As the State of New York (AA+/Negative) plans for fiscal 2022, it faces an uncertain economic recovery brought on by the pandemic that began nearly a year ago. The state's first confirmed COVID-19 case was reported on March 1, 2020, followed by the governor declaring a state of emergency less than a week later. Looking to recover from the social and economic consequences of the pandemic, the state faces multiple challenges to maintain structural balance.

S&P Global Ratings considers fiscal 2022 a bridge year for the state between the extreme uncertainty in fiscal 2021 and a potential return to social and economic normalcy in fiscal 2023. Decisions made to address this year's budget gap are likely to be consequential for the state's credit quality. In our opinion, the state has the budgetary management tools necessary to maintain structural balance, but practical and political limitations place its ability to do so at risk.

Proposed fiscal 2022 general fund disbursements total $74.7 billion, 3.5% less than those for fiscal 2021, while the total state operating funds budget remains flat at $102.2 billion. After accounting for an improved revenue forecast, the budget closes nearly half of its estimated $10.2 billion receipts shortfall with an expectation of new tax revenues and unrestricted federal aid. The state does not plan to use any of its rainy day or economic uncertainties reserves as part of its gap-mitigation plan, holding reserves flat at fiscal 2021 levels (approximately $4 billion, or 4.8% of proposed fiscal 2022 general fund disbursements).

Table 1

While early approval of several vaccines is a positive development, it is merely the first step. Equally critical is the widespread availability of effective immunization, which could come by mid-2021. Although signs of a recovery have begun to take hold across all states with the steadying of certain revenues, many headwinds will continue to bear down on near-term stability (see "Outlook For U.S. States: Symptoms Persist, But A Shot In The Arm Could Lead To Growth," published Jan. 5, 2021, on RatingsDirect).

Estimated General Fund Budget Gaps Exceed 10% Over The Financial Plan

Based on the updated financial plan released with the executive budget, S&P Global Ratings estimates New York State's general fund receipt shortfall at 6.4% in fiscal 2021 and 12.4% in fiscal 2022 before mitigation (see table 2). During the remaining fiscal years of the plan, we estimate the gap to be 12% or more. The state has outlined a number of proposals to mitigate its revenue shortfall, including raising new revenues, expenditure reductions, and using new federal resources.

Table 2

Unlike the 2021 enacted budget financial plan, the fiscal 2022 plan adds back approximately $8 billion in local assistance or aid-to-localities reductions. Through December 2020, withheld local aid payments are estimated to total $2.9 billion. However, increasing receipts and federal aid has reduced the need for these cuts and the Division of Budget expects to reduce most local aid payments by only 5% from the fiscal 2021 enacted budget estimate (rather than an anticipated 20%).

Improved Revenue Forecast Falls Short Of Balancing Budget

Since the midyear update, improved tax and other receipts reduced the fiscal 2022 gap by $6.5 billion (39%). The governor is also proposing to raise $2 billion in new income tax revenues per year that include:

• A temporary surcharge on taxable income above $5 million effective for tax years 2021 through 2023; and
• Pausing the phase-in of a middle-class tax cut, which began in 2018, by having the 2020 tax rates remain in effect for an additional year.

Chart 1

The improved revenue profile provides much-needed relief but is insufficient to address the state's budget gaps. Reductions in local aid spending are expected to provide savings of $2.2 billion in fiscal 2021 and $3.4 billion in fiscal 2022. School aid is the largest reduction, totaling $1.5 billion in 2022. However, the state's reduction to education aid mostly consists of cuts to its School Tax Relief (STAR) program and is offset by supplemental federal coronavirus relief aid. Further complicating the state's revenue receipts is a potential U.S. Supreme Court case that may direct remote worker income taxes to their state of residence from the physical location of their primary office (see "Massachusetts And New York State Could Lose Billions Of Income Tax Dollars If Lawsuit Challenging Remote Work Succeeds," Jan. 22, 2021).

In fiscal 2021, the state achieved $1.2 billion in Medicaid savings, primarily by reducing rates paid to managed and long-term care insurance carriers based on lower health care utilization. For fiscal 2022, approximately $599 million in savings is expected, mainly from across-the-board reductions and the use of available resources to support spending. Spending under the state's Medicaid Global Cap is expected to increase at the indexed rate. These savings are exclusive of federal support provided by the temporary enhanced Federal Matching Program (eFMAP). (For more information on how Medicaid affects states' budgets, see "Medicaid Diagnosis: U.S. States’ Growing Caseloads Come With Rising Costs," Dec. 8, 2020.)

Federal Support Increases Risks To Proposed Plan

The state benefited from $2.5 billion in Coronavirus Relief Funds (CRF) and $497 million from the eFMAP in fiscal 2021. For fiscal 2022, the financial plan assumes an additional $995 million in eFMAP funds based on an extension of the program through at least June 30, 2021. The savings is net of estimated increasing Medicaid enrollment and utilization. Further extensions of the eFMAP through the state's fiscal year will also provide additional budgetary relief.

Chart 2

Unlike the eFMAP already authorized, any unrestricted aid still needs Congressional approval. The financial plan assumes $3 billion of this type of aid in fiscal years 2022 and 2023. We view the inclusion of federal aid not yet approved as part of the financial plan as a significant risk to structural balance. If not authorized, the state will need to make further significant budgetary adjustments throughout the fiscal year.

For more detail on the project receipts shortfall and gap-mitigation measures, see the table in the appendix.

Proposal Extends Extraordinary Budget Authority Enacted Last Year

Recognizing the challenging fiscal environment and risk of depending on unrestricted federal aid, the budget proposal includes continuing extraordinary authority granted in fiscal 2021, summarized in table 3. Some expanded authority was never used, but nonetheless provides the state with contingencies to maintain balance as conditions change.

