New York State continues to mount a steady recovery from the depths of the pandemic’s devastation, regaining 50% of the jobs lost and surpassing financial plan expectations for state revenues by $5.2 billion through July. New Gov. Kathy Hochul and state leaders should think strategically about how to use this "surplus" – by dedicating it to rainy day fund reserves and using it to pay for critical infrastructure projects.
In April, state leaders enacted the largest budget in New York history, more than $208 billion. The spending plan benefited from the economic rebound, new tax increases and a historic amount of federal aid that virtually eliminated budget gaps for fiscal years 2022 and 2023 and reduced out-year gaps to a combined $3.4 billion.
But the financial plan is not without risk. COVID-19 cases are rising again. A slowing recovery or a second economic downturn will upend revenue forecasts, and may create additional spending pressures to extend or enhance programs currently funded federally or intended to be temporary.
Personal income taxes levied on high earners will increase the reliance on this group. The top 1% of taxpayers pay an average of 40% of New York’s personal income tax liability; since high earners rely more extensively on capital gains, the change could make state revenues more volatile. What’s more, the tax increases may create a new out-migration pattern among high-income taxpayers, particularly in New York City, which has the highest combined state and local personal income tax rate in the country.
Finally, statutory debt limits were bypassed; more than $45 billion in debt issuance is now planned through fiscal year 2026. This debt will quickly exceed the statutory cap, adding significant debt service costs to future budgets.
Our state has a tremendous opportunity presented by federal relief and new resources to ensure both an equitable recovery and a stronger long-term fiscal position. To do so, policymakers should take several steps.
First, prudently and transparently use federal recovery aid. Current plans are to spread relief aid over the next four years; this multi-year use should be maintained. Most federal aid will be used to reimburse COVID-related costs and to provide temporary assistance to New Yorkers who need it; these funds should be disbursed swiftly. Federal aid should not be used to support recurring spending, which may put spending on an unsustainable trajectory.
Second, commit to further strengthening rainy day reserve funds. Increases to reserves have been minimal compared to significant increases in spending. The state plans to deposit $825 million to rainy day reserves this year; while this is positive, state reserves will total $3.3 billion – significantly less than the $6.4 billion statutorily authorized and less than 4% of general fund spending, or less than 14 days of average daily disbursements.
Third, carefully consider strategic infrastructure priorities. While New York has significant capital needs, the state capital plan is not clear about which investments are most important to improve service, enhance economic growth, or address repair needs. Debt should only be issued for state capital assets and for the most essential investments.
To the extent the state's "surplus" funds are not needed to cover unanticipated expenses, these revenues should be deposited to the rainy day fund or a similar reserve, or used as "pay-as-you-go" funding for capital projects in order to limit debt issuance.
These steps will help ensure the state limits the financial impact of future risks and is able to sustain investments through downturns, disasters, and other emergencies.
Newsday published an op-ed from New York State Comptroller Thomas P. DiNapoli today urging New York's leaders to take steps that can help protect and strengthen the state's finances.
