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Why New York City Gave Up $3 Billion in 2016

New York City is the first major government this year to release what it gives up in economic development-related tax incentives to corporations, following new financial reporting requirements. In its annual financial report, the city disclosed that it waived more than $3 billion in potential tax revenue in 2016 alone, mostly in uncollected property taxes.

The tax abatements represent a little under 4 percent of the city’s nearly $80 billion in general fund revenue in fiscal 2016, which ended on June 30.

The most expensive abatement was for the commercial conversion program, which cost nearly $1.3 billion in forgone revenue last year. The program encourages new housing in the city by offering a property tax discount on new construction or on commercial space that was converted into residential housing. Developments have to meet certain requirements, like reserving one-fifth of the units for affordable housing.

The Takeaway: It’s commendable that the city is not only first with its assessment of its tax abatement program, but it also includes 2015’s data, which was not required by the new accounting rules. It allows for observers to start tracking trends sooner than previously thought.

The other notable detail from the annual financial report is that of the 11 city programs listed offering abatements, only two of them had any provisions for recapturing the abated taxes. The two programs, which both encourage commercial development, accounted for about $130 million in forgone revenue in 2016. That means that, for the remainder of the $3 billion in abatements, the government has no established means of ensuring the deal continues to be worth the cost. This is likely just the tip of the iceberg of tax giveaways in this country that have few strings attached.

Tax Revenue Is Weakening

Preliminary numbers show that state tax revenue is weaker this year than in 2015, particularly in sales and income tax returns. April income tax returns were down in 14 of the 17 states for which the Nelson A. Rockefeller Institute of Government has data. (April tends to be the bellwether month for the income tax as that’s when most returns are filed.)

Many states expected a drop but still ended up swallowing a bigger hit than anticipated. Mississippi, for example, expected its April income tax revenue would be down about 7 percent from April 2015. The actual revenue dropped by more than one-quarter.

Meanwhile, quarterly sales tax revenues are continuing a slide that began in early 2015. Of the 37 states with full data, total sales tax collections for June, July and August were down in 12 states compared with the total from last summer. While sales taxes from dining out was a “bright spot,” Rockefeller researcher Lucy Dadayan’s analysis said energy taxes and taxes related to car maintenance and sales dragged down the numbers.

The Takeaway: Rockefeller’s Director of Fiscal Studies Don Boyd, who recently presented the update to state budget officers, said low inflation and slow real growth will continue to weigh state finances down. He expects that states will have to adjust their revenue forecasts downward for fiscal 2017. It is “not an ebullient environment for revenue,” the report concluded.

Nixing Pensions Altogether

Jacksonville Mayor Lenny Curry is proposing eliminating pensions for new public employees as part of that city’s plan to get its pension system fully funded.

“Guaranteed pensions are not what a majority of the people of Jacksonville have,” Curry told the Jacksonville Supervisors Association, as reported by the Florida Times-Union this week. “Legacy pension plans are not sustainable and frankly they are dinosaurs.”

Curry’s proposal, which exempts public safety employees, is based off a recent voter referendum that approved a half-cent sales tax to pay down Jacksonville’s $2.85 billion pension debt. The referendum said that before the city can collect the tax, it has to close one of its three pension plans -- police and fire, general employees or corrections officers. New employees would instead have a 401(k)-style plan in which employees contribute 8 percent of their salaries and the city contributes a 10 percent match. The city's match would kick up to 12 percent after 15 years of employment.

The Takeaway: The general employees plan is made up of more than 10,000 workers and retirees and is by far the city’s most expensive plan. Since 2011, its costs have skyrocketed from less than 13 percent of payroll to nearly one-third. At the same time, the city has been unable to make its full pension payment to the plan, which tends to add to the debt total down the road.

Still, closing plans altogether do funny things to pension accounting: It actually costs the government more money in the short term. That’s because participants in the plan are only growing older because new, presumably younger, employees aren’t factoring into the plan’s demographic assumptions anymore. As a result, the plan’s investment portfolio grows more conservative over time, and the portfolio’s expected return declines. So the government’s payments into the plan would have to increase to make up for the eventual lower assumed rate of return.

Ultimately, the city gets more funding certainty under a 401(k) plan because it is only guaranteeing a matching payment while the worker is employed -- not a final pension payment three decades down the road for as long as the employee lives. Still, it’s important for all stakeholders to realize that closing a pension plan doesn’t provide immediate financial relief.

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*CORRECTION: A previous version of this misstated the date that New York City's fiscal year 2016 ended.