Governor Cuomo continues to burn while pols in Washington fiddle around the issue of providing more aid to states and localities in yet another federal stimulus bill. Meanwhile, New York State’s plummeting revenues still haven’t hit their post-pandemic bottom, according to the First Quarterly Update to the state’s FY 2021 Financial Plan.
This is an installment in a special series of #NYCoronavirus chronicles by Empire Center analysts, focused on New York’s state and local policy response to the coronavirus pandemic.
Based on results through June, Cuomo’s Division of the Budget (DOB) has reduced its projection of already cratering state revenues by $1.2 billion. This would bring the state’s receipts from taxes and gambling revenues to $77.1 billion—or $9.4 billion below last year’s actual number, and $14.5 billion below the optimistic revenue projection issued with Cuomo’s original budget proposal as updated in February.
Assuming those numbers hold up (or stay down), in percentage terms, this is shaping up as the biggest single-year tax revenue drop on record in New York. Not since the Great Depression has the state experienced anything close to an 11 percent nominal decrease in revenues from one year to the next.
Meanwhile, congressional Democrats and Republicans in Washington have deadlocked in negotiations aimed at producing the fifth federal coronavirus stimulus and relief package since March—a situation the reliably hyperpartisan Cuomo has blamed on Republicans “playing politics.”
While Cuomo routinely inflates numbers for political purposes, his DOB’s revenue estimates don’t look hyped at all, given the economic impact of the shutdowns and slowdowns triggered by the governor’s New York State on PAUSE orders. Indeed, it could be worse.
The update makes no change in projected receipts from the personal income tax (PIT), Albany’s largest revenue source, which was above projections in May and June but fell $1 billion below Cuomo’s target in the big payment month of July, according to a monthly cash report issued by the state comptroller’s office today. The big bellwether month for PIT will be September, which includes a large quarterly estimated payment that will preview the outlook for high earners, in particular.
While revenues are going down, spending is still going up—because even as the economy was shut down and the pandemic curve was climbing near-vertically in early April, Cuomo and the Legislature agreed to a budget that would spend only slightly less than the governor had proposed in January.
Cuomo usually describes the size of the state budget problem as $14.5 billion (the shortfall from FY 21 projected revenues) or $63 billion (the cumulative four-year shortfall from previously projected revenues through FY 2024).
The core problem would be accurately estimated at $8 billion—the amount by which Cuomo’s financial plan assumes he will cut local assistance unless the gap is backfilled by federal aid.
Based on the latest financial plan update, however, it is possible to discern how the problem could be made much smaller even in the absence of added federal aid— but only temporarily, and only in the short term.
The FY 2021 budget gave Cuomo added authority and full discretion to issue up to $11 billion in short-term revenue anticipations notes (RANs) to cover cash flow losses due to the federal government’s postponement of the income tax filing deadline, from April 15 to July 15. He settled for borrowing $4.5 billion.
The liquidity squeeze has passed, but Cuomo still has that $4.5 billion. The financial plan assumes “currently” (a carefully chosen word) that those notes will be paid off before the end of the year. But they don’t have to be. The governor has the discretion to renew the RANs for one more year, borrow up to $6.5 billion more next year, and then convert the entire amount, up to $11 billion, into long-term debt.
Thus, in a pinch, he could renew the RANs for another year and reduce his gap by $4.5 billion, leaving a problem this year of $3.5 billion. And that probably does not reflect the full extent of the budgetary relief the state can achieve by artfully tapping New York’s $5.1 billion share of Coronavirus Relief Funds awarded to states and localities under the CARES Act, passed in April. Technically, the CRF was supposed to cover only added expenses directly related to dealing with Covid-19 cases, but the U.S. Treasury Department subsequently issued “guidance” giving states much broader leeway to define normal expenses under the “coronavirus” heading.
The quarterly financial update for the first time provided a categorical breakdown of the state’s CRF-funded spending. Sure enough, it says a lot of that money is for COVID-19 specific expenses, such as personal protective equipment and ventilators, and temporary hospitals (which ended up largely unused). It also includes $886 million for “personal service,” including a big chunk of the state police payroll; $1.14 billion in “other”; and $336 billion for unspecified “quarantine activities.”
Elsewhere in the report, the financial plan tables include an $869 million offset for “eligible expenses” covered by the CRF, but if DOB has been doing its job and exploiting the Treasury guidelines to the maximum extent, the true amount of general budget relief drawn down from the CRF is probably larger.
The bottom line, then, is that the size of Cuomo’s short-term FY 2021 problem could be in the neighborhood of a much more manageable $3 billion or less.
Without any added federal aid, and without touching his roughly $7 billion in reserves, he could squeeze, nip and tuck his way to achieving temporary budget balance without following through on his repeated (and exaggerated) threat to cut local aid (including school aid) by 20 percent. But again, that would only solve this year’s problem—assuming revenues don’t fall even further, which is quite possible.
The dreaded out-years
The governor’s true, massive challenge begins in FY 2022 and thereafter when recurring budget shortfalls are projected to reach $19 billion, or nearly 20 percent of current state operating spending.
For now, Cuomo seems to be banking on the expectation that November’s elections will produce a Biden presidency and a Democratic takeover of the U.S. Senate as well as the House, producing something like a repeat of the Obama administration’s ARRA aid to states and localities starting in 2009.
But as demonstrated by the ARRA precedent—and keeping in mind that federal deficits are already at a postwar high—more federal aid will be just a band-aid, not a solution. Indeed, to the extent it allows New York to perpetuate spending it can no longer afford, it will plow into the future a bigger problem—such as the one Cuomo inherited in 2011.
Sooner or later, the state will need to massively scale back the cost of government at every level in New York. The prospective gaps are otherwise much too large to be closed even if Cuomo drops his resistance to the kind of economically destructive and counterproductive soak-the-rich tax hikes proposed by the enlarged left-wing blocs in the state Legislature.