Mayor Adams and Governor Hochul (photo: Don Pollard/Governor's Office)

New York State and City weathered the worst of the financial devastation caused by the COVID-19 pandemic thanks to billions in federal aid and a good bit of fortune in revenues from Wall Street and personal income taxes. But fiscal uncertainty looms on the horizon amid major stock market losses, warnings of a recession, ongoing pandemic workplace shifts, and federal relief funds running out, creating future budget gaps that will test the fiscal management of Governor Kathy Hochul and Mayor Eric Adams’ administrations.

Recent budget updates released by the city and state showed positive signs, with revenues stronger than expected, allowing both levels of government to project somewhat higher spending for their respective current fiscal years as well as added savings and prepayments for next year. Though both the state and city have shown some caution in their budgeting, watchdogs say that the fiscal risks they face could be dire and require further belt-tightening and socking away. New York leaders also face the additional burden of saving the Metropolitan Transportation Authority (MTA) from fiscal disaster as federal aid begins to run out and ridership is expected to remain well below pre-pandemic levels.

“If you step back, all three [the state, city and MTA] are living on the tail of federal aid and the city and the state are living on the benefits of a really good last year on Wall Street,” said Andrew Rein, president of Citizens Budget Commission, a nonprofit fiscal watchdog. “So short term, it doesn’t look so bad. Mid- and long-term, there are really big problems…If there's a recession, those problems multiply.”

All three entities have had to put out their latest fiscal updates in recent weeks. New York State’s $220 billion budget grew to $222 billion in its update, but there are significant budget gaps by fiscal year 2027, the end of the financial plan period, and structural issues that remain unresolved. The city’s $101 billion budget grew to $104 billion, but with few new savings and major costs looming that were not budgeted. And while the MTA’s update to its $18.5 billion annual budget is still in the offing, the transportation authority continues to have a $2.5 billion structural deficit and faces fiscal disaster once federal relief runs out.

The budget updates set the stage for next year, when the budgeting processes will start in January with Governor Hochul’s executive budget proposal for the state’s next fiscal year, which begins April 1. That will be followed by Mayor Adams’ preliminary budget proposal, likely to be released in February, for the city’s next fiscal year, which begins July 1. New York State, City, and MTA finances are all intertwined.

“One of the challenges when you have long-term significant problems, but short-term resources is, at best, it takes the wind out of the sails of any kind of spending restraints or restructuring efforts. And at worst, it drives decisions that make the future worse,” he added.

New York State
The state’s mid-fiscal year budget update projects overall spending for the fiscal year at just under $222 billion, marginally lower than previous budget projections but higher than the $220 billion budget adopted in April. Revenues were $3.1 billion higher than in the first quarterly update because of higher than expected personal income taxes and certain other non-tax revenues, and spending was $1.7 billion lower than projected.

The state Division of Budget expects that the state will end the fiscal year with a $2.1 billion surplus and that future budget gaps will be unchanged or even lower than expected.

“This update to the State’s financial plan reinforces what was known from the prior one – global and national economic headwinds will have an impact in every state of the country, but New York is prepared with fiscally responsible budgeting that puts record-level deposits and balances into our reserves,” said outgoing State Budget Director Robert Mujica, in a statement.

But the budget update points to significant uncertainty. “The Financial Plan is subject to economic, social, financial, political, public health, and environmental risks and uncertainties, many of which are outside the ability of the State to predict or control,” it states, citing the continuing covid pandemic, the war in Ukraine, and actions taken by the Federal Reserve.

Nonetheless, the state also has higher reserves than ever before, with $9 billion set aside at the start of the fiscal year and planned deposits of $10.4 billion over the next three years, bringing the total to $19.4 billion, about 15% of state operational spending, by 2025. Budget gaps are estimated at just $148 million in FY24, which begins April 1, 2023; $3.5 billion in FY25, $3.3 billion in FY26, and $6 billion in FY27 when federal pandemic aid runs out.

