New York State Budget Gap Falls From Nearly $39 Billion to $3.4 Billion

ALBANY—The State Fiscal Year 2021-22 Enacted Budget Financial Plan shows a remarkable improvement in the state’s financial condition as cumulative four-year budget gaps estimated at $38.7 billion just four months ago have been reduced to $3.4 billion, according to a report released on June 24 by State Comptroller Thomas P. DiNapoli.

The reduction was fueled by the receipt of substantial new resources, including $15.2 billion in federal assistance and $17.3 billion from tax and other policy actions, he noted.

“The state’s economic and fiscal outlook have improved,” DiNapoli said. “Local sales tax collections are up significantly, and our May Cash Report shows the state is $4 billion ahead of projections. It is essential that additional resources are used for critical infrastructure projects to reduce debt issued and to bolster reserve funds beyond planned levels to help us to weather the next crisis or recession.”

The SFY 2021-22 Enacted Budget Financial Plan released in May by the state Division of Budget (DOB) totals $208.9 billion, a 12 % increase over last year. The current year budget includes $16.4 billion in COVID-related spending (including aid enacted before SFY 2021-22), of which $13.2 billion is federally funded.

State-funded pandemic relief initiatives total $3.1 billion in the current fiscal year with little planned for subsequent years. However, significant new recurring spending commitments are planned in two key areas: education and Medicaid. General Fund spending in these areas is projected to increase by more than $15 billion over the Financial Plan period. Total school aid is projected to reach $31.4 billion in SFY 2024-25, an increase of $6.7 billion from the current year, reflecting average growth of 8.4 % annually. Medicaid spending will increase an average of 9.7 % annually over the Financial Plan to reach $21 billion in SFY 2024-25.

In contrast to these significant new investments, only $825 million in total deposits to the rainy-day fund reserves are planned in SFY 2021-22, bringing total rainy-day fund reserves to $3.3 billion, equal to just 3.7 % of forecasted General Fund SFY 2021-22 disbursements, or less than 14 days of average daily disbursements.

Risks

The report identifies several spending and revenue risks:

• The investments and programs established in the budget to support pandemic recovery for New York’s struggling individuals, families and businesses may result in pressure to continue spending at the elevated levels established in SFY 2021-22, without the benefit of the extraordinary federal aid that fueled current spending levels. On a combined basis, these recovery initiatives and temporary federal education resources total $6.5 billion of average annual spending, which could not be supported during the Financial Plan period absent the federal relief funds.

• High growth forecasts for education and Medicaid may not be supported by available revenues outside the Financial Plan period. In addition, there may be pressure to replace federal relief aid provided directly to school districts with state dollars when that aid is depleted. It is also unclear if cost and enrollment pressures will subside in the Medicaid program.

• Increased tax rates on high-income earners will make the state more reliant on personal income tax revenues and may make personal income tax revenues more volatile. The new top rates will be the third highest among states and highest in the nation when combined with the New York City personal income tax. If this spurs additional out-migration of high-income residents, it would result in less revenue.

Recommendations

State Comptroller DiNapoli issued the following recommendations:

• Boost the rainy-day fund reserves. The Financial Plan’s anticipated deposits to reserves would bring the new total to $3.3 billion —significantly lower than the $6.4 billion that is statutorily authorized. If collections remain above forecast and are not needed to cover unanticipated expenses, these additional revenues should be used to bolster the rainy-day fund reserves.

• Prudently and transparently use federal aid. federal funding should be spread out over the life of the Financial Plan to limit the risk of a “funding cliff,” and use of these temporary resources to support recurring spending should be avoided. In addition, transparent and timely detailed reporting of the use and administration of federal funds is necessary.

• Closely monitor personal income tax collections and taxpayer behavior. The high reliance on high-income earners, combined with volatility of capital gains and the possibility of taxpayer migration creates a risk that should be carefully monitored to ensure appropriate and timely responses to any shortfalls in PIT receipts.

• Restore prudent debt policies. For the second year in a row, new debt issuances were excluded from the provisions of the Debt Reform Act of 2000. With the state’s financial condition stabilized, policymakers should restore prudent debt policies, including the establishment of updated and binding limits on state debt. In addition, policymakers should replace some planned debt issuances with more “pay-as-you-go” funding to reduce long-term debt service obligations, including limiting debt uses to capital projects related to state assets. In the near term, if state tax receipts continue to surpass forecasts, a portion of the additional revenue could be used for that purpose.