New York State Comptroller Thomas P. DiNapoli today released a review of recent federal data about how the pandemic negatively affected student performance in New York. In response, he urged New York school districts to assess their plans for spending federal pandemic funds and to target funds towards children most in need.

New York was allocated over $15 billion in emergency education aid during the pandemic from the federal government, with $14 billion from three rounds of the Elementary and Secondary School Relief Fund (ESSER) assistance. This aid was aimed at elementary and secondary schools and must be obligated by September 2024. Based on data from DiNapoli’s COVID-19 Relief Program Tracker, through Jan. 31 New York’s school districts have spent roughly 40% of ESSER funds.

“The classroom disruptions caused by the pandemic have hurt New York’s students. Academic losses were greater for younger students, with fourth grade scores dropping more than the national average,” DiNapoli said. “School districts must act quickly to take full advantage of available resources to help students that are most in need get caught up, before time runs out.”

Recent data from The National Assessment of Educational Progress (NAEP) shows student performance dropped significantly in 2022 from 2019. New York’s average score remained steady for eighth grade reading but declined in eighth grade math (down 6 points). Over this time, New York’s losses in fourth grade math and reading scores were double the national average and exceeded 45 other states in math and 38 other states in reading. The average drop for fourth grade math scores (10 points) was so severe that McKinsey & Company estimated this learning loss to be the equivalent of nearly an entire school year.

Over the same time frame, fourth grade math proficiency rates declined across all gender, racial and ethnic groups, and the decline was steepest for Asian and Pacific Islander students, at 14 percentage points. Students from low-income households also experienced steep declines in fourth grade math proficiency rates from 24% to 18%.

The Executive Budget proposes $42.1 billion in combined state and federal education aid for the upcoming state fiscal year (SFY) 2023-24; however, that total is projected to decline, as the balance of federal pandemic relief funds must be obligated by September 2024. This could be problematic if a significant portion of the relief funds is left unspent or is dedicated to programs with recurring expenses or if significant progress in academic recovery has not occurred.

DiNapoli urged the State Education Department to provide school districts with guidance on best practices for spending of funds and encouraged school districts to ensure funds are being used for evidence-based practices for students most in need.

Report
“Nation’s Report Card” Underscores New York’s Need for Academic Recovery

Despite the state’s economic recovery since the pandemic first hit three years ago, significant headwinds will present challenges to ongoing economic growth and fiscal stability. The state faces prolonged inflation, rising federal interest rates and the end of federal relief aid that was instrumental in balancing the past two budgets, according to a report by State Comptroller Thomas P. DiNapoli on the State Fiscal Year (SFY) 2023-24 Executive Budget.

The Executive Budget proposes $227 billion in All Funds spending in SFY 2023-24, an increase of $5.4 billion, or 2.5%, from the prior year. The Division of the Budget (DOB) projects outyear gaps of $5.7 billion in SFY 2024-25, $9 billion in SFY 2025-26, and $7.5 billion in SFY 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.

“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 budget proposals to increase state reserves and strengthen the state’s rainy-day reserves should be supported. At the same time, there are several concerning proposals that exempt approximately $12.8 billion from competitive bidding and oversight requirements, leaving too much in the dark. The budget also advances debt proposals that reinforce concerns about the affordability of debt levels and the transparency and accountability of current debt practices. I urge lawmakers to reject these proposals.”

DiNapoli’s assessment of the Executive Budget identified several economic, revenue and spending risks and other concerns.

Economic and Revenue Risks

Risks associated with the economic environment include continued inflation, the impact of interest rate hikes and disruptions related to Russia’s invasion of Ukraine. Increased interest rates by the Federal Reserve have resulted in increased borrowing costs for consumers and businesses. With inflation expected to remain elevated and additional rate hikes expected in 2023, consumer and business spending could be further constrained.

With the Executive Budget Financial Plan forecasting a recession, DOB reduced its projections of tax revenues for the upcoming fiscal year by $2.1 billion and a total of $10.3 billion over the life of the Plan. Should a recession be more severe or be longer in duration, revenues could decline more than currently forecasted. The changes in the labor market are also a risk to the state economy. New York’s job recovery from the pandemic has lagged the nation’s, there are fewer workers in the labor force and the labor force participation rate is among the lowest in the nation.

