financial situation is so grim that the state comptroller has warned that the Metropolitan Transportation Authority may seek more financial support from the city. And while the nation has regained the jobs it lost during the pandemic, New York City is still 176,000 jobs short, with the situation especially dire for Black New Yorkers, whose unemployment rate of more than 10 percent remains nearly three times the national average.

Mayor Eric Adams entered office in January as the nation’s largest city faced one of its most challenging periods. The coronavirus pandemic caused tourism and some tax revenues to plunge, while violent crime and unemployment rose.

But thanks to an extraordinary flood of federal aid, fiscal disaster was kept at bay, enabling the city to pass a record-breaking $101 billion budget in June.

That fiscal buoyancy may soon give way.

Last week, the Adams administration directed city agencies to cut their city-funded expenses by 3 percent this year, and 4.75 percent the next. Even the Police Department, which is sometimes exempt from across-the-board belt-tightening, must cut its budget.

The mayor sounded the need for fiscal conservatism in the face of a new class-size mandate from Albany that he says will cost at least $500 million a year; impending contract negotiations with the city’s 300,000 workers; a growing population of asylum seekers stretching the city’s shelter resources; and the potential pension shortfall.

Overall, the city’s revenue stream is projected to fall this year and next — the first two-year decline in audited state comptroller records, which date back to 1980. The state comptroller recently said the city faced a potential budget gap in 2026 of nearly $10 billion.

“Since I took office in January, we have made public safety and fiscal discipline hallmarks of our administration,” Mr. Adams said in a statement. “We currently face new costs that will increase the city’s obligations by billions of dollars, including growing pension contributions, expiring labor contracts and rising health care expenses. In response, we are asking every city agency to tighten its belt without laying off a single employee or reducing services.”

James Parrott, the director of economic and fiscal policy at the New School’s Center for New York City Affairs, said it seemed like the mayor was using the economic downturn “to propose a really conservative budgeting approach at this point to dampen the expectations that many of the parties out there have for what to expect from the city budget for the next year or two.”

New Yorkers have already felt the impact of diminished city services. The city is building fewer units of affordable housing than in years past, emergency response times are up and serious injuries resulting from jail violence have increased.

Should the city be forced to cut billions of dollars in spending, it could lead to fewer garbage pickups, fewer protected bike lanes and even fewer police officers on the streets at a time when fears of rising crime are prevalent.

The city has bounced back in far worse economic environments, most notably in 1975, when it recovered from the brink of bankruptcy. City leaders also found ways to cut multibillion-dollar deficits after the post-Sept. 11 economic nosedive — in part by raising property taxes — and the Great Recession, which ended in 2009. A spokesman for the mayor did not respond directly when asked if Mr. Adams would consider raising property taxes, the only tax the city can raise on its own without state legislative approval.

The cuts are slated to go into effect in November, though the City Council can object.

Arrayed before the mayor is a cast of increasingly hostile counterparties who look askance at austerity and question the timing of his cost-cutting effort. They include labor leaders eager to settle new, more generous contracts, and a City Council that is aggressively reconsidering its earlier approval of recent cuts to the city’s education budget, and whose support for the mayor’s November budget cuts is far from assured.

However, Andrew Rein, president of the nonpartisan Citizens Budget Commission, said the mayor’s budget cuts are an important first step.

“Even without a recession, the mayor is facing a really tough fiscal challenge. The recession will make it much, much, much more,” Mr. Rein said.

Budget experts anticipate city agencies will grapple with some of these cost-cutting demands by eliminating unfilled job openings. Many of those jobs are open because droves of people have been leaving city government, and the city has struggled to to replace them. Some of those experts argue that to demand cuts while expecting agencies to avoid service reductions is unrealistic, particularly since some programs, like the expansion of prekindergarten for 3-year-olds, are dependent on federal aid that is drying up.

Four agency leaders said this cost-cutting effort would mean eliminating jobs that need to be filled and would further exacerbate the city’s staffing problems and service delivery issues.

“It does affect service delivery in the city, certainly,” Mr. Parrott said. “It will affect the morale of city workers.”

By many accounts, morale and service delivery are already suffering.

As of this summer, the city government’s overall job vacancy rate was 7.9 percent — roughly five times higher than in recent years, according to the most recent data from the Citizens Budget Commission. Nearly 25 percent of jobs at the Buildings Department remain empty. The Parks Department has had trouble hiring entry-level staff, information technology workers and lifeguards.

A recent survey by the Managerial Employees Association found that more than 70 percent of members who responded said they had taken on more work thanks to colleagues leaving their agencies.

Opposition to the mayor’s cuts is growing.

Adrienne Adams, the speaker of the Council, recently described the administration’s decision to freeze hiring as part of its cost-cutting efforts as “counterproductive.”

Brad Lander, the New York City comptroller, agreed, and on Friday sent a letter to the budget director warning that “imposing a hiring freeze at this time could put at risk critical programs that New Yorkers rely on.”

When Mr. Adams, a former police officer, was running for election last year, he won support from several of the city’s most influential labor unions, which represent many Black and Latino New Yorkers. Mr. Adams is expected to seek their support again in his re-election campaign, for which he is already raising money.

While union leaders could theoretically hold off on contract negotiations until the economy improves and the city is in a better position to award raises, union members may be too restive to wait.

In an email to members on Tuesday, Michael Mulgrew, head of the United Federation of Teachers, indicated as much.

“We plan to move as aggressively as possible to reach a deal given how inflation has raised the cost of living over the past year,” he said.

Henry Garrido, executive director of the city’s largest municipal union, District Council 37, has adopted a similar stance.

“We ask the mayor to stop making the mistakes of the past by cutting vital services, and urge him to come to the table to negotiate in good faith,” he said in a statement issued last week.

Mr. Garrido said in an interview that the union’s top priorities would include higher wages and a policy that would allow employees to work from home where appropriate.

“We’re having a serious issue with recruitment and retention,” Mr. Garrido said. “We have a lot of competing organizations that are trying to recruit and retain our members, particularly in health care and information technology.”

At the moment there is only enough money set aside for 1.25 percent raises, a number that even the mayor acknowledges will not suffice.

“We’re clear, that this is a beginning not an ending,” Mr. Adams said earlier this month at a state Financial Control Board meeting. “However, while we are committed to paying fair wages, we will not make deals that the city cannot afford.”