Table 3

This year, New York issued $4.5 billion of subordinated personal income tax (PIT) notes with the intent to repay them by fiscal year-end and entered into a credit commitment that was never used. Interest expense on the notes and the commitment fee on the credit facility are expected to be reimbursed with Federal aid provided by the CRF, as the financings are due solely to the Federal decision to extend tax filing deadlines in response to the pandemic. The line of credit was never drawn on.

We positively view continuing authority to make across-the-board expenditure cuts if federal aid is less than anticipated. However, we observed these expenditure cuts to be fraught with political uncertainty and most cuts were planned for the last quarter of the fiscal year. Continuing to prolong difficult budgetary decisions only exacerbates fiscal pressures that may result in structural imbalance.

Continued exclusion of debt issuances in fiscal 2022 from statutory limits and allowing maturities to exceed 30 years may negatively affect our view of the state's debt profile and management practices. While the state has some capacity to borrow under some of our debt metrics, its debt profile ranks among the 10 highest of all states in some categories (see "Moderating Debt Burdens Allow Some U.S. States Room To Borrow During A Recession," June 16, 2020).

Planned Debt Issuance May Pressure New York's Debt Profile

The state's Debt Reform Act applies to debt issued after April 1, 2000, and restricts the issuance of state-supported debt to funding capital purposes and limits the maximum term of bonds to 30 years. In addition, outstanding state-supported debt is limited to 4% of state personal income and new debt service costs to 5% of all funds' receipts. In our view, the Debt Reform Act serves as a guard against excessive debt issuance.

Proposed debt issues, coupled with weaker post-pandemic economic growth, have the potential to weaken our view of the state's debt profile. Possible state debt issuance in fiscal 2022 totals approximately $11.6 billion, or 57% higher than the $7.4 billion proposed in last year's enacted capital program and financing plan. The proposed capital program would more than double the amount of state debt excluded from the Reform Act to $23.9 billion in fiscal 2022. While not envisioned at this time, should the state borrow for annual operating expenses, it would likely negatively affect our view of its ability to achieve structural balance.

Chart 3

In the fiscal 2022 budget proposal, the state adds new bond-financed capital commitments of $2.7 billion over its five-year capital plan period. To help the Metropolitan Transportation Authority (MTA), it also proposes converting to bond financing its $10.3 billion contribution for the MTA's 2015-2019 and 2020-2024 capital plans that otherwise would have been made through additional local aid payments to the authority. In fiscal 2021, the state issued $2.8 billion of PIT bonds for MTA projects. For further savings, it is also proposing refunding bonds through either its PIT or sales tax security.

Federal stimulus was vital following the Great Recession to prevent steeper declines in capital spending (see "Infrastructure After COVID-19: Risk Of Another Lost Decade Of U.S. State Government Capital Investment," Oct. 29, 2020). An infrastructure package is expected to be proposed by the Biden Administration and any action at the Federal level may affect the state's future capital plans.

State's Economic Recovery Lags Nation's

According to the Division of Budget, New York lost 1.9 million private-sector jobs from March to April 2020 or 8.9% of the total number of private jobs lost nationwide. The state's unemployment rate peaked in July 2020 at 15.9%, while the country's rate gradually declined from a high of 14.7% in April. As of November 2020, the state's unemployment level was elevated at 8.4% compared with a national 6.7% rate.

The state's ability to quickly regain lost jobs was critical to its recovery following the Great Recession and allowed its economy to recover faster than the nation. Although several sectors are projected to see significant growth in 2021, employment in the leisure, hospitality, and other services sector is estimated by the state to be 18% below its 2019 level, even after growing nearly 15% in 2021. The only sector that is expected to surpass its 2019 level is the information sector, as firms like Google, Facebook, and Amazon expand their footprint in New York City.

Chart 4

A shift in work locations appears to be having an effect on regional recovery. Except for Buffalo, the areas that recovered the smallest percentage of their job losses are among the state's larger metropolitan statistical areas (MSAs). Data on jobs lost in March and April that have been regained as of November 2020 by major MSAs show New York City lagging while its closest suburbs--Long Island and the Orange-Rockland-Westchester area--are performing better.

Chart 5

Over the long term, any permanent changes in business, travel, or consumer patterns in and around New York City are likely to have a material effect on the state's economy. S&P Global Ratings is monitoring any changes in demographic patterns that may affect long-term credit quality, but only time will tell the extent to which office workers, tourists, and residents will return to the city.

Given the severity of the downturn, it will likely be years before the New York economy gets back to where it was before the pandemic hit. Real gross output in New York is expected to decline in 2020, worse than that of the nation, with much of the recovery expected in 2021 and beyond. In its most recent report, S&P Global Economics forecasts national real GDP will contract 3.9% this year and grow a modest 4.2% in 2021. Adding to the pain of the economic contraction is that the U.S. unemployment rate is unlikely to fall to its pre-crisis low until after 2023 (see, "Economic Research: Home for the Holidays," Dec. 2, 2020).

Appendix

Related Research

• Outlook For U.S. States: Symptoms Persist, But A Shot In The Arm Could Lead To Growth, Jan. 5, 2021
• Massachusetts And New York State Could Lose Billions Of Income Tax Dollars If Lawsuit Challenging Remote Work Succeeds, Jan. 22, 2021
• Medicaid Diagnosis: U.S. States’ Growing Caseloads Come With Rising Costs, Dec. 8, 2020
• Economic Research: Home for the Holidays, Dec. 2, 2020
• Infrastructure After COVID-19: Risk Of Another Lost Decade Of U.S. State Government Capital Investment, Oct. 29, 2020
• Moderating Debt Burdens Allow Some U.S. States Room To Borrow During A Recession, June 16, 2020