{"id":752,"date":"2026-07-11T01:42:24","date_gmt":"2026-07-11T01:42:24","guid":{"rendered":"https:\/\/valutednews.com\/?p=752"},"modified":"2026-07-11T01:42:24","modified_gmt":"2026-07-11T01:42:24","slug":"the-case-against-hard-rules-for-city-reserve-funds-j-w-mason","status":"publish","type":"post","link":"https:\/\/valutednews.com\/?p=752","title":{"rendered":"The Case Against Hard Rules for City Reserve Funds \u2013 J. W. Mason"},"content":{"rendered":"
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The following is a somewhat expanded version of testimony I presented on June 23 before the New York City Commission on Government Efficiency.<\/em><\/p>\n

My name is Josh Mason. I am an associate professor and chair of the economics department at John Jay College, CUNY, and a senior fellow at the Groundwork Collaborative. It\u2019s a pleasure to address the Committee\u00a0 <\/span>on Government Efficiency, several of whose members I worked with back in my days as the Policy Director of the New York Working Families Party.<\/p>\n

I am here today to speak in opposition to any measure to create stricter rules for the use of City reserve funds, or to enshrine limits on reserve-fund withdrawals in the New York City Charter. I believe that the City needs greater short-term flexibility in budgeting, not less.<\/p>\n

Economics suggests two broad principles for thinking about the City budget position.\u00a0<\/span><\/p>\n

First, over the long run, growth city expenditure needs to match growth in revenue. Unlike the federal government, the city cannot run deficits indefinitely, nor can it use long-run debt to fund current expenditure.<\/p>\n

Second, over the short run, adjustments in response to unexpected shocks to revenue or program costs should fall on those areas of spending with the greatest intertemporal elasticity of substitution. In other words, when faced with a mismatch between current revenues and current expenditure, the adjustment required in order to bring them into balance should as much as possible fall on those budget items for which a dollar of spending next year is a close substitute for a dollar of spending this year.\u00a0<\/span><\/p>\n

The first of these principles, presumably, is accepted by everyone here. The second one is less familiar. But it is also implicitly accepted by everyone when it comes to periods of a year or less.<\/p>\n

New York City, like many governments has very large short-term fluctuations in revenue. Between quarters, the average change in tax receipts is 13 percent; the average change in total receipts is 10 percent. It is not unusual to see total City revenues fall by 10 percent from one quarter to the next, or to see tax revenues fall by as much as 15 percent over a quarter, as they did between the first and second quarters of this fiscal year. (See Figure 1.)<\/p>\n

<\/a>
Figure 1. Source: New York City Comptroller, New York City Quarterly Cash Report; and author\u2019s analysis<\/figcaption><\/figure>\n

No one believes that short-term variation in the timing of city receipts should lead to city departments cutting (or increasing) spending by 10 or 15 percent, simply because relatively little tax revenue comes in the second quarter compared with the first. Everyone, I think, agrees that these short-term fluctuations should be entirely absorbed on the city\u2019s balance sheet via short-term borrowing or changes in the city\u2019s cash holdings.\u00a0<\/span><\/p>\n

That is not controversial. But what I would add is that, economically, there is no sharp line separating periods of less than a year from periods of more than a year. The same logic that tells us that variations in revenue or program costs over the course of the year should be entirely absorbed on the balance sheet, suggests that variation over a period of few years should also be primarily absorbed in this way. \u00a0<\/span><\/p>\n

It is true that the timing of tax revenue means there are greater fluctuations in revenue from quarter to quarter than from year to year. But the city still faces substantial variation in revenue from year to year, much of which is temporary. In recent years, we\u2019ve seen city revenues increase by over 10 percent in some years, by as little as 1.5 percent in other years. It is far preferable to see spending rise steadily at the average rate of revenue growth, than to have big increases in spending in some years and cuts in real terms (which a 1.5 percent growth in spending would be) in other years, in an effort to achieve balance in each fiscal year. Variation in revenue from year to year is often temporary, and reverses the next year; and even if slower revenue growth turns out to be persistent, a gradual adjustment to the new situation is almost always preferable to an abrupt one.<\/p>\n

Again, this principle is well understood at the level of practical budgeting. That is the reason that the city has reserve funds in the first place. And it is why, historically, the city has often used surpluses to prepay future years\u2019 expenses rather to increase spending. <\/p>\n

The items in the city budget that are most intertemporally elastic \u2014 most substitutable between one year and the next \u2014 are fund contributions. A dollar contributed to the fund next year is almost as good as a dollar contributed this year. If we were to contribute nothing to a given fund this year, and double the contribution next year, the overall funding position would be almost the same. In general, if the total contributions over some period are unchanged, there is very little economic cost to shifting those contributions around in time.\u00a0<\/span><\/p>\n

