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Municipal Bonds

New York: on the road back to normal

Glen R. Anderson
Senior Research Analyst
Statue & building

New York State is a prolific issuer of municipal debt. Heavy dependence on the financial services industry persists, but will likely be reduced by expected growth in technology-related jobs. As a sovereign entity, the state has a variety of tools at its disposal to maintain fiscal stability, including but not limited to raising taxes, reducing or deferring expenditures, and engaging in short-term borrowing.

New York is a major issuer of municipal bonds

New York State participates extensively in the municipal market. Issuance of new municipal debt in New York State, including state and local issues, registered $48 billion in 2021, according to The Bond Buyer. That represented 10% of 2021 issuance nationwide, and made New York State the third largest issuer of municipal debt in the nation in 2021 (behind California and Texas). Such a dependence on the capital markets reduces the risk that New York State would imperil its access to the market by defaulting on any of its debt. A rating reduction is more probable than an outright default.

As is the case with all states, the State of New York itself is not authorized to file for Chapter 9 bankruptcy. New York State does, however, allow most of its political subdivisions (with the exception of school districts) to file. Even so, New York State has a track record of imposing state financial control boards on its troubled subdivisions before things reach such a point. Examples include New York City in the 1970s, Yonkers in the 1980s and Buffalo in the early 2000s. While a government entity can default without filing Chapter 9 (and, conversely, file Chapter 9 and continue to pay its bonded debt), New York State is nowhere near that for reasons outlined below.

The state itself issues debt under a variety of programs, including general obligations and dedicated revenue obligations. Most New York State debt is well-secured.

The state’s general obligation (GO) bonds carry the state’s strongest security pledge. New York State GO bonds are rated Aa1 by Moody’s, AA+ by Standard and Poor’s and AA+ by Fitch. Prior to issuance, GO debt of the state of New York must be approved by the citizens of New York State in a general election. Under Article VII, Section 16 of the New York State constitution, if state GO debt service is not paid, the state controller is required to set aside sufficient funds from the first revenues received by the General Fund to pay that debt service. New York State GO debt does not need a formal appropriation or enacted budget to get paid, and, in essence, enjoys a constitutionally protected first lien on taxes levied on the 11th largest economy in the world.

Two largest debt programs are secured by dedicated taxes

However, most debt issued by the state of New York is not GO debt. The state’s two largest debt programs are secured by dedicated taxes – the personal income tax bonds and the sales tax bonds. Strong set-aside mechanisms and bondholder protection provisions are included in both programs. The personal income tax (PIT) bonds are the state’s largest borrowing program, representing approximately 75% of the state-supported debt. The personal income tax bonds are secured by a set-aside of 50% of the state’s personal income tax revenues.

FY21 pledged PIT revenues covered FY21’s annual debt service payment by 2.59 times. This is low by the program’s history, due to short-term borrowing in FY21 to help the state cope with pandemic-related issues. As a result, debt service expense jumped sharply from $4.1 billion in FY19 to $10.6 billion in FY21. All the short-term debt was retired by the end of FY21, and annual debt service has returned to the $5 billion range going forward, with coverage projected to remain above 6.5x through FY25.

This program can withstand an 80% drop in PIT revenues from FY21 levels before debt service would be impaired. The New York State comptroller indicates that PIT revenues have come in 28.7% higher in FY22, as opposed to FY21, partially due to an increase in the New York State income tax rates, partially due to better-than-expected economic activity.

The sales tax bonds are secured by a set-aside of two cents of the of the state’s four cent sales tax revenue. FY21 pledged sales tax revenues covered projected maximum annual debt service by 2.83 times. This program can withstand a 75% drop in sales tax revenues from FY21 levels before debt service would be impaired. The state comptroller estimates that sales tax revenues increased 24.3% in FY22. At one point, New York State mostly issued debt secured by annual appropriations. With the advent of the PIT and sales tax programs, use of appropriation debt has been greatly reduced.

