The multi-billion-dollar gap Governor Hochul and the Legislature must confront in next year’s state budget appears to be growing larger.

The fiscal 2025 budget, for which the governor will present her proposal in January, was already shaping up to be a difficult one before the ink dried on the previous spending plan.

The budget approved in May essentially used $2 billion of cash to cover some of the significant growth in state spending during the current fiscal year, and pushed off the question of how to pay for it going forward. To make matters worse, officials based their spending plan on state tax receipts—which hit new records in 2022—remaining unusually high.

Those inflated assumptions about taxes were burst in June when budget officials updated their revenue forecast, which showed revenues would fall $9 billion short of expenses in fiscal 2025, which begins April 1, and $13 billion in fiscal 2026.

State tax receipts have since come in close (or even slightly above) this revised forecast, but trouble is brewing on the other side of the ledger in the form of higher-than-planned spending. It suggests the budget gap state officials face next year could be creeping past $10 billion—and go higher still.

Migrants

The arrival of roughly 100,000 foreign migrants in New York City has strained the City’s finances, with state government so far putting up about $2 billion. Governor Hochul last week indicated she’d ask the Legislature for another $1 billion to cover still-mounting costs of shelter and other care.

Unfortunately, this might not be the last time, because two key variables remain unknown.

There’s no indication that the rate at which people are arriving in New York City is slowing. The state of Texas continues offering free bus service to NYC, having transported more than 8,000 migrants since last year. Reporting by the New York Post indicates the state and city were together incurring a cost of about $10,000 per person per month to house migrants on Randall’s Island—an indication of the sort of costs the city and state could face as the situation peaks.

Meanwhile, it remains to be seen how quickly migrants can find employment (in part due to issues surrounding their legal status) and stop needing government accommodations. The city and state together could be looking at years-long financial obligations.

With the city facing its own fiscal crunch—and little flexibility to address it—state taxpayers could get hit with a bigger share of the costs.

Medicaid

About one-quarter of state spending (excluding federal reimbursements) will next year go toward Medicaid, the joint state-federal healthcare program for the poor and disabled.

Medicaid by its nature is prone to cost overruns, since it must cover eligible patient costs beyond what the Legislature may have appropriated to pay for them. That requires governors to keep a tight grip on costs, something Hochul does not appear to have been doing.

The governor and lawmakers earlier this year hiked provider reimbursement rates and made other changes to the program, pushing the state’s costs up 13 percent. They had previously (in 2022) weakened the “global cap” on Medicaid costs, a mechanism designed to discourage cost overruns.

State data indicate trouble ahead: budget officials appear to be lagging Medicaid payments, delaying them from the last quarter of the fiscal year into the start of the next—a mechanism used by Governor Andrew Cuomo to conceal overspending. (Cuomo’s 2019 plan to require New Yorkers to get new license plates was part of his effort to cover the associated costs).

The program is meanwhile re-evaluating the eligibility of Medicaid enrollees, something it was barred from doing for the first three years of the pandemic. Officials expect more than one million people to drop from the rolls, mainly from having obtained private employer health coverage. But delays in this “unwinding” process, which is poised to continue over the next several months, would have the state continue paying for people who otherwise aren’t eligible.

State Workforce

The cost of operating state agencies will be higher than forecast due to raises and bonuses promised to state workers. Hochul in June reached deals with the Public Employees Federation (PEF) and the United University Professionals (UUP), covering more than 88,000 workers in total. Other smaller union contracts expired at the end of March and will further add to state costs when settled.

To be sure, these aren’t unexpected spending increases. Budget officials appropriately set aside cash to cover “labor settlements/agency operations”—$1 billion in the current fiscal year, and about $1.5 billion in each of the next three years. But these deals will drive up the long-term cost of running state government, and the state can’t cover those extra expenses with cash indefinitely.

Light on Details

The state Budget Division last month issued its First Quarterly Update to the state’s financial plan. The update, however, was just 11 pages long (compared to over 100 around 400 pages for typical updates), and didn’t revise the budget gap estimates issued in June.

The Mid-Year Update, due at the end of October, will give an idea of whether Governor Hochul has undertaken any substantial belt-tightening to get ahead of what’s shaping up to be her greatest fiscal challenge yet.

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