This is much less true of other city expenditures. If we were to shutter the city\u2019s libraries this year, and double library spending next year, the overall value of library services provided to the public would be far less than with a stable level of spending. Additional hours of libraries open next year are a very poor substitute for hours the libraries are closed this year. The same goes for fire and police services, education, and most other public services.\u00a0<\/span><\/p>\n

In principle, capital expenditures are more substitutable \u2014 a major road improvement, say, is almost as valuable if it is carried next year as this year. But in practice, the process by which projects are approved makes them hard to shift around in time \u2014 a project that has passed all the necessary hurdles to go forward in one year cannot necessarily be deferred to a later year or advanced to an earlier one. So in practice, the least costly way to address unexpected changes in City revenues or program costs is via contributions to or withdrawals from the city\u2019s reserve funds \u2014 a category in which I would include the Retiree Health Benefit Trust and the Budget Stabilization Account as well as the Revenue Stabilization Fund and General Reserve.<\/p>\n

The proposals to mandate contributions to the reserve funds and limit withdrawals from them would reduce this flexibility, and create greater instability in other categories of city spending. Perversely, they would force the burden of adjustment onto budget items that have less intertemporal substitutability. This is the opposite of what we should be trying to achieve. The budget needs more short-term flexibility, not less.<\/p>\n

A number of these proposals involve formulas that are intended to allow flexibility when economic conditions warrant it, but not otherwise. For example, a recent proposal from the Comptroller\u2019s office suggests that except in the event of natural disasters or similar catastrophic events, withdrawals from reserves should be permitted only once there have been two quarters of declining employment in the city. <\/p>\n

Since the idea of tying withdrawals to economic conditions may seem appealing, I want to explain why it is not a workable solution in practice. There are four reasons, in my view, why hard rules based on economic data are not a practical solution.<\/p>\n

First (as the Comptroller\u2019s proposal acknowledges, but other similar proposals do not), reliable macroeconomic data is often unavailable in real time; most economic data is subject\u00a0 <\/span>to substantial revisions which can dramatically change the initial numbers.<\/p>\n

For local employment, the final data are not released until a full year after the period which it covers, and are often quite different from the initial data.\u00a0<\/span>For example, in 2025, the jobs data as initially released showed a respectable gain of 50,000 jobs over the year. But the numbers have been subsequently revised downward and the most recent numbers show no job growth over the year at all. (See figure 2.)<\/p>\n

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Figure 2. Source: Bureau of Labor Statistics, State and Metro Area Employment, Hours, and Earnings; and author\u2019s analysis<\/figcaption><\/figure>\n

This does not mean that we should not use the most current economic data, of course. But data whose final value is not available until a year after the fact, and where the initial release may be very different from the revised value, needs to be used cautiously and weighed alongside other evidence on the state of the economy. It is not a suitable basis for imposing hard rules on the city budget.\u00a0<\/span><\/p>\n

Second, while national economic data is available sooner than for local areas, these are also unsuitable for budget rules, since business cycle dynamics in New York City can be quite different from national dynamics. For example, the 1990 recession was quite mild at the national level \u2014 employment fell by only about 1 percent and had fully recovered within two years of the end of the recession. But in New York, it was much more severe, with fully 10 percent of jobs lost and employment not returning to pre-recession levels until a decade later. This was also the case for the 2000 recession. The 2007-2009 recession, on the other hand, was milder in New York City, with employment returning to pre-recession levels two years after the recession ended, compared with five years nationally. So a rule based on national economic data may be a poor fit for local conditions.<\/p>\n

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Figure 3. Source: Federal Reserve Bank of St. Louis<\/figcaption><\/figure>\n

A rule based on recessions, which has also been suggested as a trigger for drawing down reserve funds, combines both of these problems. The National Bureau for Economic Research often does not announce recession turning points until a year or more after the fact, and the timing of downturns may be significantly different at the local and national levels.\u00a0<\/span><\/p>\n

Third, even if we had reliable data, economic indicators do not move in sync, and it is not always obvious which is the appropriate one to use.<\/p>\n

For New York City, as for most local governments, the single most important source of revenue is the property tax,\u00a0 <\/span>which in recent years accounts for between 40 and 50 percent of all City tax revenue. Property tax receipts depend on property values, and these can move quite differently from employment or output. For example, while the 2007-2009 recession was, as noted, fairly mild in New York in terms of employment, home prices saw a steep and lasting fall \u2014 average New York home prices were lower in 2017 than they had been a decade earlier in 2007. (See Figure 3.) Given the city\u2019s reliance on property taxes, this is arguably more important than employment conditions. A rule based on employment would not necessarily give a good sense of the economic conditions that are most relevant for the city budget position.<\/p>\n

Finally, in practice, data-based rules create arbitrary cutoffs and thresholds. The nature of rules is to impose hard binaries \u2014 either withdrawals from the reserve funds are permitted or they are not. But in practice, economic conditions may be quite similar in periods when the threshold is not quite reached as in periods when it is, and whatever indicator is used as the basis of a rule will, in reality, only be one of many pieces of information relevant to economic and budget conditions. Policymakers in the moment can weigh various considerations to decide whether it is appropriate to draw down or to add to reserves; a predefined rule does not allow this flexibility.<\/p>\n

