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DiNapoli: State's fiscal picture has improved, but impact of pandemic revenue losses will linger

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Tue, Mar 2nd 2021 01:55 pm

From the Office of New York State Comptroller Thomas P. DiNapoli:

New York State Comptroller Thomas P. DiNapoli recently said there are some positive developments for the state’s fiscal recovery from the pandemic, including higher-than-expected personal income tax collections and the prospect of significant aid from the federal government. However, risks remain and could threaten the state’s fragile improvement.

Comments were offered in his review of the executive budget for state fiscal year (SFY) 2021-22, as amended by the governor.

DiNapoli urged the governor and the Legislature to avoid shortsighted choices when adopting the new budget, to maintain transparency and include oversight measures. He recommended actions be taken to address the state’s long-term structural imbalance and put the state’s finances on a sustainable path once emergency federal aid ends.

“One year after the first case of COVID-19 was confirmed in New York, we continue to suffer unimaginable losses. Too many families have lost loved ones, huge numbers of New Yorkers have lost their jobs, and we are still dealing with the consequences of when our economy came to a standstill,” DiNapoli said. “There are signs our economy is rebounding and the federal government will soon provide aid to suffering New Yorkers and devastated communities. But this recovery is fragile, and I urge state leaders to consider the long-term impact of this year’s actions to avoid tougher choices later.”

DiNapoli released a preliminary analysis of the executive budget in January. His full analysis of the executive budget released this week – which includes a review of the governor’s 30-day amendments and the amended financial plan – found federal aid, better than expected tax receipts, and other actions are expected by the Division of the Budget (DOB) to produce surpluses of $1.6 billion in SFY 2020-21 and $676 million in SFY 2021-22. DOB plans to use this to prepay debt service payments for budget gap relief in subsequent years. After that, budget gaps are projected to grow from $902 million in SFY 2022-23 to $6.2 billion in SFY 2024-25.

Federal Aid

While additional federal aid for states is being debated by Congress, New York is receiving at least $9 billion in aid from prior federal pandemic relief packages that have been instrumental in deterring the most devastating cuts to key services, particularly Medicaid and education. At least $6 billion in enhanced federal Medicaid funding will offset costs usually covered by state revenues, although at least $1.5 billion of this is not yet recognized in the executive budget financial plan. Another $2.5 billion from the federal Coronavirus Relief Fund will be available for budget relief, and more than $1 billion in pandemic-related federal aid will support state education costs.

The budget assumes an additional $6 billion in unrestricted federal relief and stimulus aid will be received evenly over the next two fiscal years. If the state receives less than $3 billion by Aug. 31, 2021, spending from local assistance appropriations would then be withheld across the board by the budget director, with exceptions including school aid and public assistance. Support from Washington is critical if such cuts are to be avoided.

A special emergency appropriation of $9 billion is included in the budget to avert spending reductions for school districts, local governments and other services, if the state receives its $15 billion request in unrestricted federal aid by the end of August. DiNapoli’s office said the executive budget is unclear on how the state would use billions of dollars in unrestricted federal aid if less than this amount is received. When combined with an additional $53 billion in other new emergency appropriations, the executive could have full discretion as to how to allocate approximately $62 billion. While these provisions may provide flexibility in managing the budget, they also leave uncertainty as to how their use might affect important programs and services, state agencies, local governments, nonprofit organizations and individual New Yorkers who rely on state funding.

Use of Temporary Resources

The state’s financial plan includes nearly $15 billion in SFY 2021-22 that DiNapoli’s office identifies as temporary or non-recurring, including temporary tax increases, with more than half of that coming from federal aid.

The budget continues to defer $1.7 billion in annual Medicaid payments and $110 million in non-public school aid payments to the following state fiscal year for SFY 2020-21 budget relief. Manipulating the timing of payments to fill budget holes worsens the state's structural budget gap, increases the difficulty of balancing the budget each year and contributes to future cash flow pressures.

Debt

DiNapoli questioned whether some debt proposals could hurt the state’s long-term financial outlook. Important provisions of the Debt Reform Act of 2000 are proposed to be suspended again, and would omit more than $19 billion in new debt from the statutory limits over two years. These actions would suspend the state’s statutory limits on outstanding debt and debt service for borrowing during SFY 2021-22 (also suspended for the current year), as well as the 30-year maximum term for state-supported debt.

The budget also renews authorizations for up to $11 billion in short-term borrowing. DiNapoli said it is not clear that these authorizations are necessary, especially at the proposed levels, given the state’s improved fiscal outlook.

Other Key Findings

The 30-day amendments include the proposed creation of a COVID-19 extraordinary relief fund. Revenues from newly enacted taxes, increased rates of existing taxes, and the elimination of tax credits or deductions in SFY 2021-22 would be deposited into the fund. A $3 billion appropriation from the fund is proposed to provide various local assistance grants or loans, and would be disbursed under an expenditure plan approved by the budget director. This would also place significant state resources solely under the discretion of the executive.

Support for school districts would be reduced by $607 million (2.1%) on a school year basis. The addition of $3.85 billion in one-time federal aid results in a proposed increase in school funding of $2.1 billion (7.1%) for the coming school year, but may leave districts facing a “fiscal cliff” afterward.

The budget includes provisions that would bypass existing statutory requirements that are intended to ensure procurement integrity. In certain instances, the budget proposes to eliminate the competitive bidding process, notice provisions and the Office of the State Comptroller’s contract review authority.

The budget diverts $143 million to the general fund from the MTA. However, the MTA has budgeted to a worst-case scenario, and so proposed tax revenue appropriations exceeded MTA's 2021 projections. Overall, aid to the MTA is essentially unchanged in SFY 2021-2022 at $5.2 billion.

The general fund balance is projected to decline to $5.7 billion by the end of SFY 2021-22, down by 36% since March 2020, and the lowest year-end balance since SFY 2013-14.

Statutory rainy day reserves of $2.5 billion will be preserved, but no additional deposits are planned.

Report: Report on the State Fiscal Year 2021-22 Executive Budget (as amended by Governor)

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