New York State downgrade underscores need for long-term revenue raisers, analysts say
Stop-gap measures won't help New York State’s fiscal condition long-term, a truth driven home by its first credit downgrade in 17 years, according to analysts.
Moody’s Investors Service lowered its rating on New York's general obligation bonds by one notch to Aa2 from Aa1 citing the state’s inaction in addressing budget gaps projected at $14.5 billion for the current fiscal year and $30 billion by 2022. The state’s GO debt was concurrently revised to stable from negative, with Moody’s noting that lawmakers have tools at their disposal to enact meaningful revenue raisers and spending cuts.
“While the state has taken actions to balance the budget, thus far they are primarily of a stop-gap nature and decisions about lasting budgetary changes to address the state's large projected budget gaps have been postponed," Moody’s analyst Marcia Van Wagner wrote.
The Moody’s action marked New York’s first credit downgrade since 2003, when Fitch Ratings dropped it to AA-minus from AA. Moody’s and S&P Global Ratings had last downgraded New York State debt in 1990 and 1992, respectively.
The Empire State’s Aa2 Moody’s rating is one notch lower than Fitch Ratings, S&P Global Ratings and Kroll Bond Rating Agency, which rate it at AA-plus. Moody’s and Fitch revised New York’s credit outlook to negative from stable last April.
Progressive-leaning Democratic lawmakers in the state legislature have proposed a series of taxes on the wealthy as a strategy to confront the revenue woes, but Gov. Andrew Cuomo opposes these proposals, which include higher income taxes on millionaires, and a stock-transfer tax.
Howard Cure, director of municipal bond research at Evercore Wealth Management, said Cuomo will likely not change his resistance to new taxes this year, but noted, the upcoming state elections may change the political landscape since more progressive Democrats are poised to win seats in the legislature. Absent federal aid from Congress, he said, the governor might be forced to support at least one of the wealth tax proposals in order to avoid large-scale cuts to school districts, municipalities and public colleges.
“You really need to have a long-term plan in place to convince investors that you are not only structurally balancing the budget, but also that you are providing a decent level of service,” Cure said. “There could be contentious budget negotiations to figure this out.”
Assembly Speaker Carl E. Heastie, D-Bronx, first came out in support of raising taxes on the wealthy last December when the state was facing a then-estimated $6.1 billion budget gap tied to escalating Medicaid costs. Senate Majority Leader Andrea Stewart-Cousins, D-Yonkers, announced her support in July for tax hikes on multimillionaires and billionaires to help offset massive revenue hits caused by the virus.
Ron Deutsch, an economic analyst at the Fiscal Policy Institute, a liberal think tank, said Cuomo and the Democratic-controlled legislature should seriously consider a millionaires tax similar to the one adopted by neighboring New Jersey last month that upped income taxes on those earning $1 million or above to 10.75% from 8.97%. Elected officials should take proactive steps on revenue raisers given the decreasing likelihood of another congressional stimulus package this year, he added, noting the state has turned to wealth taxes in past financial crises including under Gov. David Patterson during the Great Recession.
“It’s time now that we start looking at ways that we can remedy our own situation in New York without help from the federal government,” Deutsch said. “We need the governor to take the lead here and bring the legislature back and come up with a package that makes sense.”
Jerry Kremer, president of Empire Government Strategies and a former New York assemblyman, said he doubts Cuomo will embrace a millionaire’s tax, but expects him to eventually compromise on one of the other wealth taxes to avoid cuts to public schools that would hurt his popularity. Cuomo could decide to wait until next winter before making any decisions on raising taxes, he added, to use them as bargaining chips in crafting the fiscal 2022 budget, due by April 1.
“The governor is not going to quickly embrace any taxes on the rich unless he is convinced that it won’t drive further people out of the state,” Kremer said. “It may be smart politics on the governor’s part to push it into the spring where there is more pressure on the legislators.”