Overview

S&P Global Ratings expects stability in New York State local government (LG) credit quality, given the portfolio's demonstrated revenue, expenditure flexibility, and reserve growth. We anticipate that built-up reserve positions for LGs will help mitigate current and future economic headwinds. Currently, sales tax revenue growth lagged previous years, with several counties trailing previous years' growth levels. Despite slowing sales tax collections, significant expenditure savings, growing property tax revenue, and strong investment income revenue underpin strong operating performances.

The potential for a broader economic slowdown in the upcoming year could temper LGs' operating performances. LGs that depend heavily on economically sensitive revenue with limited expenditure flexibility are the most exposed to downward pressure. Federal funding is not a significant portion of revenue for New York LGs, although any unknown impacts of tariffs and rising energy and capital costs, coupled with reductions in grant funding will pressure LGs, especially those with limited operational and revenue-raising flexibility.

S&P Global Ratings maintains ratings on 252 LGs: 221 municipalities and 31 counties. Throughout 2024, overall credit quality has remained stable, with 207 ratings assigned stable outlooks, three with positive outlooks, and 11 exhibiting negative outlooks or being on CreditWatch negative.

During this time, we upgraded several counties and local governments due to strong reserve growth and positive economic momentum. Negative rating actions have primarily stemmed from deteriorating financial positions, often linked to reserve draws. Following the implementation of our new criteria, "Methodology For Rating U.S. Governments," published Sept. 9, 2024, on RatingsDirect, negative rating actions have been associated with LGs with small populations and nominally low reserves. Conversely, positive rating movement has reflected strong reserve and liquidity balances and robust local economies, supported by formalized policies and practices.

What We Are Watching In 2025 And Beyond

Economic development is expected to continue, albeit at a slower pace than previous years

New York State's economy remains one of the strongest among states. However the possibility of an economic contraction and any potential negative variances in tax revenue, exacerbated by the state's reliance on capital gains and its exposure to changes in the financial service sector, may weaken the already anticipated slow economic growth that trails peers. Additionally, U.S. federal policy implementation on trade and tariffs, immigration, and the administration of federal funding to states could pressure New York in particular. Despite these possible pressures, the state continues to invest in various economic development projects and incubators throughout the state to ensure future growth. Notably, it continues to focus on investments in the semiconductor and renewable energy space such as Micron in Onondaga County, in addition to various projects all over New York. The governor has proposed another round of grants ($100 million) for its FAST NY shovel ready program to develop sites throughout the state for large employers. Overall, we believe ongoing economic growth will underpin key revenue sources, such as property and sales taxes, for most New York LGs.

Revenue-raising flexibility remains somewhat constrained and pressured by growing expenditures

New York LGs remain constrained by the state's 2% levy increase cap, which can be overridden with a 60% vote of its governing body, which, depending on each municipality, may be politically untenable. That said, given still-somewhat elevated inflation and pressure from collective bargaining agreements, their budgets could be squeezed further. Increases in salaries and benefits and the cessation of American Rescue Plan funding have several local governments exceeding the tax cap and raising taxes north of 4% to ensure fiscal stability. In addition, in the fiscal 2026 budget, the governor proposed keeping AIM funding flat with minimal increases in CHIPS funding, which could stress budgets even more. The governor's executive budget contains increased support, especially to counties, for initiatives around public safety, infrastructure, government consolidation, and antipoverty.

Spotlight On Environmental, Social, And Governance Factors

Several New York LGs have coastal exposure, particularly New York City and municipalities on Long Island, and inland flooding is common, notably in the Southern Tier and Mohawk Valley along flood plains. To address these issues, many LGs are making infrastructure improvements, such as stormwater management upgrades. The state continues to support various efforts for climate change mitigation. Investments in reductions in carbon emissions at state facilities, additional funding for coastal resiliency programs, and increasing grant funding for flood control infrastructure projects underpin the state's ongoing support to mitigate the effects of physical risks. We view these efforts positively but note the long-term risks the environment and location pose.

We consider governance factors for New York LGs neutral, based on offsetting supportive and challenging operating aspects. All New York municipalities and school districts are subject to oversight through the state comptroller's fiscal stress monitoring system, an early warning system that allows officials and taxpayers to be proactive in communities and school districts under financial stress. The 2026 state budget continues investment in the Cyber Risk Remediation Program and builds on efforts and initiatives out of the New York Security Office. We expect this continued investment will help LGs build a baseline defense against this evolving risk. OPEB liabilities continue to pose a challenge to municipalities, and we expect they will rise unless significant changes are made to state statutes.

We view social capital risks as neutral overall. Many LGs are facing demographic pressures while others face affordability problems. In addition, an aging and shrinking workforce, coupled with recruiting difficulties, has led to staffing shortages and human capital challenges. To alleviate these pressures, LGs continue to find ways to retain workers, such as offering incentive pay and higher salaries. We note the governor has launched various housing initiatives throughout the state to grow workforces and improve affordable housing. Furthermore, the budget calls for a new $50 million round of capital grants for "Resilient and Ready," which supports homeowners affected by extreme weather events.

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