Bonds

Hochul’s New York State budget would hold steady on state reserves

The budget proposed last week by New York Gov. Kathy Hochul shows fiscal discipline, analysts said, noting that the spending plan takes advantage of New York’s strong economic position to prepare for the future while still leaving some long-term questions unanswered.

Her fiscal 2025 budget plan asks the state Legislature for $233 billion of all-funds spending.

The executive budget addresses issues including education, housing, Medicare and public safety, and attempts to narrow budget gaps without raising income taxes. 

Gov. Kathy Hochul’s proposed fiscal 2025 budget includes no income tax increases.

Mike Groll/Office of Governor Kathy Hochul

“This budget makes it clear that fiscal discipline can co-exist with progressive, people-driven policies,” Hochul, a Democrat, said in her budget address. The proposal is 4.5%, or about $6 billion, bigger than the fiscal 2024 budget. 

“Governor Hochul balanced the Executive Budget with additional receipts from the strengthening economy and lower spending,”  Citizens Budget Commission President Andrew S. Rein said in a statement. “While the budget takes some important initial steps to reduce spending growth, significant additional restraint will still be needed to close the State’s structural budget imbalance.”

The CBC is a nonpartisan think tank that calls itself a watchdog over New York State and New York City finances and policies. 

Hochul’s budget would not raise income taxes, which New York Budget Director Blake Washington attributed to concern about high cost of living. 

“If you live in the City of New York, you pay the top [personal income tax] rate in the entire nation, and we want to make sure that wherever you reside in the State of New York and whatever your income, we want you to stay here,” Washington said in a press conference. “Particularly the high-income earners, we want you to stay here because our budget is heavily dependent upon you.”

The CBC said holding the line on taxes is “critically important to New York’s competitiveness.”

But Democratic state lawmakers, who hold supermajorities in both houses, may have other ideas than their fellow Democrat in the governor’s office.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said some state lawmakers are advocating adding a wealth tax or other progressive tax structures. 

The budget proposed using $2.4 billion from the state’s reserves to fund the response to the ongoing migrant and asylum seeker crisis, an increase over the $1.9 billion in funding for the migrant crisis in the FY 2024 budget. 

More than 13,000 new migrants have come to New York City monthly, Hochul said in her address, and she believes the costs associated with humanitarian aid should ultimately fall to the federal government. 

“We’re using [the reserves] because we view the migrant crisis as a one-time expenditure, an extraordinary expenditure that should not be recurring,” Washington said. “Our representatives in the federal government should be resolving this issue once and for all.”

Despite that use of reserves, the budget would preserve the state’s reserves at $19 billion, plus another $2.2 billion including the debt management reserve and the retiree health benefit trust fund. The state will deposit another $500 million from its budget surplus into its reserves at the end of the fiscal year. 

The budget also included projections for future budget gaps. Washington said this year’s proposed budget will lower those gaps by 50%. There would be a $5 billion deficit in FY 2026, $5.2 billion in 2027, and $9.9 billion in 2028, according to state projections. 

The CBC’s Rein argued that these projections include revenue from temporary tax increases. If the taxes are allowed to sunset, the budget gap in 2028 will actually be approximately $15 billion.

John Hallacy of John Hallacy Consulting said the state’s estimates for future revenues were ambitious and the gaps will only become more difficult to close through spending cuts. 

“Every time you [make] cuts, it’s hard to go back to the well on those cuts” in future budgets, Hallacy said. “You have to look elsewhere on the next go around. So I think it’s just going to get a little harder going forward.” 

Cure said the budget gap was a concern, but it isn’t particularly big. 

“This is a $233 billion budget,” Cure said. “Yes, it’s large when you hear that kind of number, but as a percentage of the budget, perhaps not as large. And then, I think the state is better positioned than they had been in prior projected budget gap years because they have a decent sized reserve fund.”

Between the budget gap and projected slowing in the economy in future years, Cure said the state needs to have discipline in its spending. The legislature may pressure Hochul to increase spending in areas like education and healthcare. 

“What you’re waiting to see is: how disciplined is the state going to be now when they have money, rather than having to scramble when there is a deficit in the next few years?” Cure said. 

The most expensive item on the budget is education, where Hochul plans to spend $35.3 billion in total school aid — an increase of $825 million from FY 2024 — but also restructure spending formulas. 

The state increased education aid by $6 billion over the last two years, partly to supplement federal aid from COVID packages running out. This budget proposal is about a 2.4% increase from FY 2024. 

New York currently has a policy known as “hold harmless,” where some schools cannot receive less funding than they did the previous year, even if enrollment declines. The governor views this as untenable, Washington said at the press conference, and plans to change how aid is calculated. 

This is likely to be contentious in the legislature, Cure said, as it could lead to cuts in state aid, especially for wealthier suburban school districts. 

The proposal also includes more than $1 billion for new capital projects for the City University of New York and the State University of New York. 

In transportation, the budget would continue New York’s $33 billion Department of Transportation capital plan, spending $7.6 billion. It would also allocate $100 million to the Pave Our Potholes Program.

Other capital highlights in Hochul’s budget proposal include: $500 million in capital resources to support the state’s commitment to expand and modernize the NY CREATES Albany NanoTech Complex; $435 million for resiliency projects to protect communities from severe floods, including $250 million for a voluntary buyout program; and $500 million in capital funds to develop up to 15,000 housing units on state-owned property.

Cure said the state may have to increase its investments in the New York Metropolitan Transportation Authority beyond what’s in the budget proposal if ridership continues to lag. The MTA also faces questions about whether it will be able to implement congestion pricing tolls in Manhattan on schedule.

New York State’s general obligation bonds are rated AA-plus by both S&P Global Ratings and Fitch Ratings, and Aa1 by Moody’s Investors Service, according to the New York Division of the Budget.

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