New York State Budget Outlook
It is always interesting from an analyst’s viewpoint how New York State comes to market with a bond issue when the budget adoption is close but is far from done. This year is no different.
Of course, all the numbers under discussion have been greatly impacted by Covid-19 and the expected aid that will flow from the $1.9 trillion that was just passed by Congress and signed by the President. The state had requested $15 billion of new federal aid but has assumed receipt of $6 billion spread over two years. Given the passage, the aid has been secured.
Budget gap closing potential measures are numerous. These include revenues from sports wagering and sales taxes on vacation rentals. There is consideration for a tax credit for businesses who rehire workers that were adversely affected by the pandemic. All these measures are subject to final approval.
Some tax actions are still anticipated for high wage earners. The top rate of 8.82% depends on where the income line will be drawn. The scheduled phased tax reduction for middle class earners will be delayed for another year. Other measures may be discussed in the budget deliberations.
The closing General Fund cash balance of $7.237 billion represents a relatively strong 9.6% of GF Receipts in a difficult year. The anticipated General Fund cash balance at the close of FY 2022 is estimated at $5.73 billion or approximately 6.9% of anticipated GF receipts. The reduction year to year in part reflects the drawdown of Extraordinary Monetary Settlement funds.
Debt service to All Funds is quite manageable at 3.9%. The state has a long history of not selling as much general obligation debt as debt issued by other authorities and agencies. The Personal Income Tax or PIT bonds are issued on a more frequent basis. When the general obligation bonds come to market demand is strong.
The two-year budget gap of $12.7 billion reflects a gap of $5 billion in 2021 and $7.2 billion in 2022. The outyear gaps are estimated in the range of over $9 billion for 2023 and beyond.
Cuts that have been made are anticipated to be made permanent. Otherwise, the estimated budget gaps would be elevated.
A positive amid challenges is that some of the key receipts have been performing well through the first three quarters of the year. The Personal Income Tax collections have been $2.25 billion above estimated and the Sales & Use Tax has been $515 million above estimate. Business taxes have been below estimated.
The administration is seeking an authorization of up to $8 billion in PIT and/or SUT backed notes for liquidity purposes. In the present year, $4.5 billion of said notes have been issued and are expected to be fully repaid by fiscal year end. The state also has $3 billion of bank lines in place that may be called upon if required.
Another key item in the current year was the increase in the efMap extension by the federal level for the Medicaid share at 56.2% versus 50% in times predating the pandemic. The state anticipates this higher level of reimbursement will run through June of 2021 or the first quarter of the state’s FY 2022. Since Medicaid spending is a large item this additional assistance has made a significant difference.
Among other items, there has been a 5% cut in operating support for SUNY, CUNY and the Community Colleges. It is not known if this step will put pressure on tuition levels.
The spread for ten-year New York State paper according to Bloomberg remains within 20 basis points of the AAA level. The general obligation is usually very tight to the AAA scale when it comes to market on a new issue. Despite all the challenges, we expect this status to remain the case.
The $350 billion for states & localities in the Stimulus has increased confidence in municipals generally. There is also a great deal more talk about increasing taxes at the federal level that always serves to stoke demand for municipals especially in higher tax states.
John Hallacy
John Hallacy Consulting LLC
03/15/21
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