New York State's (AA+/Stable) fiscal 2021 enacted budget financial plan presents a $13.3 billion gap for the year and a cumulative $58.3 billion loss in state operating fund tax receipts over the next four years. As effects of the COVID-19 induced recession mount, S&P Global Ratings expects the state to face a difficult, but not unmanageable, operating environment for the foreseeable future. In essence, current estimates reverse five years of increased tax receipts back to a level last seen in fiscal 2016.

We view New York's enacted budget financial plan as reasonably achievable and consider its revenue forecasts consistent with S&P Global Economics' view of the U.S. downturn. The ability to reduce expenditures to achieve structural balance, maintain reserves, and manage liquidity is consistent with our view of the state's overall credit quality. However, the financial plan is not without risk. Changing economic and political conditions--particularly at the national level--beyond the state's control may upend its ability to maintain structural balance.

During periods of crisis, we have observed a strong track record of fiscal resilience by the state and consider New York's government framework among the strongest of all U.S. states. Nonetheless, Albany's already strong budgetary management tools were further expanded this year to address revenue shortfalls. Mechanisms within the budget and existing statutes should allow the state to manage risks from federal uncertainties by allowing adjustments to disbursements in nearly all areas.

Economic Forecast Shows Significant Revenue Declines While New York Maintains Reserve Balances

Outyear gaps have substantially increased (see chart 1) since January. The identified fiscal 2021 general fund gap is 14% of state operating fund receipts, increasing to an average 19.4% annually through fiscal 2024. In aggregate, the state has identified a $69.1 billion general fund budget gap over the four years of the financial plan absent any mitigation efforts.

Chart 1

In the span of two months, the economic effects of COVID-19 have reduced New York's estimated state operating funds tax receipts by $12.4 billion or 14.1% for fiscal 2021. The revenue loss increases in the outyears, averaging $15.4 billion from fiscal years 2022 to 2024 (see chart 2). Compared to fiscal 2020 results, the receipts forecast estimates an 8.6% decline in personal income tax (PIT) receipts and a 14.1% drop in sales tax receipts.

Chart 2

The state's reliance on PIT revenue (65% of all state tax revenue) and financial services economic activity indicate a propensity for greater revenue volatility, primarily due to its linkages to equity markets via taxes on nonwage capital gains income (see "Market Volatility Has Varying Impact On U.S. States’ Capital Gains Tax Exposure," published March 10, 2020 on RatingsDirect). For tax year 2020 alone, the state estimates a 42% decline in capital gains income.

In our opinion, the state's economic forecast is consistent with S&P Global Economics' view (see "An Already Historic U.S. Downturn Now Looks Even Worse," published on April 16, 2020). The COVID-19 induced recession will have a material negative effect on the state's economy and finances. Despite the difficult budgetary environment, the state's budget maintains balance primarily through expenditure reductions.

The plan maintains reserve balances to help manage liquidity. At fiscal 2021 year-end, rainy day reserves are estimated at $2.5 billion while adding $80 million to the fund balance reserved for economic uncertainties, for a balance of $970 million. Including monetary settlements of $2.2 billion, the state's combined fund balances would total $5.6 billion at fiscal year-end; 7.6% of total estimated state tax receipts or 5.8% of estimated taxes and miscellaneous receipts. However, such maintenance of reserves may erode throughout the year depending on financial performance and if reserves are reduced to offset proposed expenditure cuts.

Financial Plan Balances Outyear Budget Gaps By Reducing Expenditures Absent Federal Aid

For fiscal 2021, the $13.3 billion gap is likely to be mitigated primarily through expenditure reductions absent any future federal aid. The expenditure cuts are concentrated ($8.2 billion) in a broad spending category known as "Aid to Localities." Reduction to local aid represents 62% of gap mitigation efforts (see chart 3).