But, as Rein noted, the state has a structural budget problem. On top of that last gap of $6 billion, the state has budgeted for spending another $6 billion from federal aid and from a temporary personal income tax surcharge on top earners that expires in 2027. That could mean $12 billion in funding needs the year after that the state has not yet planned for. “The state has no effort underway to deal with education aid, or Medicaid, or state operations in any way that's going to reduce spending,” he said.

It’s also near impossible to predict the exact impact of the expected recession. In an interview, Maria Doulis, the deputy comptroller focused on budget and policy analysis for State Comptroller Tom DiNapoli’s office, said, “There's still a lot of uncertainty about how that hits the nation, how that hits the state, the differential impacts between those two and of course, when it happens, and for how long.”

Doulis did note that the state may have enough reserves to handle the initial impact of an economic downturn and has the flexibility to use unrestricted federal aid, which it did not appear to use for new and recurring programs that would otherwise require continuing funding. “In the event of a shock, economic or otherwise, that can be sort of pulled in quickly,” she said of the leftover federal aid.

But, in the case of a recession, the state is far more vulnerable than New York City to a decrease in personal income taxes, which is its largest revenue source. The city’s revenue base depends more on property taxes which tend to be more stable. “I think from the state's perspective, what we need to keep eyes on is the sensitivity of the personal income tax in particular,” Doulis said. The mid-year state budget update does project that Personal Income Tax revenue will fall from $33.4 billion in the last fiscal year to just $22.6 billion for the current fiscal year, before growing to $28.1 billion in FY24; $29.1 billion in FY25; $31.2 billion in FY26; and $37.8 billion in FY27.

The MTA Budget
A big unresolved question for the state is the future of the MTA, which was already struggling with its finances before being thrown into deep crisis by the pandemic. The authority, which is expected to release its latest budget update any day now, was rescued by federal aid but faces a fiscal cliff as it runs out and ridership on subways, buses, and commuter rail has yet to recover. Governor Hochul, the State Legislature, and New York City will face the difficult task next year of finding new, sustainable revenue streams for the agency while also attempting to cut costs.

The MTA’s annual operating budget was about $18.5 billion for 2022 – 38% paid from various taxes, 26% from farebox revenue, 12% from tolls, and 15% from federal aid.

As ridership and revenue plummeted, the authority has received a total of $16 billion in pandemic aid from the federal government, which will be expended through the 2026 fiscal year. But the state-run authority also has a $2.5 billion structural deficit, up from roughly $750 million before the pandemic, with annual spending higher than revenues, which is being covered with federal funds. And the agency has only proposed a $100 million efficiency plan in its current budget, a mere 4% of that deficit.

Rein expects that the MTA’s updated budget will include a larger efficiency plan, and CBC has its own recommendations that would find as much as $2.9 billion in savings for the agency. “That's really hard to achieve, that full amount or close to it, because it relies on working with the unions and changing contracts,” he said. “The unions have to be part of the solution.”

MTA Chair and CEO Janno Lieber has for some time been calling on state leaders to start funding the MTA as an essential service, like policing and schools, meaning rethinking how it factors into the annual budget cycle. But, as Rein said, the state faces its own budget risks. “There's absolutely no question that New York's economy depends on the MTA being successful. But we have to figure out how to balance the successes in New York. It can't come at the expense of devastating taxes or service cuts somewhere else,” he said.

“We do think that there are more savings that are possible without necessarily hurting service,” said Rahul Jain, a deputy state comptroller who focuses on New York City and the MTA.

The ideal solution to the MTA’s woes, Jain said, would be to bring ridership back up to pre-pandemic levels. McKinsey, the consulting firm hired by the MTA, has projected that ridership will only reach 80% of 2019 (pre-covid) levels by the end of 2026. “The simplest way honestly, the best way really is to continue to beat the McKinsey projections,” Jain said. Ridership, however, has been difficult to recover as there have been broad pandemic-era shifts to hybrid and work-from-home models, as well as lingering concerns about public safety on the subway system.