New York’s debt load is heavy

In relation to other states, New York State is considered heavily indebted. New York State has the second highest amount of tax-supported debt outstanding at $65 billion, according to Moody’s. On a per-capita basis, the state’s debt burden is fifth highest among the 50 states at $3,614 versus the Moody’s median of $1,039. Net tax-supported debt as a percentage of personal income was sixth highest in the nation, at 4.8%, versus the Moody’s median of 1.9%. Net tax-supported debt as a percentage of state GDP was tenth highest in the nation, at 4.1%, versus the Moody’s median of 2.0%. All of these ratios have improved since FY13.

Despite being more heavily indebted than most states, principal and interest on New York State’s bonded debt comprised only 3.0% of the state’s total governmental funds’ expenditures in FY21. This has as much to do with New York State’s level of total expenditures being high as it does with the State’s actual debt service expense being low. Taking New York State’s total governmental funds’ expenses in FY21 ($199.3 billion) and dividing them by the current population (20.2 million) produces an expenditure per capita of $9,866. The same ratio for Florida, with a larger population, is $4,836. It’s $9,040 for California, and $5,673 for Texas. No one can credibly accuse New York State of being a bare-bones, low-cost provider. This might suggest room for economizing before the state would move to impair debt service.

The state’s two largest debt programs are secured by dedicated taxes – the personal income tax bonds and the sales tax bonds. 

A balanced budget is required

The New York State constitution requires that the governor submit a balanced budget, and New York State law requires that the legislature enact a balanced budget. The budget is due by the start of the state’s fiscal year, which begins April 1. Because New York State’s politics and budget adoption process are sometimes chaotic, New York State has often missed the mandated April 1 deadline and adopted its budget late.

New York has done better in recent years, as the FY19, FY20 and FY21 budgets were adopted essentially on time. The FY23 budget was signed nine days late. In those years when the budget was late, the legislature enacted a separate debt service bill by March 31 to ensure timely, uninterrupted payment of the state’s debt obligations. The rest of the budget may be months late, but historically New York State has always provided for the punctual payment of its public debt. We expect that will continue to be the case going forward.

Despite the pandemic, the state’s General Fund posted an $8.6 billion surplus in FY21, equal to 12.6% of General Fund revenues. That positive variance is due heavily to the federal assistance received in FY21 under various federal coronavirus relief bills. In addition, General Fund tax revenues came in approximately $1.8 billion (5.0%) ahead of the initial estimate. Offsetting that, expenditures came in $2.6 billion (4.0%) higher than initially budgeted.

As a result, total General Fund balance increased to a strong 29.9% of General Fund revenues. During FY21, New York State issued $4.5 billion of short-term borrowings for cash flow purposes under its Personal Income Tax (PIT) Bond program, all of which was paid off by the end of FY21.

New York State’s pensions have traditionally been well funded.

The $208.9 billion FY22 budget was adopted seven days late on 07 Apr 2021. It was $31 billion or 18% larger than the adopted FY21 budget. The new budget contained numerous tax hikes, including significant tax increases on high wage earners. The FY22 budget also relied on substantial federal assistance, which was projected to total $96.6 billion, an increase of nearly $18.5 billion or 23.7% from the prior year. The budget plan anticipated combined total deposits of $825 million to the tax stabilization reserve fund and the rainy day fund in FY22, bringing total rainy day reserves to $3.3 billion.

Preliminary numbers released by the New York state comptroller indicate that FY22 will post a sizable surplus. According to the comptroller’s March 2022 State Cash Report, total governmental funds’ receipts in FY22 came in $30.6 billion (or 14.3%) ahead of the enacted FY22 budget, and $53.0 billion (or 27.7%) ahead of FY21. That performance was bolstered by federal aid, but also by robust tax revenues. Personal income taxes came in $9.8 billion ahead of plan, and business taxes came in $18.1 billion ahead of original estimates. Sales taxes came in $1.5 billion ahead of initial budget estimates. Disbursements came in only slightly ahead of plan, resulting in a substantial estimated surplus for FY22.

The $220 billion FY23 budget was adopted nine days late on 09 Apr 2022. It is 5.3% larger than the adopted FY22 budget, and unlike last year, contains no major tax hikes. Among other things, it increases education funding by 7.2%, which will strengthen the state aid intercept mechanism for local school district bonds. New York State also enacted a gas tax holiday that will suspend 16 cents of the state’s 33 cent per gallon gas levy. That is scheduled to take effect June 1, and last through December 31.

