After two years of extraordinary volatility in state finances, the state Budget Division’s 2022-23 state budget financial plan projects fiscal stability for the next five years and includes plans to significantly strengthen rainy day reserves , according to a State Intervention report. Thomas P. DiNapoli.
However, DiNapoli’s analysis identifies several revenue, expense and sustainability risks that could disrupt the financial plan that should be closely monitored.
“Amid great uncertainty, the state’s fiscal position is currently stable, providing an opportunity to build reserves that should not be missed.” DiNapoli said. “While the State Financial Plan expects continued revenue growth, economic risks are growing and could jeopardize the state’s tax base. Making deposits into rainy day reserves early or ahead of schedule can help prevent disruptions to critical programs and services.”
The financial plan provides for disbursements in 2022-2023 of $222.2 billion from All Funds, including $122.7 billion from state operating funds. The DOB projects that General Fund disbursements (including transfers to other funds) will total $96.1 billion in fiscal year 2022-23, rising to $115.8 billion in 2026-27, with average annual growth of 4.8% General Fund revenues are projected to reach $88.3 billion in 2022-23, rising to $113.2 billion in 2026-27, reflecting average annual growth of 6.4%. While projected disbursements exceed revenues in some years, the financial plan indicates that surplus general fund resources, mostly accumulated in 2021-22, will be used to balance the budget in 2022-23 and beyond.
DOB’s projected growth in General Fund spending reflects continued temporary funding for pandemic recovery and the health care and direct care workforce in 2022-23, as well as significant growth in spending during the financial plan period in school aid and Medicaid.
Spending may increase beyond projections in the current financial plan. For example, the Financial Plan assumes Medicaid enrollment will peak at nearly 7.7 million in 2022-23 and return to near-pre-pandemic levels of 6.1 million in 2023-24. If Medicaid enrollment declines at a slower rate than projected or does not decline as much as projected, the state will incur significant additional costs.
Over the long term, the high level of General Fund spending may be difficult to sustain as temporary resources are depleted or expire. Notably, the American Rescue Plan included $12.7 billion for New York State that can be used for a wide range of purposes, including to cover lost revenue due to the economic impacts of COVID-19 . The state Budget Division intends to transfer this funding to the General Fund over four fiscal years. While spreading the use of these funds over multiple years is prudent, the Budget Division indicates that the majority of 2021-22 funding went to “government services”. Without further details, it is difficult to assess the extent to which temporary funds support recurring expenditure. However, temporary funding is an important factor in the projected balance of the General Fund during the Financial Plan period.
The Financial Plan’s reliance on certain actions in the 2021-2022 enacted budget, including temporary personal income tax increases for seniors, creates additional risk. In 2019, taxpayers with income of at least $1 million accounted for 1.2% of total taxpayers and contributed 38.2% of the liability. The temporary increase in the personal income tax rate makes the state more dependent on high-income taxpayers; these taxpayers tend to have income from more volatile sources, such as capital gains.
Personal income tax revenue also depends on taxpayers, especially high-income taxpayers, remaining New York residents. According to analysis by the State Comptroller’s Office, more taxpayers moved out of New York than they did annually from 2015 to 2019. Although this happened at all income levels , the number of taxpayers with incomes over $1 million who left the state. they were almost twice as many as moved.
Over the life of the financial plan, temporary tax rate increases in personal income tax and corporate franchise taxes and largely unrestricted federal aid are expected to total $27.6 billion or more than 5% of the expenditure of the General Fund during the period of the Financial Plan. At the end of the plan period, when the personal income tax rate increase is scheduled to expire, nearly $4 billion a year would be unavailable.
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