The MTA also currently has long-planned 4% fare and toll hikes scheduled for 2023 and 2025, after a planned fare hike in 2021 was postponed and then canceled by Hochul earlier this year in an effort to encourage riders back onto the subways and buses.

Jain said there could be new recurring revenues raised through taxes but that’s a task left up to the Legislature. “There's pros and cons to sales tax. There's pros and cons to real estate taxes, pros and cons to more broad-based economic taxes like the payroll mobility tax. So that's really kind of a question for the Legislature,” he said.

Reinvent Albany, a nonprofit government watchdog, issued urgent warnings about the MTA’s fiscal cliff in a recent report, which noted that the agency is continuing to lose revenue, collecting $1.6 billion less in passenger and toll revenues in 2022 than in 2019 through September. “The MTA has emergency aid, but the fact is, it would be far better if they started dealing with the impending budget deficit now,” said Rachael Fauss, the report’s author, in a phone interview.

The report makes several recommendations for the MTA, governor, and Legislature to follow: the MTA should continue implementing open data laws to be more transparent about its budget; publicly discuss debt affordability statements and only use recurring revenues in its debt affordability metrics and not count federal aid when measuring debt affordability; and release updated ridership projections with every financial plan update; while state government should ensure existing transit-dedicated funds are sent directly to the authority; use the Outer Borough Transit Fund to improve bus, subway, and commuter rail service, rather than provide toll discounts; and refuse to continue the suspension of the state gas tax holiday; among other measures.

Fauss noted that part of the problem is that the MTA has slowly lost state support over the years, particularly under former Governor Andrew Cuomo, who diverted MTA funds to other state purposes. The authority, she said, needs new sources of recurring revenue, which could be achieved in various ways. “There's different ideas of how to do it and I think that it's just really about the political will of finding the best tax or the best source of revenue,” she said.

“I don't think we can expect very much good news” from the imminent MTA budget update, said Nicole Gelinas, senior fellow at the Manhattan Institute, a conservative think tank. She noted that besides the budget update and the struggling ridership, the agency also has to sign a new contract with the Transit Workers Union next year. With high inflation, TWU workers may demand higher raises than the 2% wage growth that the MTA has budgeted for. “If the unions demand a 10% raise, that's close to an extra billion dollars that the MTA hasn't budgeted for at all and that’s something that they haven't even started talking about publicly,” she said.

“I think we shouldn't even start thinking about new sources of revenue until they have carefully gone through all of the drivers of their costs and have agreed to a new union agreement with some productivity enhancements,” she added.

There’s also the open question of the MTA, with state and city partners, implementing congestion pricing in New York City, which is meant to help fund the MTA’s separate $55 billion capital program by helping it raise more than $15 billion.

New York City
The city’s November budget revised expected spending to $104 billion, a record level for the city and up $3 billion from when the budget was adopted in June.

Prior to the update, Mayor Eric Adams ordered city agencies to cut 3% of their spending in his latest Program to Eliminate the Gap (PEG), which resulted in $2.5 billion in savings across the current and next fiscal years, without making cuts to services or laying off municipal employees. But most of the savings came from spending re-estimates, including eliminating some personnel vacancies, and debt service recalculations rather than finding recurring efficiencies at city agencies.

“Fiscal discipline has been, and continues to be, a hallmark of my administration,”  Adams said in a statement. “The city faces significant economic headwinds that pose real threats to our fiscal stability, including growing pension contributions, expiring labor contracts, and rising health care expenses — and we are taking decisive actions in the administration’s first November Financial Plan to meet those challenges.”

The PEG helped the city cut its projected budget gap for the upcoming 2024 fiscal year by $1 billion, bringing it down to $2.9 billion. But those gaps are expected to grow to $4.6 billion in FY25 and $5.9 billion in FY26 because of significant losses in the stock market, which hurt revenue as well as increase the city’s pension obligations.