Structural Balance and Use of Federal Funds

State budgets often include provisions that cause recurring spending to grow more quickly than recurring revenue, creating a structural imbalance and budget gaps. Such gaps are often closed with short-term solutions. The Executive Budget includes $14.9 billion in SFY 2023-24 resources that DiNapoli’s office identifies as either temporary (more than one year but not permanent) or non-recurring (one year). About 98% of that funding results from temporary federal assistance related to the pandemic (69%) and tax increases enacted in SFY 2021-22 (28%).

The American Rescue Plan provided the state with $12.7 billion of funding from the State and Local Fiscal Recovery program that could be used for a broad range of purposes, including replacement of lost tax revenue due to the pandemic. The Financial Plan continues to assume these funds will be used through SFY 2024-25, including $2.25 billion in SFY 2023-24 and $3.64 billion in SFY 2024-25. Little information is available to determine whether the funding has been used equitably, efficiently and with the proper balancing of short-term need with long-term sustainability. Increased transparency on the planned use of the funds is needed.

There are also significant spending risks. In June 2023, the state will begin redetermining eligibility for all enrollees in Medicaid, the Essential Plan and Child Health Plus programs that are projected to reduce coverage by 10.3% to 8.3 million individuals by April 2024. In the Medicaid program, the Financial Plan projects a decline of almost 888,000 individuals in a single year. If enrollment exceeds current projections, significant unbudgeted costs will occur. For example, if only half of the assumed decline is realized, there could be an additional $6.2 billion in total costs, including $2.2 billion in state costs in SFY 2023-24.

Reserve Funds

For years, DiNapoli has warned of the state’s underfunding of its statutory rainy-day reserves. The Executive Budget proposal increases the balance of statutory rainy-day reserves to $6.5 billion at the end of the current fiscal year and includes legislation to further increase the maximum annual deposits to 10% of State Operating Funds (SOF) spending and the maximum fund balance to up to 20% of SOF spending. If enacted, these measures would provide tools to manage economic or other challenges ahead and ensure fiscal stability. DiNapoli urges lawmakers to support these actions.

The Financial Plan also indicates unrestricted fund balances designated for “economic uncertainties” would grow to $13.5 billion at the end of the fiscal year. DiNapoli urges greater priority should be placed on building statutory rainy-day reserves rather than relying on informal, unrestricted reserves.

Debt Practices

The Executive Budget proposes to continue circumventing the state’s debt cap by utilizing a loophole in the Debt Reform Act for structuring the Gateway Plan debt. 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. These actions result in a misleading picture of the size of the state’s debt burden.

The Executive Budget again proposes “backdoor borrowing” authorizations for up to $5 billion in short-term cash flow borrowings during SFY 2023-24 that are redundant to the existing ability to issue more cost-effective Tax and Revenue Anticipation Notes (TRANs). Given the state’s current strong cash balances, it is unclear why this more costly form of borrowing is proposed.

Collectively, these and other actions in recent budgets have rendered the state’s current debt limits functionally meaningless. DiNapoli recently issued a report highlighting how caps and other debt restrictions set in statute have not worked to rein in state debt or stop inappropriate borrowing practices, and recommended several reform measures to address these problems.

Transparency

The SFY 2023-24 Executive Budget continues a problematic pattern from past budgets that include eliminating the Comptroller’s contract pre-review oversight and waiving competitive bidding requirements for certain contracts, including the proposal related to selection of certain Managed Long Term Care plans. In addition, the budget includes an appropriation that would unduly and inappropriately impair the Office of the State Comptroller’s duty to conduct independent audits of the New York State Health Insurance Program.

This report details provisions of the SFY 2023-24 Executive Budget proposal submitted on February 1. The report does not reflect 30-day amendments released on March 3 or the amended Financial Plan released on March 8.

Report
New York State Fiscal Year 2022-23 Executive Budget Review
Debt Report