Thanks to the coronavirus emergency, New York State tax revenues in the coming fiscal year will be $4 billion to $7 billion lower than projected, state Comptroller Thomas DiNapoli estimates.
As if that wasn’t bad enough, one of the Trump administration’s proposed economic palliatives would actually make the situation worse.
This is the latest installment of #NYCoronavirus chronicles, a special series of blog posts by Empire Center analysts, focused on New York’s state and local policy response to the Coronavirus pandemic.
As DiNapoli pointed out in a letter to Governor Cuomo:
The federal government is also considering delaying tax-filing deadlines, which could result in billions of dollars of New York tax payments being delayed as well. This raises concern regarding the State’s cash flow in the coming year.
Nearly a week ago, Treasury Secretary Steven Mnuchin said his department would recommend pushing back the April 15 income-tax filing deadline “for virtually all Americans, not the super-rich” in light of concerns around the coronavirus pandemic.
Like most major states with income taxes, New York annually reaps its biggest cash infusion in April—with $9.7 billion expected next month. This, in turn, helps fund a large outlay of school aid scheduled in May. Because state personal income returns and filing deadlines are inextricably linked with the federal schedule, a delay in federal filings could force Governor Cuomo to issue short term tax anticipation notes (TANs) to make up for delayed payments.
In fact, a cash flow problem may already have arrived. As CNBC reported yesterday “many accountants are already taking matters into their own hands, putting S-corp and partnership clients on automatic extension for Sept. 15.” That change by itself would knock the state’s cash flow projections a bit further off target, quite apart from the impact of the mass business shutdowns and inevitable recession touched off by the public health emergency.
The bigger picture
In past years, the emergence of a multibillion-dollar budget shortfall would be quickly followed by a pledge of strong executive action, such as Governor Paterson’s announcement of a hiring freeze and of cuts in agency spending as the financial crisis was brewing in the summer of 2008.
So, with Comptroller DiNapoli forecasting, in advance, a massive drop in tax revenues, what does Governor Cuomo propose to do about it?
The governor’s answer—publicly at least—remains vague.
At today’s daily media briefing on the public health response to the virus, Cuomo said the comptroller’s forecast of a $4 billion to $7 billion drop in tax revenues “means our budget as we prepared it is possibly over-optimistic.”
Budget Director Robert Mujica, seated beside his boss, said the budget would need to include “flexibility… to be able to make changes as you go.” Cuomo himself said the budget should include “a built-in mechanism to adjust the expenditures … so you don’t have to come back every 24 hours.”
Missing from those statements was even the slightest hint of any specific step the governor will take, or recommend taking, to cope with a massive revenue shortfall that is inevitable and unavoidable, given the stock market crash and the broad shutdown of economic activity brought on by “social distancing” orders.
To be sure, this is deep, dark uncharted territory for all concerned, and Governor Cuomo understandably has been focused mainly on the public health crisis to the exclusion of much else.
But even allowing for the unprecedented nature of the most economically disruptive event since 9/11, it’s remarkable that New York’s chief executive has offered no specific public recommendations for adapting the next state budget to radically changed conditions.
Less than two weeks from the start of the state’s 2021 fiscal year, three weeks and counting into the most economically disruptive event since 9/11, neither Assembly Speaker Carl Heastie and Senate Majority Leader Andrea Stewart-Cousins publicly has offered much indication of how they intend to proceed, either.
One explanation for the governor’s stand-offish approach may be the exceptionally inconvenient timing of this disruption, from the standpoint of his own role in the budget-making process.
Timing is everything
Under Article 7 of the New York State Constitution, the governor’s exceptionally strong executive budget powers stem primarily from his control of appropriations language and line item amounts. Once the governor submits his appropriations bills and supporting legislation, the Legislature cannot make any change to the language of those bills, and it cannot authorize any spending for any purpose until it first acts on the governor’s bills. That’s why, when a budget is not adopted by the start of a fiscal year, any “extender” bill to keep government functioning must originate with the governor—a situation Paterson exploited to his advantage during his 2010 budget fight.
If the Legislature wants to spend more than the governor has proposed, it must add those amounts in separate line items, subject to the governor’s separate approval or veto.
The governor is authorized to submit amendments to his appropriations bills within 30 days. This year’s 30-day amendment period ended on Feb. 21—the week before the start of a historic stock market crash.
But once the 30-day amendment period has passed, a governor can make no further changes to his appropriations bills. He is authorized to submit “supplemental” appropriations bills, but only with the consent of the Legislature.
In a typical year, including this year, the Senate and Assembly (regardless of which party controls each house) want to add spending to the governor’s proposal, but they need to negotiate with the governor to ensure he won’t veto their additions. The exception comes in years when both houses are confident that they have enough votes to override a veto, as happened repeatedly during Governor Pataki’s last term, 2003-06.
But this year, the usual negotiating dynamic has been turned on its head. The governor needs to reduce his own amended proposal by billions of dollars, but he needs the Legislature’s cooperation and agreement to do it.
