Amidst spiking inflation, a market downturn and recession fears, state spending will soar to new heights under the April budget deal, as per the Enacted Budget Financial Plan (Plan) that the Governor’s budget office quietly issued late last Friday afternoon.
State operating funds spending is set to rise this year by $14 billion or 12 percent, after adjusting for accounting maneuvers. * That’s a near-record increase in state-sourced spending, even discounting for inflation.
More broadly, total (all funds) spending flowing through the Albany budget is set to rise to $222.2 billion this year, an increase of $49.2 billion or 28 percent in the three years since the pre-pandemic 2019-20 budget cycle.
And yet, the Plan optimistically forecasts that the increased tax take fueling most of the new spending —largely resulting from rate hikes on top earners enacted in April 2021 and scheduled to expire in 2027 — will keep the budget balanced while enabling annual multi-billion-dollar reserve deposits that create by 2025 a cushion of 15 percent of state operating funds ($19.4 billion) to guard against a revenue shock.
And it’s laudable that two-thirds of these notional reserve deposits would go into the statutory Rainy-Day reserves —accounts partially ring-fenced against unneeded withdrawals. That’s a 180-degree reversal from January’s Executive Budget, which had slated two-thirds of such deposits for pseudo-reserve accounts politicians could invade at will.
But all the above is academic unless the surpluses materialize. And it’s very unlikely they will— for at least three reasons.
First, the rosy scenario is critically reliant on sanguine economic and revenue forecasts, including stable market conditions; the state’s revenue is ever more reliant on capital gains and bonus income produced by Wall Street. My colleague, E.J. McMahon, recently estimated in this space that, if unreversed, the decline in the stock market since January could reduce expected tax revenue this year alone by at least $2 billion. Surplus projections also hinge on the broader economic health of the nation, the state and New York City, whose fragile recovery is marked by tepid job growth lagging the rest of the nation.
Second, the Plan assumes billions in “one-time” spending added in the budget will not be re-upped. In her January budget proposal, the Governor set to work dissipating the historic surpluses she inherited, proposing major spending hikes —albeit labeling most as one-time, non-recurring items (e.g. health care worker bonuses). In April, she acceded to an additional $2.2 billion in allegedly non-recurring spending that the budget optimistically assumes will be shut off less than a year from now.
Finally, the budget baseline projects no new spending will be added during upcoming budget cycles, by either the Governor or the Legislature.
That assumption lacks historical grounding.
All this makes it highly unlikely that reserves will be replenished as scheduled. And the budget-balancing act will only get more challenging. The $12.7 billion in federal American Rescue Plan funds the state received will be spent down by the end of 2025. And the “temporary” state tax hikes on top earners enacted in April 2021 are set to expire in 2027.
It’s important to the state’s economic future that those rates do revert—and preferably prior to 2027 — so it can hope to retain an increasingly mobile workforce. New Yorkers are already among the most heavily taxed of all Americans. But even allowing temporary, unneeded tax hikes to expire as scheduled will require more spending discipline from the Governor’s mansion than this Administration has shown it can muster.
*The budget office’s primary accounting ploy, as revealed by the Plan, was advancing $7.5 billion in spending (including debt prepayment) set to occur this year up into the fiscal year that ended March 30th — technically reducing the recent budget deal’s year over year spending hike.