Exactly halfway through the state’s fiscal year, Gov. Andrew Cuomo has quietly amassed enough money to avoid major cuts to this year’s $177 billion spending plan.
But even his budget director says using the funds would merely worsen the state’s financial crunch in coming years — including an unprecedented $16 billion hole in the next state budget.
And with talks on another coronavirus aid package resuming in Washington, the governor has a new rationale for delaying decisions on a final plan to deal with the deficit in the current year’s plan until after the election.
“Many people want to see a firm plan to deal with the budget, but we are not prepared to acknowledge that there will be zero federal aid,” Robert Mujica, state budget director, told THE CITY Tuesday.
“We are also not waiting” to deal with the budget crisis, he added.
The implications of all this for the city’s fiscal squeeze are uncertain.
The Cuomo administration has threatened a 20% reduction in local aid, which would blow a $3 billion hole in the city budget. Much of that money is for education aid, which Mujica said will not be reduced by such a large amount.
But even if state aid is delivered as expected, balancing the city budget will still depend on winning $1 billion in concessions from municipal unions and having tax revenues meet expectations.
‘A Multi-Year Problem’
Fiscal experts remain unconvinced waiting is the right approach.
“The state has a multi-year problem,” said Andrew Rein, president of the Citizens Budget Commission. “Even if they have the cash to get through the year, they have to solve the problem now.”
Cuomo often claims the state faces a $14.5 billion shortfall, which is the expected plunge in revenue from what the governor estimated in his budget proposal early this year.
But the spending plan adopted in early April had already reduced expenditures and left the state about $10 billion short of what it budgeted. Without federal aid, the Cuomo administration’s announced approach was to reduce spending on state operations by $2 billion and slash local aid by $8 billion.
Since then, the state has identified $3 billion in money from legal settlements, primarily with banks over the financial crisis, and economic reserves that could be used to close the gap, noted Robert Ward, deputy state comptroller.
The state borrowed $4.5 billion to cover the delay in income tax payments from April to July. That repayment could be delayed or even converted to long-term bonds.
Meanwhile, the state has amassed $2 billion by withholding 20% of monthly payments to local governments in case it does have to cut local aid.
And the federal government continues to relax the rules on how the state can use $5 billion in coronavirus aid, allowing the funds to be diverted to regular expenses. Last week, for example, the Treasury Department allowed the money to be used to pay correction officer salaries.
The Cuomo administration insists it has aggressively attacked the problem and put the state in a position to wait for a resolution of the fight over aid in Washington. Cuomo has reduced the state workforce by more than 4,000 positions and deferred across-the- board salary increases.
“We are managing this every day,” Mujica insisted.
The 20% Solution
The crucial lever is the 20% it is withholding in payments to localities, nonprofits and others with state contracts. If more federal aid arrives, the withheld money would be paid. If not, it won’t.
“If we haven’t made it clear, we will make it more clear that our intent is not to fill the gap,” Mujica said. “We would convert them to permanent reductions.”
The Legislature could come up with its own plan and insist on borrowing. When the governor decides on a final plan, the Legislature has 10 days to come up with an alternative.
New Jersey passed a budget last week that uses $4.5 billion in borrowing to cover part of its budget gap. Most fiscal experts in New York oppose either pushing off payment of its own $4.5 billion in short term debt or repaying it with long-term bonds.
“It just props up spending you can’t afford,” said Rein.
Ward illustrated the consequences by pointing out that the long-term bonds the state issued in the early 1990s to eliminate an annual deficit won’t be paid off in 2025.
Mujica says the current plan is to repay the short-term borrowing but that using it to cover the deficit is an option.
A Taxing Role
New Jersey’s budget also raised the top income tax rate on the wealthy, to 10.75% from 8.97% on earnings over $1 million — a demand of many Democrats in New York’s legislature.
Cuomo has opposed an increase in the state’s 8.82% rate, which affects single people making more than $1 million and couples at $2 million, arguing it would encourage the wealthy to relocate to other states.
Most of those people live in New York City where the city’s separate income tax makes their combined city and state top rate 12.7%, second only to California’s longtime 13.3% rate.
The state should cancel planned reductions in the personal income tax for residents making $100,000 and more, which will cost $360 million annually, said E.J. McMahon of the Empire Center. Public sector pay should also be on the agenda, he added.
“The top priority should be an across-the-board public-sector wage freeze — which should have been done before the end of the [legislative] session, when it could have saved a combined $1.9 billion for local governments, school districts and New York City,” he said. “But better late than never — since the vast majority of public-sector unionized workers will also be due for base and step-increment raises in the coming year.”
Time’s Running Out
The Citizens Budget Commission wants the governor to slash economic development spending that it regards was wasteful and reduce state funding to school districts in wealthy communities.
Cuomo sharply criticized the inequitable division of school funding at his news conferences during the height of unrest over George Floyd’s killing, but the formula hasn’t been fundamentally altered in his 10 years as governor.
Meanwhile, even with the recurring reductions taken this year New York faces a $8 billion gap for the next fiscal year, Mujica said.
Without those, it balloons to $16 billion.
Not everyone shares Mujica’s optimism. Moody’s Investment Service downgraded its rating on the state’s bonds one step Thursday, citing the long recovery New York faces.
New York is also one of seven states on the Fitch Ratings list of states whose bond ratings could be downgraded, a sign of the state’s precarious finances.
Time is short because it is halfway through the fiscal year, while most states are only three months through theirs.
“I recognize that the governor and budget director are facing a challenge and they are dependent on things playing out favorably that they don’t control,” said Douglas Offerman, a senior director at Fitch. “But unlike New Jersey and so many other states, they have much shorter time” to deal with the crisis.