More generally, advocates of rules for city reserve funds need to grapple with the full implications of such rules. The city will, inevitably, face unforeseen changes in its revenues and in the cost of the services it provides. The impact of these changes must be absorbed somewhere in the budget. Given the city\u2019s limited ability to control its revenue, especially in the short run, shocks that are not absorbed in the balance sheet will in general, be absorbed by changes to the level of city services provided.\u00a0 <\/span>Ensuring a steady rate of contributions to the employee retiree health benefit fund sounds like a good thing, in isolation. But, obviously, stable contributions to the fund do nothing to reduce instability in city revenues or program costs. So a rule imposing a more stable path of contributions to the fund necessarily imposes more instability<\/i> elsewhere in the city\u2019s budget. And cutbacks to funding for the school system, or for public safety, will have persistent costs that cannot be made good in future years in the way that a shortfall in fund contributions can be.<\/p>\n

A myopic focus on stabilizing contributions to city trust funds (which is of course desirable in isolation) can blind us to the very large costs of instability in the provision of public services. It is certainly true that the City, unlike the federal government and even more than the State, is constrained in its ability to issue debt, and cannot fund ongoing deficits through new borrowing. Nor, of course, can the city\u2019s financial assets be spent down indefinitely. In this sense, it is absolutely correct that public expenditures must be managed so as to keep them in line with revenue growth over time. It is unfortunate, however, that the idea of responsibility has been narrowed to mean only a focus only on financial outcomes, and not on the no less critical responsibility for consistent provision of the public services that New York\u2019s residents and businesses depend on.<\/p>\n

Even short-term reductions in the provision of education, public safety, transportation, health and other services can have lasting effects. Among other things, public services are directly relevant to decisions by both families and businesses about whether to move to, or remain in, the City, and thus have important consequences for the City\u2019s future tax base. When faced with a tradeoff between consistent contribution to city reserve funds and consistent provision of public services, the former has no better a priori<\/i> claim to be considered the \u201cresponsible\u201d course than the latter.<\/p>\n

A related mistake, in my view, is the idea that policymakers will systematically err on the side of overspending unless restrained by hard budgetary rules. Both common sense and history suggest that while this sort of error certainly occurs, there is no reason to think it is any more common than the opposite error, of excessive resort to spending cuts to close budget gaps and insufficient use of balance-sheet flexibility.<\/p>\n

There is no reason to assume policymakers will systematically err on the side of irresponsibly drawing down reserves; it is just as plausible that they will underutilize them. This is clearly the case at the state level, where the State made no drawdowns\u00a0 <\/span>from the Tax Stabilization Fund or Rainy Day Reserve Fund in either the 2000 or 2007-2009 recessions despite substantial falls in tax revenue, instead resorting to other, more costly measures to close the state budget gap. In general, there is no reason to think that today\u2019s policymakers, who would impose this rule, are any more likely to strike the right balance between the balance-sheet position and public service provision than the future policymakers who would be bound by it. The one thing we know for sure is that future policymakers will be better informed about future economic and budget conditions than we are today.<\/p>\n

To be clear, I think the existence of city reserve funds is a very good thing. Given the constraints on city borrowing, adequate reserve funds are essential to maintaining stable provision of city services in the face of unexpected shocks.\u00a0 <\/span>It is appropriate for the City to contribute more to these funds in years when revenues are usually high, while drawing them down in years when revenue growth is weaker. And it may well be that the ideal funding of city reserves is greater than it has been historically.<\/p>\n

There is nothing wrong with thinking about guidelines or targets for reserve funds. What I urge you to reject, however, is enshrining a hard limit on the use of reserves in the City Charter. The goal of maintaining reserves should be to provide future administrations with greater flexibility, not less, in responding to future challenges.<\/p>\n

No use was made of \u201cAI\u201d in preparing this post<\/em>.<\/p>\n

\u00a0<\/p>\n<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"

The following is a somewhat expanded version of testimony I presented on June 23 before the New York City Commission on Government Efficiency. My name is Josh Mason. I am an associate professor and chair of the economics department at John Jay College, CUNY, and a senior fellow at the Groundwork Collaborative. It\u2019s a pleasure…<\/p>\n","protected":false},"author":1,"featured_media":753,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/i0.wp.com\/jwmason.org\/wp-content\/uploads\/2026\/07\/revenues.png?resize=640%2C480","fifu_image_alt":"","footnotes":""},"categories":[19],"tags":[1403,1118,1264,1579,213,1580,1564],"class_list":["post-752","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","tag-case","tag-city","tag-funds","tag-hard","tag-mason","tag-reserve","tag-rules"],"_links":{"self":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts\/752","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=752"}],"version-history":[{"count":0,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts\/752\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/media\/753"}],"wp:attachment":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=752"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=752"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=752"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}