Chart 3

Nearly every activity funded by state aid is expected to see reduced support, including direct municipal and school district aid, higher education, social services, transportation, and mass transit. In our opinion, the depth and breadth of potential expenditure cuts are likely to bring considerable stress to all of the state's political subdivisions and agencies. The state estimates maintaining $8 billion in additional cuts to localities in subsequent years of the financial plan.

The state budget is benefiting from enhanced federal reimbursement (eFMAP) of Medicaid expenditures and enacting recommendations of its Medicaid Redesign Team (MRT) totaling $2.2 billion. However, as the country enters a recession, Medicaid enrollment is likely to further erode the value of the increased federal reimbursement. There is a likelihood New York will exceed its self-imposed Medicaid spending cap of 3% in subsequent years as utilization increases and federal reimbursement declines, necessitating further changes to the state's Medicaid program.

Due to the expenditure cuts proposed, we expect there to be pressure on the state to use reserve balances to address revenue shortfalls. The state has not included any voluntary contributions from the New York Power Authority or reducing Metropolitan Transportation Authority subsidies as part of its financial plan, a gap-closing measure used during the last recession, but such subsidies may be reduced within the Aid to Localities budget. Additional clarity on reductions to various agencies is expected to come later this month.

Strategies To Manage Liquidity Are Consistent With New York State's Current Rating Level

One significant expansion of budgetary authority is authorization for the state to issue up to $8 billion in short-term notes and a $3 billion credit facility to manage liquidity. Similar to most states, New York has followed the federal government and delayed income tax filings for three months to July 15, requiring it to access external liquidity sources to manage liquidity. Revised cash-flow projections from January to April (see table) show a significant change in the timing of receipts, with April alone falling 81%. Declines in April collections include the updated economic forecast and delayed filing deadline. The state now projects the bulk of its tax receipts will occur in July.

Table 1

Of the $8 billion short-term borrowing authorized, the financial plan currently assumes a PIT note sale of $3 billion this fiscal year. The notes can be renewed once for up to a year, and, as a contingency option, may be refinanced on a long-term basis. Similar to the notes, the authorized line of credit may be refinanced twice for up to a year at each refinancing and may be taken out on a long-term basis. Of the $3 billion authorized, the financial plan currently assumes an estimated $1.5 billion in proceeds from a line of credit in June 2020.

S&P Global Ratings generally views the issuance of long-term debt to fund current-year revenue shortfalls as a form of deficit financing. Currently, the state intends to repay the notes and line of credit this fiscal year. Cash-flow projections include monthly set-asides for the repayment of notes, starting in July 2020 and full repayment of the line of credit in March 2021.

Budget Provisions Increase Debt Capacity To Allow Issuance During The Recession

Debt issued during the fiscal year--including notes, the line of credit, other authorized debt, and any renewals or long-term refinancing--is excluded from the state's debt limit (outstanding debt is limited to 4% of personal income). The result is a significant increase in New York's ability to borrow in the future. Estimates show approximately $9.3 billion of debt capacity in fiscal 2021 and $3.7 billion in fiscal 2022, compared to $963 million and $204 million in the governor's executive budget proposal. Absent the debt exclusion, the state would exceed its debt cap as personal income declines through the recession.

One area of risk around the note issuances is that the financial plan assumes interest expense on both the notes and the credit facility is an eligible expense for federal aid from the Coronavirus Relief Fund, as the financings are due solely to the federal decision to extend tax filing deadlines in response to the pandemic. We are unaware of guidance from the federal government surrounding these related costs and interest expense may ultimately be the responsibility of the state.

The budget also approves a $3 billion general obligation (GO) bond referendum (Restore Mother Nature Bond Act) for November 2020 that, if authorized, would fund resilience projects around the state. If any of the issuance occurs in fiscal 2021, it would be excluded from the state's debt limit.

Despite excluding new issuance from its cap, we consider New York State prudently and actively managing its debt portfolio for it to issue debt, if needed, during the pandemic.