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Despite the state’s economic recovery since the pandemic first hit three years ago, significant headwinds will present challenges to ongoing economic growth and fiscal stability. The state faces prolonged inflation, rising federal interest rates and the end of federal relief aid that was instrumental in balancing the past two budgets, according to a report by State Comptroller Thomas P. DiNapoli on the State Fiscal Year (SFY) 2023-24 Executive Budget.
The Executive Budget proposes $227 billion in All Funds spending in SFY 2023-24, an increase of $5.4 billion, or 2.5%, from the prior year. The Division of the Budget (DOB) projects outyear gaps of $5.7 billion in SFY 2024-25, $9 billion in SFY 2025-26, and $7.5 billion in SFY 2026-27. The gaps result from reduced estimates of tax collections due to a forecasted economic downturn and increases in recurring spending, principally in school aid and Medicaid.
“With economic risks and the impending loss of federal financial assistance ahead, now is the time for New York to carefully prepare for the short- and long-term,” DiNapoli said. “The budget proposals to increase state reserves and strengthen the state’s rainy-day reserves should be supported. At the same time, there are several concerning proposals that exempt approximately $12.8 billion from competitive bidding and oversight requirements, leaving too much in the dark. The budget also advances debt proposals that reinforce concerns about the affordability of debt levels and the transparency and accountability of current debt practices. I urge lawmakers to reject these proposals.”
DiNapoli’s assessment of the Executive Budget identified several economic, revenue and spending risks and other concerns.
Economic and Revenue Risks
Risks associated with the economic environment include continued inflation, the impact of interest rate hikes and disruptions related to Russia’s invasion of Ukraine. Increased interest rates by the Federal Reserve have resulted in increased borrowing costs for consumers and businesses. With inflation expected to remain elevated and additional rate hikes expected in 2023, consumer and business spending could be further constrained.
With the Executive Budget Financial Plan forecasting a recession, DOB reduced its projections of tax revenues for the upcoming fiscal year by $2.1 billion and a total of $10.3 billion over the life of the Plan. Should a recession be more severe or be longer in duration, revenues could decline more than currently forecasted. The changes in the labor market are also a risk to the state economy. New York’s job recovery from the pandemic has lagged the nation’s, there are fewer workers in the labor force and the labor force participation rate is among the lowest in the nation.
Structural Balance and Use of Federal Funds
State budgets often include provisions that cause recurring spending to grow more quickly than recurring revenue, creating a structural imbalance and budget gaps. Such gaps are often closed with short-term solutions. The Executive Budget includes $14.9 billion in SFY 2023-24 resources that DiNapoli’s office identifies as either temporary (more than one year but not permanent) or non-recurring (one year). About 98% of that funding results from temporary federal assistance related to the pandemic (69%) and tax increases enacted in SFY 2021-22 (28%).
The American Rescue Plan provided the state with $12.7 billion of funding from the State and Local Fiscal Recovery program that could be used for a broad range of purposes, including replacement of lost tax revenue due to the pandemic. The Financial Plan continues to assume these funds will be used through SFY 2024-25, including $2.25 billion in SFY 2023-24 and $3.64 billion in SFY 2024-25. Little information is available to determine whether the funding has been used equitably, efficiently and with the proper balancing of short-term need with long-term sustainability. Increased transparency on the planned use of the funds is needed.
There are also significant spending risks. In June 2023, the state will begin redetermining eligibility for all enrollees in Medicaid, the Essential Plan and Child Health Plus programs that are projected to reduce coverage by 10.3% to 8.3 million individuals by April 2024. In the Medicaid program, the Financial Plan projects a decline of almost 888,000 individuals in a single year. If enrollment exceeds current projections, significant unbudgeted costs will occur. For example, if only half of the assumed decline is realized, there could be an additional $6.2 billion in total costs, including $2.2 billion in state costs in SFY 2023-24.
For years, DiNapoli has warned of the state’s underfunding of its statutory rainy-day reserves. The Executive Budget proposal increases the balance of statutory rainy-day reserves to $6.5 billion at the end of the current fiscal year and includes legislation to further increase the maximum annual deposits to 10% of State Operating Funds (SOF) spending and the maximum fund balance to up to 20% of SOF spending. If enacted, these measures would provide tools to manage economic or other challenges ahead and ensure fiscal stability. DiNapoli urges lawmakers to support these actions.
The Financial Plan also indicates unrestricted fund balances designated for “economic uncertainties” would grow to $13.5 billion at the end of the fiscal year. DiNapoli urges greater priority should be placed on building statutory rainy-day reserves rather than relying on informal, unrestricted reserves.
The Executive Budget proposes to continue circumventing the state’s debt cap by utilizing a loophole in the Debt Reform Act for structuring the Gateway Plan debt. The Executive Budget would further reduce transparency and accountability by classifying the Gateway loan in a manner that is inconsistent with past practice and fails the most basic standards of transparency by continuing to not count this debt in projections of any debt outstanding. These actions result in a misleading picture of the size of the state’s debt burden.
The Executive Budget again proposes “backdoor borrowing” authorizations for up to $5 billion in short-term cash flow borrowings during SFY 2023-24 that are redundant to the existing ability to issue more cost-effective Tax and Revenue Anticipation Notes (TRANs). Given the state’s current strong cash balances, it is unclear why this more costly form of borrowing is proposed.
Collectively, these and other actions in recent budgets have rendered the state’s current debt limits functionally meaningless. DiNapoli recently issued a report highlighting how caps and other debt restrictions set in statute have not worked to rein in state debt or stop inappropriate borrowing practices, and recommended several reform measures to address these problems.
The SFY 2023-24 Executive Budget continues a problematic pattern from past budgets that include eliminating the Comptroller’s contract pre-review oversight and waiving competitive bidding requirements for certain contracts, including the proposal related to selection of certain Managed Long Term Care plans. In addition, the budget includes an appropriation that would unduly and inappropriately impair the Office of the State Comptroller’s duty to conduct independent audits of the New York State Health Insurance Program.
This report details provisions of the SFY 2023-24 Executive Budget proposal submitted on February 1. The report does not reflect 30-day amendments released on March 3 or the amended Financial Plan released on March 8