New York State’s pensions have traditionally been well funded. The funded ratios for the Employee Retirement System (ERS) and the Teacher’s Retirement System (TRS) were 99.9% and 97.3%, respectively, as of FY21. So New York State is not pressured in that regard as so many other states are.

New York State’s total fixed costs, including debt service, plus pension contributions, plus retirement health care (commonly referred to as other postemployment benefits or OPEB) are low at 5.3% of total governmental funds’ expenditures in FY21. This ratio compares favorably with other states, such as New Jersey (12.2%), Connecticut (22.1%) or Illinois (17.4%).

New York is a high wealth state

New York State is a wealthy state. For 2021, New York State’s per capita income ($76,415) was third highest among the 50 states, at 120.4% of the U.S. average ($63,444). That ratio stood at 117.7% in 2000 and 119.9% in 2010, so New York has become wealthier over the past 20 years compared to the nation as a whole, though 2021 did lose a little ground.

New York State was hit harder than most states by the pandemic. It suffered a 20.2% decline in non-farm payrolls between February and April 2020, as opposed to the national decline of 14.4%. Through March 2022, New York State has regained approximately 77% of the jobs lost versus the national figure of 93%. State unemployment stood at 4.6% in March 2022, above the national average of 3.6% for the same period, and tied for sixth worst in the nation.

The state’s economy is deep and diverse, though financial services exert an outsized influence. The upstate economy is more dependent on manufacturing and had been sluggish even before the pandemic. The downstate economy, anchored by financial, professional and business services, has been the state’s growth engine. New York State’s $1.7 trillion economy represents 8.3% of U.S. GDP. On a stand-alone basis, according to the International Monetary Fund (IMF), New York State’s economy would be the eleventh largest in the world.

Wall Street activity has traditionally generated a disproportionate share of total state tax revenues because of its high levels of compensation, profitability and capital gains. While Wall Street represents about 4% of the state’s job total, it can account for 15–20% of total tax revenues realized by the state. Despite the pandemic, Wall Street had banner years in 2020 and 2021, with the stock market setting record highs and low interest rates triggering a wave of debt refinancings.

New York State’s two largest sources of local revenue are the personal income tax (PIT) and the sales tax. Of the state’s General Fund receipts, 39.0% came from the PIT in FY21. With the tax hikes enacted in FY22, and an anticipated falloff in federal revenues, that percentage is likely to increase sharply. The state’s somewhat steep income tax structure further concentrates the PIT on the highest earners, making it even more sensitive to swings in asset prices and capital gains tax receipts. In 2018, the latest year available, the top 6% of New York State income tax filers accounted for 65% of the state’s PIT revenues.

New York State’s population dropped 1.8% between April 2020 and July 2021. The pandemic may explain a good part of this, especially in New York City. However, other factors could be in play. The Tax Foundation calculates that New York State has the highest state and local tax burden in the country (even before 2022’s income tax increases). U.S. Internal Revenue Service data show that low-tax Florida is the second most popular destination for out-migrating New Yorkers (trailing only New Jersey). Are these relocations retirees seeking warmer climes or high earners looking for lower tax jurisdictions? Maybe a little of both? Hard to tell. But in any event, this does bear watching.

After two difficult years, New York State and the nation are beginning to return to normal. Despite all the hardships, New York has performed well financially. New York State has a wide array of tools at its disposal to adapt and to maintain financial stability, and again has demonstrated a willingness and ability to use them.

The downstate economy, anchored by financial, professional and business services, has been the state’s growth engine.  
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State of New York Fiscal Year 2021 Comprehensive Annual Financial Report; New York State Annual Information Statement; New York State Constitution; New York State Comptroller Reports; New York State Division of the Budget; New York State Teachers’ Retirement System Fiscal Year 2021 Comprehensive Annual Financial Report; New York State and Local Retirement System Fiscal Year 2021 Comprehensive Annual Financial Report; Moody’s Investors Service; Standard & Poor’s; Fitch Ratings; The Bond Buyer; Moody’s 2021 State Debt Medians Report; International Monetary Fund data base; U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; The Tax Foundation; U.S. Internal Revenue Service.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

Important information on risk

Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments.

This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Nuveen provides investment advisory solutions through its investment specialists.

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