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Municipal Bonds

New York: a deep and diverse economy

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 $54 billion in 2020 according to The Bond Buyer. That represented 11% of 2020 issuance nation-wide, and made New York State the third largest issuer of municipal debt in the nation in 2020 (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 for Chapter 9 (and conversely file for Chapter 9 and continue to pay its bonded debt), New York State is nowhere near that point 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 Aa2 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 secured by a set-aside of 50% of the state’s personal income tax revenues.

FY20 pledged PIT revenues covered FY20’s annual senior debt service payment by 11.32 times (in part because of restructurings), and covered projected senior maximum annual debt service by 6.44 times. This program can withstand an 80% drop in PIT revenues from FY20 levels before debt service would be affected. The New York State Division of the Budget (DOB) projects that PIT revenues will decline 4.1% in FY21.

The sales tax bonds are secured by a set-aside of 25% of the state’s sales tax revenues. FY20 pledged sales tax revenues covered FY20’s annual debt service payment by 3.89 times, and covered projected maximum annual debt service by 2.93 times. This program can withstand a 70% drop in sales tax revenues from FY20 levels before debt service would be affected. DOB projects that sales tax revenues will decline 11.5% in FY21. 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 the fifth highest among the 50 states at $3,314 versus the Moody’s median of $1,071. Net tax-supported debt as a percentage of personal income was eighth highest in the nation, at 4.6%, versus the Moody’s median of 2.0%. Net tax-supported debt as a percentage of state GDP was tenth highest in the nation, at 3.72%, versus the Moody’s median of 1.9%. All of these ratios have improved since FY13.

Despite its being more heavily indebted than most states, principal and interest on New York State’s bonded debt comprised only 3.5% of the state’s total governmental funds’ expenditures in FY20. 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 FY20 ($171.7 billion) and dividing them by the current population (19.5 million) produces an expenditure per capita of $8,828. The same ratio for Florida, with a larger population, is $3,926. It’s $7,517 for California, and $4,072 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.

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.

Though it had done better in recent years, the state missed the deadline for FY18, as the budget was signed 10 days late. The FY19, FY20 and FY21 budgets were adopted essentially on time. 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.

The $177 billion FY21 budget was adopted on 2 Apr 2020. It was $1.5 billion or 0.9% larger than the adopted FY20 budget. The new budget included no major new taxes, and all appropriations for debt service were included. The budget legislation granted the state’s budget director broad authority to reduce most local assistance and state agency spending in order to maintain budget balance. It also authorized $11 billion of deficit borrowing if necessary.

In May, the DOB estimated that FY21 would be $13.3 billion out of balance (7.5% based on the adopted budget). DOB initiated a number of expenditure reductions, including cuts in aid to local governments and the freezing of hiring, new contracts, and pay raises. The state does not currently expect to draw on its two rainy day funds in FY21. Those two funds stood at a combined $2.5 billion as of March 31, 2020, representing 6.0% of general fund revenues. All in all, DOB projects FY21 to end in balance. Not without pain, but in balance.

While the dollar amount of the FY21 deficit, $13.3 billion, is large in absolute numbers, on a percentage basis (7.5%) it is within a range that New York State has seen before and successfully navigated. In the aftermath of the 9/11 attacks, the FY04 deficit was estimated as high as 10%. The FY12 budget, reflecting the fallout of the financial crisis, had a deficit estimated at 7% at one point. New York State was able to effectively address those situations.

New York State’s pensions have traditionally been well funded. The funded ratios for the Employee Retirement System (ERS) and Police and Fire Retirement System (PFRS) were 96.3% and 95.1%, respectively, as of March 31, 2020. 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, pension contributions and retirement health care (other post-employment benefits or OPEB), are low at 5.9% of total governmental funds’ expenditures in FY20. This ratio compares favorably with other states, such as New Jersey (16.9%), Connecticut (21.8%) or Illinois (19.2%).

New York is a wealthy state

Prior to the pandemic, New York State’s per capita income ($71,717) was third highest among the 50 states, at 127% of the US average ($56,490). That ratio stood at 117.5% in 2000, and 120.8% in 2010, so New York has become wealthier over the past 20 years when compared to the nation as a whole.

New York State’s economy was especially hard hit by the pandemic. Unemployment jumped to 15.3% in April 2020, as opposed to the national rate of 14.8% for the same period. New York State’s jobless rate remained elevated longer than the nation, peaking at 15.9% in July 2020, even as the national rate had declined to 10.2% by that time.

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. Prior to the pandemic, New York State’s $1.7 trillion economy represented 8.0% of US GDP. On a stand-alone basis, according to the International Monetary Fund, 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 a banner year in 2020, 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, 53.0% came from the PIT in FY20, up from 47.9% in FY19. 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 2017, the top 6% of New York State income tax filers accounted for 66% of the state’s PIT revenues. These taxpayers are more likely to have kept their jobs, continuing to work remotely. And high-income Wall Street had a great year. This may soften the blow to the state’s PIT revenues.

New York State’s population has dropped in each of the last four years, down about 1.0% overall since 2016. The pandemic may have aggravated this trend, especially in New York City. While there are no official numbers yet, anecdotal evidence suggests as much. Are these relocations permanent or temporary? Are these retirees seeking warmer climes or high earners looking for lower tax jurisdictions? Hard numbers won’t be available for a while, but this does bear watching.

With the advent of vaccines, life may begin to return to a more normal state. That would presumably result in an easing of financial pressures on all governments, including New York State. It is safe to say that returning to pre-pandemic levels will not occur overnight and will likely take several years. It is also safe to say that some things may be different post-pandemic. However, whatever the future holds, New York State has a wide array of tools at its disposal to adapt and to maintain financial stability, and a demonstrated willingness and ability to use them.

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State of New York Fiscal Year 2020 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; Moody’s Investors Service; Standard & Poor’s; Fitch Ratings; The Bond Buyer; Moody’s 2020 State Debt Medians Report; International Monetary Fund data base; U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics.

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 is no guarantee of 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 nuveen.com. Please note, it is not possible to invest directly in an index.

A word 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.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC. Nuveen provides investment advisory solutions through its investment specialists.

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