On Monday, barely a week after releasing the budget update, the administration took the extraordinary step of announcing that it would eliminate roughly 4,700 vacant civilian positions, about half of those currently budgeted, to cover a budget gap of $3 billion for the 2024 fiscal year, Gothamist first reported. The cuts will not affect uniformed agencies or teachers. The decision comes amid a dire staffing crisis at many agencies and follows a budget modification that budgeted for the hiring of 25,000 more workers by June, an unrealistic number but indicative of the extent that city agencies have seen their workforces drop over the last few years and the city’s ongoing hiring challenges.

[Read: Facing Depleted Agencies, New York City Government Plans to Add 25,000 More Employees by June 2023]

The city’s reserves are also at about $8.3 billion, which includes $1.9 billion in the Rainy Day Fund, $4.5 billion in the Retiree Health Benefits Trust, $1.6 billion in the General Reserve, and $250 million in the Capital Stabilization Reserve. But those reserves only account for about 9% of city tax revenue, far lower than what budget watchdogs recommend.

According to the mayor’s office, the increased spending in the budget was largely funded by federal grants or expected federal funding, including a projected $1 billion to shelter and provide services to tens of thousands of asylum seekers that have arrived in New York City over the last several months. But, it is not clear that the federal government will reimburse the city for those expenses.

As the mayor himself acknowledged, the city faces the uncertainty of growing pension costs because of volatility in the stock market, forcing the city to spend more to meet annual pension obligations. The budget also doesn’t sufficiently account for the cost of municipal labor contracts, all of which are expired or expiring and must be renegotiated.

Rein of Citizens Budget Commission noted that the projected budget gap of $2.9 billion for the next fiscal year “assumes that there's no new labor contracts that are larger than one-and-a-quarter percent or that there's no recession. Those are risky assumptions.”

“Quite frankly, what you're seeing at the city, the state, and the MTA is no concerted effort to restructure operations to keep down spending,” he said. “The city's PEG barely did anything to restructure government at all. By and large, the vast majority is spending re-estimates and a little bit of debt service savings and from vacancy reductions.”

Jain from Comptroller DiNapoli’s office noted that unlike the state, the city used federal funds for recurring programmatic expenses, which will be harder to continue to fund if a recession hits. “You've allowed spending to continue, so you kind of need the revenues to come in,” he said. “And then the hard question at the end of that if they don't is where do you start trying to reduce the spend side.”

DiNapoli has raised several concerns about the city’s November financial plan, pointing to a “missed opportunity” to put away more money in the Rainy Day Fund and issuing a report recommending several ways the city could strengthen it.

He also pointed to the several risks the city faces for which it seems unprepared. The $1 billion in projected federal grants for migrant services has not yet been approved, “which we view as a material risk to its budget in the current fiscal year, and which could create spending pressure in the outyears,” he said. And the city has not yet projected weakening revenues as is widely expected.

New York City Comptroller Brad Lander, in his office’s monthly update on the city’s fiscal outlook, also urged the administration to prepare for a recession and to prudently use reserves in the case of that eventuality.

“When economic downturns hit, as people lose jobs and business revenues decline, tax revenues fall just as the needs of the most vulnerable increase. That’s why it’s critical for the City of New York to save for a rainy day,” he stated. “Putting money into our rainy day funds is not an act of austerity – it’s a form of social insurance.”

Ahead of the passage of the city budget, Lander had urged the mayor and City Council to adopt a formula for annual deposits into the rainy day fund, a recommendation that went unheeded. He has repeatedly recommended that reserves should be at least 16% of city tax revenues, while they currently stand at closer to 9%.

On Monday, in response to the administration’s latest vacancy cuts, Lander reiterated his concerns about how the move could impact city services. “While we agree that savings are critical as New York City faces economic headwinds, confronting those risks cannot come at the expense of diminishing the City’s capacity to get stuff done,” he said in a statement. “Today’s directive to agencies furthers our concerns about recruiting and retaining the staff needed to implement critical programs from traffic safety improvements to processing housing applications.”