The Legislature’s nuclear option
Notwithstanding the huge reduction in revenues, one option available to the Legislature is to simply pass Cuomo’s original FY 2021 budget bills, which would become law immediately without the governor’s signature.
This would have the added benefit of constituting the “final action” required to trigger their next salary increase under their dubious, late 2018 pay hike deal with the governor. [A provision linking additional legislative raises to timely passage of the budget was nullified by a December court ruling in favor of a constitutional challenge to the pay scheme by the Government Justice Center.]
In this scenario (albeit extreme and unlikely), legislative leaders would be in a commanding position to dictate the terms of budget reductions needed to prevent a deficit. So Cuomo obviously needs to reach a budget deal with the Legislature sooner rather than later. But, again, due to the sudden timing of the economic disruption and shortfall so late in the process, he has much less leverage than usual.
As the bills are now written, Cuomo’s power to control spending once the budget bills have passed will be limited to (a) his control of agency spending, which is only one-fifth of the budget, and (b) the powers granted to him by a clause, introduced last year and carried through to the beginning of the FY 2021 Local Assistance appropriations bills, which reads as follows:
Notwithstanding any provision of law to the contrary, if the financial plan … estimates that the general fund is reasonably anticipated to end the fiscal year with an imbalance of $500,000,000 or more, the director of the division of the budget shall prepare a plan that shall be submitted to the legislature, which shall identify the general fund and state special revenue fund appropriations contained herein and related disbursements that may be reduced to eliminate the imbalance identified in the general fund, provided, however, that the total reduction in disbursements identified in such plan shall not exceed an amount equal to 1.0 percent of estimated disbursements in total state operating funds for fiscal year 2020-2021. The legislature shall have 30 days after such submission to either prepare its own plan, which may be adopted by concurrent resolution passed by both houses and implemented by the division of the budget, or if after 30 days the legislature fails to adopt its own plan, the reductions to the general fund and state special revenue fund appropriations contained herein and related disbursements identified in the division of the budget plan will go into effect automatically.
This is better than nothing—but given the dimensions of the likely crisis, still not nearly enough.
The allowable cut of 1 percent comes to just over $1 billion. Even assuming the governor squeezes 10 percent out of agency operations, the further cuts allowed by the discretionary provision would fall $1 billion short of DiNapoli’s best-case revenue scenario, and $4 billion short of the worst case.
Long experience shows the Legislature will react slowly, if at all, to worsening economic conditions requiring cuts in spending. When Cuomo says he wants “a built-in mechanism to adjust the expenditures,” he is alluding to his need to be able to cut a much larger amount, at least $4 billion.
P.S. — All of these dire numbers don’t include a huge shortfall that, before the economic meltdown, already had developed in the state’s Medicaid program. A $2.5 billion Medicaid deficit in Cuomo’s original budget plan is supposed to be addressed by recommendations of a Cuomo-appointed Medicaid Redesign Team that is supposed to present its recommendations before the March 31 end of the fiscal year.
As Bill Hammond noted, the budget includes a separate, highly unusual provision designed to allow the governor to unilaterally reduce Medicaid spending by $2.5 billion if the Legislature fails to adopt whatever the MRT proposes.
“Bare boned” or truncated?
Based on reporters’ questions at Cuomo’s briefings, some in the Legislature or perhaps even the Budget Division may have been chatting off-record about doing a “bare-bones” budget, or a budget just covering a small portion of the fiscal year, presumably in hopes that, somehow, the pandemic concern will disappear quickly, the bars and casinos and ballparks will refill, and DiNapoli’s most optimistic forecast will prove too pessimistic.
But such talk ignores some very hard past lessons that the governor, in particular, will want to heed.
First, experience shows that when you’re the executive, and revenues are sinking, time is not on your side. That’s because both the Assembly and Senate —no matter who controls majorities—are reluctant to meet in special sessions for any reasons, difficult to call together on short notice, and always—always—reluctant to cut spending. This is not a matter of ideology so much as bred-to-the-bone political instincts and habits.
Second, the longer the delay, the bigger the cuts that must be made to deal with the problem. In December 1990, then-Governor Mario Cuomo had to call the Legislature to a December special session to cut school aid in the middle of school budget years. The elder Cuomo’s delayed reaction to the steep regional downturn of 1990-91—which itself was complicated by an external event, the Persian Gulf war in the spring of 1991—ushered in a fiscal crisis that led to his downfall in the 1994 election.
Paterson never got his feet on the ground largely because, weeks after taking office in mid-March 2008, he signed on to a budget that boosted spending by 5 percent when a severe recession had already started.
In New York’s state government, the buck stops with the governor—and as illustrated by the Mario Cuomo fiscal crisis of 1990 and Paterson’s travails during the Great Recession, the Legislature more often than not is willing to treat a crisis as primarily the governor’s problem.
That’s why the current Governor Cuomo needs to get the next budget adjusted and resolved, with sufficient flexibility to let him deal with shortfalls, as soon as possible.