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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.
Reserve
Funds
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.
Debt
Practices
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.
Transparency
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
Report
New York State Fiscal Year 2022-23 Executive Budget
Review
Debt Report