As revenues rise amid a cautious optimism, New York State is planning to bulk up its budget reserves to defend against future economic downturns.
Gov. Kathy Hochul on Tuesday unveiled the $216.3 billion fiscal 2023 executive budget that includes new spending and programs, but no new taxes, while raising the reserve level to 15%.
The budget proposal reflects the state’s improving financial position, due in part to aid from the federal government. The budget is balanced, has no gaps and holds spending growth below the inflation level.
“We have the means to immediately respond to the COVID-19 pandemic as well as embrace this once-in-a-generation opportunity for the future with a historic level of funding that is both socially responsible and fiscally prudent,” said Hochul, who had given a
Division of the Budget Director Robert F. Mujica went into the weeds at a special briefing after the presentation by the governor and
He noted, in January 2021 the state was facing a $39 billion shortfall over a four-year period due to the COVID-19 pandemic. The effects of the pandemic have now lessened, he said, and state revenues are recovering at a faster-than-expected pace as billions of dollars of federal aid helped put the state on stable financial footing.
The state decided to raise the level of reserves to be better prepared for future risks, he said.
"When the pandemic hit, we didn't have enough reserves to make it through," Mujica said at the briefing, "If it wasn't for the federal funds we would have had to make reductions of up to 20% last year — but once we got the federal funds we were able to remove those cuts [from last year's executive budget]."
If the state had had enough reserves last year, he said, it would not have needed to rely on Washington for aid.
“Never again will the state find itself unprepared for the opportunities — or challenges — ahead," Mujica said.
The budget uses $81 billion in federal funds, mostly for Medicaid and other health programs and K-12 schools, welfare, child care, homeland security and transportation programs getting up the rest.
The executive budget includes:
- A $32.8 billion DOT capital plan that uses federal funding for infrastructure projects;
- A $4 billion environmental bond act for clean water, clean air and green jobs
- A $500 million investment for offshore wind;
- $10 billion to rebuild healthcare workforce and build healthcare system of the future;
- $31 billion to strengthen teacher workforce and invest in schools;
- $900 million in grants to cover operational costs for 15,000 childcare providers;
- $1 billion to fund small businesses tax credits for COVID-related expenses;
- $1.5 billion for SUNY and CUNY over next five years and expands TAP eligibility;
- A new five-year $25 billion comprehensive housing plan;
- $224 million to fund gun violence initiatives; and
- Tax relief for small businesses and the middle class.
“The goal of having 15% of the state’s operating expenses in reserves is laudable given New York’s relatively low rainy day fund levels compared to many states,” Howard Cure, director of municipal bond research at Evercore Wealth Management LLC, told The Bond Buyer.
“Like many states, it is very helpful to have both additional federal monies as well as revenues exceeding projections,” he said. “Thus, a significant increase in the budget as well as a one-time property tax rebates. This is also worth noting since it is an election year when no governor wants to implement an austerity budget.”
Cure will be watching how the budget negotiation process works this year.
“While we have an outline of the budget from the governor, I am still waiting to see how assertive the legislature will be in getting any additional monies for expanded or new programs,” Cure said. “This is the governor’s first time dealing with the legislature and the Democrats' supermajority, so we will be following the negotiations closely. We will look to see what are one-time expenditures versus imbedded programs that require continuing appropriations.”
One new program area specifically to watch, due to its cost, was assistance to undocumented New Yorkers, he said.
"The state budget is still very reliant on high-taxed earners which includes the strong stock market. There was no mention of rolling back the tax increases on high earners that were recently implemented when a much narrower budget was contemplated," Cure said.
"Besides the risks of a weaker equity market, we still are not sure of the impact on the N.Y.
The Citizens Budget Commission noted the budget came in balanced during these uncertain economic times.
“It is unprecedented excellent news that the financial plan is balanced through the whole financial plan period, and prudent choices were made to fund some non-recurring relief, recovery, and capital programs,” CBC President Andrew Rein said in a statement.
However, the state would be better served by taking steps to restrain recurring spending, he said, to ensure programs are targeted and managed for results, and to start to roll back last year’s tax increases that made New York’s combined business and top personal income tax rates the highest in the nation.
“As strong as the receipts and federal aid are, this year’s budget negotiations risk a feeding frenzy that could destabilize the state’s future finances,” Rein said.
While the budget includes deposits into reserve funds, eventually totaling 15% of state operating funds, CBC believes this is not enough.
“This is very prudent since these funds critically help prepare for the inevitable next recession or emergency,” Rein said. “However, the total should be at least 17% of state operating funds, a commonly accepted national benchmark, which would require another $2.5 billion be added over time.”
The executive budget includes $4 billion for the Clean Water, Clean Air and Green Jobs Environmental Bond Act, which residents will vote on in November.
The bond referendum provides funds to restore environmental habitats, reduce flood risks, conserve additional lands and open spaces, protect and improve water resources and invest in climate change mitigation projects.
The bond act would also support investment in the Clean Green Schools initiative, which aims to reach public schools in disadvantaged communities.
The budget also includes a $500 million investment to develop offshore wind supply chains and port infrastructure, which is expected to create 2,000 jobs.
The five-year $32.8 billion Department of Transportation capital plan will leverage federal funds from the Infrastructure Investment and Jobs Act to support the final phases of several major infrastructure projects.
It will increase the existing BRIDGE-NY program by $1 billion, add a new $1 billion Operation Pave Our Potholes program and continues funding for local highway and bridge programs through the Consolidated Highway Improvement Program (CHIPS).
“It is notable that Gov. Hochul appears to be proceeding on the assumption that she'll formally approve congestion pricing at the end of this year,” said Nicole Gelinas, senior fellow at the Manhattan Institute. “In that light, the governor should push the MTA to appoint the members of the traffic mobility board, which is supposed to determine critical issues such as prices, times of day, and exemptions, as soon as possible, so that New Yorkers can learn as early as possible how this program will work.”
The budget also accelerates the implementation of a middle-class personal income tax cut that would affect 6.1 million residents. The eight-year phase-in of the cuts began in tax filing year 2018 and is scheduled to be completed in 2025. Under the proposed budget, this would accelerate this to be fully implemented for the 2023 tax year.
The state's general obligation bonds are rated Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency. New York ranked third in the nation in bond issuance last year. State, city, county and related agencies sold over $48.21 billion of debt in 2021.
State, city and county officials were looking carefully at what the budget included.
“State
“Our spending priorities for the coming years must guarantee that inclusive recovery. I’m glad to see investments in our essential healthcare workforce and clean energy. And I support Gov. Hochul’s plans to build up state reserves,” New York City Comptroller Brad Lander said in a statement.
Local governments would benefit by a partnership with the state, Westchester County Executive George Latimer said.
“Gov. Kathy Hochul has shown leadership in this proposed budget, addressing the urgent need for affordable childcare, funding important transportation projects and road improvements and providing support for needed environmental projects,” Latimer said.
Cure said the budget was very generous with local school aid.
"In the short-term, we will be seeing the impact on local school property taxes, how these additional monies are allocated formulaically and how, in the longer term, school districts respond if aid is reduced," he said.
Fitch Ratings said in a report released Tuesday that federal aid was critical to helping states recover faster.
“Initial allocations of the $350 billion in direct aid available via the Coronavirus State and Local Fiscal Recovery Funds to state and local governments under the American Rescue Plan Act reflect the law’s wide discretion and governments’ generally robust ability to manage budgets,” Fitch said.
“Many state and local governments are adjusting budgets to minimize potential credit risks of relying on one-time federal aid for operating support,” Fitch said. “Additionally, the majority of SLFRF remains unspent, providing governments with an important fiscal cushion.”
