New York warily eyes bank failures, economic data as budget talks loom

New York officials are looking with caution as the fallout from the Signature and Silicon Valley Bank failures casts a pall over budget negotiations.

Both the city and the state are working on their fiscal 2024 budgets. The state’s fiscal year begins April 1 while the city’s starts on July 1.

Amid rising inflation and higher interest rates, the economic data for the city has been mixed, Comptroller Brad Lander noted in a report released Tuesday.

“On the positive side, employment in New York City is now back at 99% of pre-pandemic levels, even with layoffs in technology. Restaurants and hotels, which took the hardest hit, are back at 95%,” he said.

“But the bank failures at Silicon Valley Bank and Signature Bank pose serious new concerns and remind us of the importance of strong public policy to manage risk, even when fast-talking lobbyists push to eliminate it.”

He noted inflation remained high and that the Federal Reserve’s efforts to bring it down through interest rate increases could have implications for other mid-sized banks already under pressure.

“If banks become even more reluctant to make new loans, the likelihood of a recession grows,” he said.

He said the city’s economy could be adversely affected by the closing of Signature Bank.

“Signature has been especially prominent in real estate lending in New York City — ranking first in number of loans (882) and third in loan volume ($13.4 billion), according to an analysis by the property data company PincusCo,” the comptroller’s office said. “Signature and other regional lenders are believed to be especially important in lending to rent-stabilized multifamily buildings that larger banks are less likely to pursue.”

John Hallacy, founder of John Hallacy Consulting LLC, said that one of the better aspects of the “bailout engineering” for the two banks was that payrolls are met and that not everyone at various affected businesses lose their jobs.

“This approach keeps revenues flowing to states and localities — particularly income taxes,” Hallacy wrote in a recent blog post.

Meanwhile, property taxes don’t reflect the economic environment as quickly as other taxes, he noted.

“Some of the businesses will either choose to or be forced to dispose of real assets. A forced sale is more likely to establish a new revised valuation for that asset,” Hallacy said. “Eventually, this downward adjustment will be reflected in the assessed valuation of the tax base. However, we know that the timeline is slow for this kind of adjustment.”

Lander noted the latest economic news for the city was mixed.

“Higher-than-expected revenues thus far will help to balance the budget for this fiscal year and next,” he said. “But new labor contracts, declines on Wall Street and the end of federal pandemic aid portend big gaps in the following years.”

In the fourth quarter of 2022, profits among New York Stock Exchange member firms were $6.20 billion, slightly up from the previous two quarters, but down from $13.45 billion in the same quarter a year prior. For the full calendar year, NYSE member firm profits were $25.5 billion in 2022, less than half of the $58.4 billion in profits seen in 2021.

In the first quarter, the city receives tax payments on most year-end bonuses.

The comptroller’s office expects New York City tax withholdings related to December through March bonus payments will total around $1.35 billion for fiscal 2023, down 20%, or $270 million, from the prior year, a fall mostly due to the financial sector.

Additionally, the ongoing arrival of families seeking asylum has pushed the shelter census to its highest levels ever, as the housing market remains tight, Lander said.

Earlier this month, the City Council began hearings on Mayor Eric Adams’ preliminary $102.7 billion fiscal 2024 budget proposal.

By law, the council must vote on a balanced budget by July 1.

In the fourth quarter of fiscal 2022, New York City had about $38.8 billion of general obligation bonds outstanding. That doesn’t include agency debt, such as the Transitional Finance Authority or the Municipal Water Finance Authority, which have $44 billion and $32 billion outstanding, respectively.

The city’s GOs are rated Aa2 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency.

The winding down of federal pandemic relief programs will be a challenge.

The Pew Charitable Trusts said federal funds were the largest revenue source for 15 states in fiscal year 2021. In New York State, taxes accounted for 46.7% of its revenue in fiscal 2021 while federal funds accounted for 41.3%.

The analysis shows in federal fiscal 2021 all states had a positive balance of payments with the federal government for the second year in a row.

New York’s balance of payments of $115.2 billion in fiscal 2021 represented the sixth most favorable balance of payments of any state, the report said, a departure from pre-pandemic years where New York was a net donor state that typically ranked in the bottom five in total balance of payments.

“Like last year’s report, this year’s analysis details a federal government using a more equitable formula for distributing aid than in a typical year,” Laura Schultz, executive director of research at the Rockefeller Institute, said in a statement. “Unfortunately, for the state of New York, that picture is likely to revert to something more familiar in the years to come. As pandemic-era programs subside, New York will likely return to contributing billions more to the federal government than it receives back in spending.”

According to the New York City Independent Budget Office, dashboard.

as of March 20, there were $13.5 billion in total federal funds available from the American Rescue Plan Act of 2021 and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, with $12.9 billion of that already allocated.

At the state level, lawmakers are negotiating over Gov. Kathy Hochul’s $227 billion executive budget proposal for fiscal 2024, which she unveiled in January. While the state’s fiscal year begins on April 1, the state budget was approved a week late last year.

Despite the state’s post-pandemic economic recovery, significant headwinds will challenge to its fiscal stability, according to a report issued by Comptroller Thomas DiNapoli.

The executive budget proposes $227 billion in all funds spending in fiscal 2023-24, an increase of $5.4 billion, or 2.5%, from the prior year.

“With economic risks and the impending loss of federal financial assistance ahead, now is the time for New York to carefully prepare for the short- and long-term,” DiNapoli said.

The Division of the Budget projects outyear gaps of $5.7 billion in fiscal 2024-25, $9 billion in fiscal 2025-26 and $7.5 billion in fiscal 2026-27.

The gaps result from reduced estimates of tax collections due to a forecasted economic downturn and increases in recurring spending, principally in school aid and Medicaid.

“The budget proposals to increase state reserves and strengthen the state’s rainy-day reserves should be supported,” he said.

DiNapoli singled debt plans in Hochul’s budget.

“The budget also advances debt proposals that reinforce concerns about the affordability of debt levels and the transparency and accountability of current debt practices,” he said. “I urge lawmakers to reject these proposals.”

The executive budget proposes to continue circumventing the state’s debt cap by using a loophole in the Debt Reform Act for structuring debt of the Gateway plan to rebuild passenger rail infrastructure linking New Jersey and Manhattan, according to the report.

“The executive budget would further reduce transparency and accountability by classifying the Gateway loan in a manner that is inconsistent with past practice and fails the most basic standards of transparency by continuing to not count this debt in projections of any debt outstanding,” the report says. “These actions result in a misleading picture of the size of the state’s debt burden.”

The report noted the governor’s budget proposal includes “backdoor borrowing” authorizations for up to $5 billion in short-term cash flow borrowings in fiscal 2023-24 that are redundant to the existing ability to issue the more cost-effective tax and revenue anticipation notes.

“Given the state’s current strong cash balances, it is unclear why this more costly form of borrowing is proposed,” the report notes.

“Collectively, these and other actions in recent budgets have rendered the state’s current debt limits functionally meaningless,” the report said.

Last month, DiNapoli spoke with The Bond Buyer about the need for debt reform in the state and recommended several measures.

Issuers across New York State ranked first in the nation for municipal bond issuance in 2022, up from number three in 2021, selling more than $49.39 billion of debt last year, according to Refinitiv.

The state’s general obligation bonds are rated Aa1 by Moody’s and AA-plus by S&P, Fitch and KBRA.