New York State budget gap widening amid uncertainty of federal aid
New York State’s revenue deficit deepened during the first three months of fiscal 2021 underlining how crucial federal funding to help combat coronavirus, according to Gov. Andrew Cuomo’s administration.
The New York State Division of Budget’s first quarterly update showed a $14.5 billion revenue loss through June compared to $13.3 billion that was forecasted in April. The state DOB also projects $62 billion revenue declines through 2024 driven by the economic fallout of the COVID-19 pandemic.
“The pandemic has done more damage to our economy than the Great Recession and is driving a fiscal crisis,” New York State Budget Director Robert Mujica said in a statement. “The Federal government must put an end to its months of dithering and deliver funding to states.”
The Cuomo administration noted the state reduced spending by nearly $4 billion through June compared to the first quarter of fiscal 2020 to offset revenue losses. The savings were generated through a hiring freeze along with a suspension of new contracts and pay raises, according to the DOB.
Cuomo has been pushing for the Republican-controlled U.S. Senate to include funding for state and local governments in its $1 trillion emergency relief package introduced in late July similar to the $915 million congressional Democrats supported in the House of Representatives-passed HEROES Act. Prospects for federal assistance has been waning though with the Republican-controlled Senate so far opposed to providing municipal aid and Senate Majority Leader Mitch McConnell sending the chamber home until September.
Dan Berger, senior market strategist at Refinitiv’s Municipal Market Data, said while there hasn’t been any recent trades that point to a sell-off of New York State-backed bonds, spreads are not close to recovering from where they were pre-pandemic. Traders have noted, though, this is the case for most of the high-grade, better-known names, including many New York State and City issuers.
New York State general obligation bonds with maturities between 15 and 20 years traded in early March at spreads of seven basis points above the above the triple-A scale before rising to 25 basis points in April during the height of the health crisis, Berger said. These same Empire State’s GOs are now trading at 18 basis points wider.
Berger stressed that pricing for the New York City Transitional Finance Authority’s $1.6 billion negotiated deal of future tax-secured subordinate bonds this week will be a good test of how the markets views New York debt.
"Even though it’s a New York City deal, it’s a barometer of how investors will feel about New York paper,” Berger said.
New York City TFAs are actively traded and do provide guidance for how New York paper will be received, traders say. Most recently, a block of 5s of 2022 traded on Thursday at 0.17%, hovering around triple-A benchmarks. Investors are banking on the state and the city to rebound from the crisis.
BofA Securities priced for retail on Monday the New York City TFA's (Aa1/AAA/AAA/NR) $1.33 billion of tax-exempt future tax-secured subordinate bonds. The deal was priced to yield about plus-10 to plus-95 triple-A benchmarks, depending on the coupon. The 2021 maturity with a 5% coupon was 10 basis points higher than Refinitiv MMD's AAA scale.
David Friedfel, director of state studies for the independent Citizens Budget Commission, said the state is facing budget gap of between $8 billion and $9 billion for fiscal 2021 that began April 1 when factoring in spending cuts and aid received under the federal CARES Act this past spring. Friedfel said it is important for the state to take necessary steps now in preparation that additional federal aid may not arrive.
“It’s paramount that the feds provide new aid to New York,” Friedfel said. “But in lieu of that the state needs to make adjustments now.”
Friedfel said before resorting to new tax increases state officials should instead look to freeze planned middle-class tax cuts scheduled to take effect in January as a temporary measure that could generate around $400 million of revenue in fiscal 2022. He also suggests suspending New York’s sales tax exemption on clothing items costing less than $110, which would net around $774 million for fiscal 2021 and $2 billion by 2024.
Moody’s Investors Service and Fitch Ratings both revised New York’s credit outlook to negative from stable in April citing financial headwinds caused by COVID-19. The Empire State’s general obligation bonds are rated Aa1 by Moody’s and AA-plus by Fitch, S&P Global Ratings and Kroll Bond Rating Agency.