Gov. Kathy Hochul said the state budget that's nearing a final deal will not pay down $6.2 billion in outstanding federal unemployment insurance debt from the COVID pandemic — forcing New York employers to continue to shoulder the burden.
Instead, the governor said the spending plan will include $165 million to cover the interest payments business owners across the state have absorbed for the last few years.
"We've heard them, we're concerned about them, and we want to alleviate that burden on them," Hochul said of employers during her budget announcement Monday night.
State business leaders and a nonpartisan fiscal watchdog Tuesday criticized the decision, arguing it's not the best fiscal choice for business owners who have been paying down the principle of the $6.2 billion debt.
"It hurts small businesses more than big businesses, and small businesses are the driver of the economy," Business Council of New York State President & CEO Heather Mulligan said. "It's a direct tax on employers, and the more in debt we are, the higher the taxes, because the rate goes up."
Mulligan told Spectrum News 1 the state covering employers' interest payments is a nice gesture, but is insufficient after four years of state inaction.
Employers in the state are paying the highest rate possible to the federal government, she added.
New York is one of two states that still has COVID-related federal unemployment insurance debt after the state failed to use $25 billion in federal stimulus aid for unemployment tax relief.
That decision predated Gov. Hochul, but she isn't interested in using state dollars to make the UI fund whole.
"Decisions were made before my time — I will acknowledge that, OK?" Hochul told reporters about the debt. "I have to do a lot of cleanup, and so what I'm talking about is conversations we've been having about what we do with this."
The arrears have cut a few hundred dollars from weekly benefits for unemployed New Yorkers, but would be restored after the debt is eliminated.
"It is a real challenge because you have to fit it in amongst everything else within the budget," said Patrick Orecki, director of state studies with the Citizens Budget Commission. "You don't want to deplete your reserves to do it, either."
The Assembly's one-house budget proposed fully paying off the UI debt as the higher burden prevents businesses from hiring more staff or increasing wages.
State Assembly Labor Committee Chair Harry Bronson led the push earlier this session to use money from the state's reserve, or rainy day fund, to pay off the UI debt.
The assemblyman declined to comment Tuesday amid ongoing budget negotiations.
Orecki said state leaders should have paid down the debt in the budget to provide more relief to businesses.
And Mulligan and Orecki agree — Hochul's pared down $2 billion one-time "rebate" checks for low- and middle-income families would have been better spent on debt principle.
"Paying off the UI debt would have been a much more prudent use of the $2 billion rather than a one-time check to people," Mulligan said. "I think it would be more significant in terms of its impact on the economy. It would help us get out of this debt sooner and hopefully help, esepcially, small businesses in the long run."
More than 450,000 registered employers pay into the state's Unemployment Insurance fund, according to the state Department of Labor.
State budget officials said employers are on track to pay off the debt by the end of 2027.
"[Monday] night, Gov. Hochul announced an agreement with the state Legislature on many of the major elements of the FY 2026 budget and final budget bills will be printed later this week that will provide additional details," a Division of the Budget spokesperson said in a statement.
Orecki said the state should be putting more in reserves to prepare for potential billions in federal cuts, and added a chaotic market that could drive up unemployment.
"If you're spending as much as this plan appears to do with those cuts in view, the state could be in a really difficult spot mid-year going forward," he said.