Given current economic uncertainty and the possibility of an economic downturn, the State does not anticipate net deposits to its reserves for fiscal year 2024 or subsequent years. One pool of other fiscal resources is set to grow under the fiscal year 2024 enacted budget financial plan: recurring $1.45 billion reservations to the operating cost account — funds set aside in the general fund to cover State operations cost inflation, including higher costs that result from labor negotiations. These deposits will push the operating cost account from $1.8 billion in fiscal year 2024 to $6.15 billion by fiscal year 2027. These funds will be available to support general state operating costs in the years ahead.
Reserves as an alternative to austerity
In its fiscal year 2024 enacted budget financial plan, the State projected considerable fiscal gaps in fiscal years 2025 through 2027. Unlike historical gaps of similar size, however, the State’s current gaps result from an anticipated, rather than a current, economic downturn. Further, as FPI noted in a recent brief, financial plans typically project modest outyear gaps even in times of greater fiscal and economic stability. For this reason, there is considerable uncertainty around each year’s gap, such that aggregating the outyear gaps provides an unreliable measure of fiscal stress ahead.
If a recession materializes, fiscal reserves should be deployed to stabilize public services. If the depth and duration of a recession were known in advance, the prudent policy response would fully draw down reserves at an even pace through the downturn to best maintain fiscal stability, and rebuild the funds as the economy recovers. In reality, the uncertainty inherent to the economic cycle complicates the full use of reserves. Drawing down reserves too quickly carries risks if a downturn persists longer than expected. Conversely, over-cautious use of reserves may lead to unnecessary budget cuts, which impede economic recovery. How these risks are balanced depends on the causes and severity of a recession and the availability of federal support, as well as the effect of the downturn on the State’s spending programs. Clarity around the State’s economic forecasting models used to project future revenue would allow the public to more clearly understand if fiscal reserves are being effectively deployed.
While nearly all U.S. states averted both cuts and reserves drawdowns during the last recession due to federal relief, they cannot rely on the expectation of unprecedented federal relief in future crises, given political uncertainty and the ad hoc nature of local fiscal support at the federal level. Rather, states should plan proactively to use a combination of reserve deployment and, as needed, targeted tax increases, to avoid budget cuts during recessions. While use of reserves is preferable to tax increases, serious recessions may require complementary revenue action. These potential tax increases should focus on high-income earners to avoid exacerbating recessionary effects on the hardest-hit New Yorkers.
Appendix: New York State’s fiscal reserves and other resources
New York’s principal reserves are comprised of three funds: two statutory funds — the rainy day reserve fund (RDRF) and tax stabilization reserve fund (TSRF) — the use of which is governed by State law, and an informal account — economic uncertainties — that can be deployed by the State on an ad hoc basis. Beyond these principal reserves, the State general fund is comprised of other reserve resources set aside from certain sources or for specific contingencies.
Principal Statutory Reserves:
- The Rainy Day Reserve Fund (RDRF), the State’s primary statutory reserve, is reserved for use during economic recessions. Withdrawals from the fund can only be made after the coincident economic index (CEI) — a monthly composite indicator published by the New York State Department of Labor that tracks current economic data — declines for five consecutive months. Since 1970, five-month declines in the CEI have always aligned with national recessions.
The RDRF statute limits maximum annual deposits to the fund and its total balances. These limits have been raised in each of the last two enacted budgets, reflecting policymakers’ recent seriousness about building fiscal reserves. In fiscal year 2023, the RDRF balance limit was raised from 5 to 15 percent of general fund spending. In fiscal year 2024, the balance was again increased to 25 percent of general fund spending. The maximum annual deposit was also raised from 3 to 15 percent of general fund spending. The increase in annual deposits affords the State authority to shift recent surpluses from unrestricted economic uncertainties reserves (described below) into the restricted RDRF. The State plans to make a deposit at the end of fiscal year 2024, pending fiscal and economic conditions.[ii]
- The Tax Stabilization Reserve Fund (TSRF), the State’s other statutory reserve, is designed to automatically smooth year-to-year revenue fluctuations. The TSRF statute requires any general fund surplus, up to 0.2 percent of general fund spending per year per year, to be deposited into the fund such that the fund balance is maintained at two percent of annual general fund spending. In years in which general fund revenue falls below spending at the end of the fiscal year, funds are transferred from the TSRF to balance the budget.[iii]
Principal Non-Statutory Reserves:
- Economic uncertainties refers to unrestricted general fund balances designated as fiscal reserves. Because these funds are not restricted under State law, they afford the State more flexibility than statutory reserves. Together with the two statutory reserves (referred to as “rainy day reserves”), these funds comprise the State’s three “principal reserve funds.”
Other Fiscal Resources:
- Other fiscal resources comprise additional funds in the State’s general fund. These funds include the extraordinary monetary settlements fund, funded by settlements with major financial institutions in the wake of the 2008 financial crisis, which has disbursed proceeds to a range of State spending, including fiscal reserves. Other reserve resources include funds set aside to support the State’s future debt service liability, as well as to cover above-trend operating cost growth as the State reaches collective bargaining settlements.
[i] National Association of State Budget Officers (NASBO), “Rainy Day Fund Historical Data” (accessed June 2023), https://www.nasbo.org/reports-data/historical-data.
[ii] New York State Division of Budget, Fiscal Year 20204 Enacted Budget Financial Plan (July 2023), https://www.budget.ny.gov/pubs/archive/fy24/en/fy24en-fp.pdf.
[iii] State Finance Law, Chapter 56 Article 6, Section 92, https://www.nysenate.gov/legislation/laws/STF/92.