Bonds

As the New York State Legislature returns to work Monday, lawmakers face several challenges, most importantly negotiating an agreement on a state budget that’s already more than two weeks late.

Gov. Kathy Hochul unveiled her $227 billion executive budget proposal for fiscal 2024 in February. Budget approval is required by the start of the state’s fiscal year on April 1; last year, the first of Hochul’s tenure, the budget was approved a week late.

However, while this year’s late budget is making headlines, it doesn’t yet have a significant impact on state operations, said Howard Cure, director of municipal bond research at Evercore Wealth Management.

“New York is able to have continuing funding resolutions to maintain operations and continue to pay state workers,” Cure told The Bond Buyer. “This contrasts with some other states, such as Minnesota and New Jersey, that require closure of state functions not deemed essential until a budget is passed. I also think that having the earliest state fiscal year in the country, April 1, puts added pressure to pass a budget on time.”

Many contentious issues delaying an agreement aren’t strictly budget-related, he noted.

“These include bail reform, a housing compact for rezoning NYC’s suburbs, tax abatements for residential construction and raising charter school caps and the minimum wage,” Cure said. “It is common to have non-budgetary issues negotiated within the budget since the governor has much greater leverage in this process to achieve her goals rather than through the legislative process.”

However, there several direct budget issues have also proven challenging, he said.

“These include additional taxes on the wealthy (supported by the legislature, opposed by the governor), additional MTA funding and increasing Medicaid reimbursements for hospitals and nursing homes,” he said.

Since the state Assembly and Senate have a Democratic super-majority and have asserted their authority in the recent past over Hochul, such as denying her nomination of a chief judge, Cure believes the Legislature is being more insistent on getting its way in budget negotiations this year.

On the opposing side, New York Republican State Committee Chair Ed Cox blasted the Democrats’ agenda.

“In case you missed it, the New York Post has extensive coverage of a devastating new Siena poll: nearly a third of New Yorkers are planning to leave our state within five years. Already, 10,000 New Yorkers have fled to Florida in 2023,” he said.

“Uniparty Democratic rule in New York has created a national model for poor governance,” Cox said. “Republicans will continue the fight to save our state with safe streets, more jobs and better schools.”

Citizens Budget Commission President Andrew Rein said there could be a silver lining to a tardy budget pact.

“This delay will prove worthwhile if our elected leaders craft a budget that is sustainable; keeps New York an attractive, affordable place to live, work, and conduct business; and addresses New Yorkers’ essential needs now and in the future,” Rein said.

Any final agreement should maximize reserve deposits “to protect New Yorkers from economic shocks, boost housing production, restrain spending to stave off massive future cuts, not raise taxes, stabilize the MTA while improving its efficiency and eschew wasteful subsidies,” he added.

New York City Comptroller Brad Lander noted the delay impacts the city’s budget negotiations.

“We’re waiting to see what the state budget agreement will mean for New York City,” he said. “Will it help us meet the growing cost of providing shelter and services for asylum-seekers or will it cost the city hundreds of millions through cost-shifts?”

The New York City Council has finished its first round of hearings on Mayor Eric Adams’ preliminary $102.7 billion fiscal 2024 budget. The mayor will release his revised executive budget by the end of this month and the council will hold a second round of hearings in May. By law, the council must vote on a balanced budget by July 1.

Three years after the pandemic began, data shows economic patterns are stabilizing, Lander said, with employment at 99.5% of pre-pandemic levels, workers and employers settling into hybrid schedules, impacted industries — like accommodations and food services — returning, with low office occupancy and high residential rents becoming the new normal.

“According to recent numbers from Forbes, New York City has reclaimed its status as home to the most billionaires of any city on the planet (107, worth $640 billion), and the most millionaires, too,” Lander said.

New York State Comptroller Thomas DiNapoli released a report last month showing the average bonus paid to Wall Street brokers and traders plunged 26% to $176,700 last year from $240,400 in 2021.

Rising interest rates and fear of a recession led to less profits for securities firms after they saw a record year in 2021. As a result, bonuses returned to pre-pandemic levels and this will mean a decline in related income tax revenue, the report said.

“Wall Street’s cash bonuses were expected to fall as several factors weighed on the securities’ industry profitability in 2022,” DiNapoli said. “A 26% decline brings the average bonus closer to what financial employees received prior to the pandemic.”

The $33.7 billion bonus pool for 2022 was 21% lower than the previous year’s record of $42.7 billion — the largest drop since the Great Recession, the comptroller’s office said.

“While lower bonuses affect income tax revenues for the state and city, our economic recovery does not depend solely on Wall Street,” DiNapoli said. “Employment in leisure and hospitality, retail, restaurants and construction must continue to improve for the city and state to fully recover.”

Still, Wall Street bonuses do have a significant impact on tax revenue in the state and city budgets.

DiNapoli estimates the securities industry accounted for roughly $22.9 billion in state tax revenue, or 22% of the state’s tax collections in state fiscal year 2021-22, and $5.4 billion in city tax revenue, or 8% of total tax collections, for the city’s fiscal 2022.

In 2021, bonuses drove income tax gains of $282 million for the state and $128 million for the city compared to the prior year. DiNapoli projects the 2022 bonuses in the city’s securities industry will generate $457 million less in state income tax revenue and $208 million less for the city when compared to the previous year.

The securities industry also has a significant impact on the city’s employment and overall economy.

In 2022, the sector employed about 190,800 people, the highest level in more than two decades. DiNapoli estimates that 1 in 11 jobs in the city is either directly or indirectly associated with the securities industry.

While the city remains the capital of the U.S. securities industry, its share of jobs has been declining over time as large firms have left. Sector employment in 2022 was 5.1% lower than in 2000, which represented the peak for securities employment. 

However, more securities employees are back in the office, which contributes to increased spending in the city and subway ridership, Di Napoli noted.

Financial services firms reported 59% of employees were in the office on a given day in January 2023, compared to 52% for all firms in the city, according to the Partnership for New York City’s survey. Additionally, 43% of securities employees ride the subway, a higher rate than the citywide average for workers.

DiNapoli estimates Wall Street was responsible for 16% of all economic activity in the city in 2021, with the financial sector’s ability to generate revenue and turn a profit being critically important to both state and city finances.

Cure also noted the effect that federal aid has had on New York.

“I think there is a certain amount of anxiety for New York — and many other states — as federal pandemic funds run out and questions about the potential for a recession emerge,” Cure said.

In New York, while the economy has diversified, there is still a heavy dependence on the finance industry, with bonuses down from previous years, Cure said.

“Therefore, funding new programs or increasing funding for existing, recurring programs could create a structural imbalance going forward,” he said. “Also, while rainy-day funds have increased, there should be an air of caution.”

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