Federal Cuts and a Weaker Economic Forecast Could Create Budget Gaps Not Seen Since Global Financial Crisis
The state’s Financial Plan shows a growing structural budget deficit with a cumulative three-year budget gap of $34.3 billion, as forecasted by the Division of the Budget (DOB). When accounting for recent federal actions, the gaps as a share of spending reach levels not seen since the Global Financial Crisis of 2009, according to State Comptroller Thomas P. DiNapoli’s report on the State Fiscal Year (SFY) 2026 Enacted Budget and First Quarterly Financial Plans.
The $34.3 billion gap is up $7 billion since the January release of the Fiscal Year (FY) 2026 Executive Budget Financial Plan, and is attributable to downward revisions to the economic forecast and projected revenues, as well as increases in projected spending.
“The Financial Plan paints a challenging picture for the state that will only grow more problematic with the incoming federal cuts from the reconciliation bill signed by the President,” DiNapoli said. “This is likely just the beginning; the relationship between the federal government and the states is being restructured, and state governments will be facing drastic reductions in federal aid that could force difficult decisions about state revenue and spending priorities. There is an urgent need to formulate a fiscal response to the federal reconciliation bill and support New York’s safety net.”
Growing Budget Gaps and Structural Imbalance
According to DOB’s FY 2026 Financial Plan, All Funds disbursements are projected to total $254.4 billion in SFY 2026, compared to $249.2 billion in All Funds receipts. State Operating Funds (SOF) disbursements are projected to grow by $12.4 billion (9.3%) and General Fund disbursements by $16.8 billion (15.5%) in SFY 2026. SOF spending growth is estimated to be 13.9% over the Financial Plan period, outpacing projected SOF revenue growth of 4.6%.
Higher spending growth in school aid and Medicaid has driven overall spending growth. In addition to being the largest areas of spending, they have also grown the fastest. Between SFY 2016 and SFY 2026, SOF spending is projected to grow 55%; DOH and Other Agency Medicaid spending is projected to grow nearly 120% and School Aid 58.7%.
On an All Funds basis, DOB projects Medicaid spending will total almost $112.2 billion in SFY 2026, which would represent 44.1% of projected All Funds disbursements for the year. When spending on the Essential Plan is included — estimated to be $13.7 billion in SFY 2026 — these two healthcare programs are projected to comprise almost 50% of All Funds disbursements.
Economics and Revenue
The economic forecast published with the Financial Plan was revised downwards from the projections made with the Consensus Forecast report on March 1. Job gains both nationally and statewide slowed through May. Average monthly employment growth in New York was 4,600 jobs, down from 19,100 for the same period last year. For the current fiscal year, DOB is projecting a weaker New York economy with both wage and personal income growth forecasted to decelerate from their previous fiscal year levels.
Federal receipts are projected to decline by $2.6 billion in SFY 2026 largely due to waning federal pandemic relief funds. Spending reductions recently enacted for federal fiscal year (FFY) 2025 and currently being negotiated for FFY 2026 in Congress are not included in DOB’s projections. Based on DOB’s estimates, the Financial Plan is projected to become more reliant on tax revenues; by SFY 2029, tax collections are projected to account for nearly half of total revenues. Of the state’s individual tax sources, over 50% come from the Personal Income Tax.
Impact of Federal Actions
The Enacted Budget Financial Plan was released prior to the enactment of federal budget legislation signed by the President on July 4. The federal bill implements deep cuts to federal funding and changes to eligibility for safety net programs, which will have major impacts on the Financial Plan and on New Yorkers, particularly on healthcare and nutritional assistance.
In the First Quarter Update to the Financial Plan, released in July, the Executive estimates $3 to $5 billion in costs to state and local governments as a result of the federal bill. The update indicates the federal budget law will have a $750 million state impact in SFY 2026 and impacts ranging between $3 billion and $3.4 billion in subsequent years on the Financial Plan, but did not adjust estimates of receipts, disbursements and budget gaps for these estimates.
Analysis by the Office of the State Comptroller based on information currently available indicates the early impacts of spending provisions of the federal budget bill will result in lost federal receipts between $27 and $29.6 billion over the Financial Plan period. Besides increasing the number of New Yorkers who are uninsured or suffering from food insecurity, the state will also contend with changes made to terminate funding for climate, clean energy, and resiliency programs, many of which were approved under the Inflation Reduction Act. These changes will slow the transition to clean energy and make it more costly for consumers and small businesses.
Reserve Funds
The Financial Plan indicates that the state’s principal reserve levels will decrease by $7.5 billion (34.7%) to $14.1 billion in SFY 2026 and remain at that level throughout the Financial Plan period, with the only change being shifts from the informal “economic uncertainties” reserve into the Rainy Day Reserve Fund. No increases in principal reserves are planned for the Financial Plan period. If continued deposits are made as currently projected in the Financial Plan, the statutory rainy day reserve funds would total $11.6 billion by SFY 2029 – approximately 7% of SOF spending.
Debt Burden
New York’s use of debt to finance its essential capital needs is appropriate, but its overreliance on bonds, in particular backdoor borrowing through public authorities, has led to one of the highest debt burdens in the nation. Total state-supported debt outstanding is projected to grow over 70% during the next five years, from $55.9 to $95.1 billion. As a result, the state is projected to near its debt limit, with room under the state’s debt cap projected to decline to just $503 million by SFY 2030. Approaching the debt cap would mean that future projects might have to be delayed and it will be more difficult for the state to both keep existing infrastructure in a state of good repair and make infrastructure investments to move the state forward. Read more »
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