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No plans yet to fix future budget deficits for New York

Karen DeWitt

As the nation’s economic uncertainty continues, with a volatile stock market, higher gas prices and inflation, New York state’s budget forecast has also suffered a reversal of fortune. Here’s a look at what’s changed since the budget was settled in the spring.

When Gov. Kathy Hochul and the legislature agreed on a state budget back in April, they said the spending plan would be in balance for the next several years.

It was an unusually rosy outlook in a state where financial fortunes rise and fall with the ups and downs of the stock market. About one-fifth of all tax collections are tied to the financial industry, including income taxes on the annual Wall Street bonuses and the capital gains tax.

Just a little over three months later, on a hot summer evening, the governor’s budget division released a new economic forecast.

It greatly reduced expected collection projections from personal income taxes, and cut job growth estimates in half for 2023, from 1.5% to 0.8%. It cited the highest inflation rate in 40 years, at 9.1% in June 2022, and noted that every major stock index is down by more than 10%, since the beginning of the year. The NASDAQ, based in New York City, is down 23%.

As a result, projected budget deficits are back, beginning in 2023, with a $310 million gap for the next fiscal year. It’s expected to balloon to $6.2 billion by 2027 if the current rate of state spending continues.

"Like the rest of the country, New York State is facing substantial headwinds with a changing national economy, and our latest update to the Enacted Budget Financial Plan reflects that," Hochul said in a statement.

Patrick Orecki with the fiscal watchdog group Citizens Budget Commission says it’s one of the most rapid reversals he’s seen.

“What we saw, in the first-quarter update, was a change of the script going forward,” Orecki said.

Orecki says the budget division’s projections in April reflected the economy at the time, and the outlook was very positive. But he says some of the spending plan’s foundations were already shaky and relied significantly on one-shot revenues.

An example of one of those costs is a pandemic-related federal grant that provides over $800 million for 1 million additional New Yorkers to enroll in Medicaid. That aid is ending, but Hochul has not yet ended the pandemic state of emergency declaration, so the state will have to pick up the tab for those costs.

Orecki credits the budget office for coming clean on the impending shortfalls, but he says it would be smart to take some steps now to avoid future deficits. He says state spending growth is much higher than in previous years, at about 12%, compared to roughly 3% to 4% per year in the past decade.

“Spending growth is well above trend. So they need to start thinking about where there are cost-saving opportunities,” Orecki said.

One contributor to the spending increase is Hochul’s plan to pump $10 billion into the state’s health care workforce over the next five years.

“It’s not just a crisis for these workers. It’s a crisis for all of us who really do need that health care, as well,” Hochul said.

Orecki says the health care workforce spending would be easier to reduce because not all of the money has been committed yet.

He says health care represents the biggest part of the budget, followed by spending on schools and the state’s workforce.

“Two out of every three dollars you spend is in those programs,” Orecki said.

Orecki says Hochul and her budget staff should not, however, follow some past practices for a quick fix. They include actions by former Governor Andrew Cuomo.

Cuomo had promised to limit state spending growth to 2% per year. One of his approaches to try to fulfill that was delaying some large Medicaid payments owed to providers from one fiscal year to the next. That way, the spending growth would appear to be more limited than it actually was.

Orecki says there is one element in future spending plans that he’d like to see stay the same. That’s the commitment to put more money into the state’s rainy-day fund.

The plan calls for depositing $15.4 billion into reserve funds over the next four years, bringing the total to $19.4 billion.

“There are no changes to Enacted Budget programs currently planned,” said Shams Tarek, a spokesman for the Division of the Budget.

Karen DeWitt is Capitol Bureau Chief for New York State Public Radio, a network of 10 public radio stations in New York State. She has covered state government and politics for the network since 1990. She is also a regular contributor to the statewide public television program about New York State government, New York Now. She appears on the reporter’s roundtable segment and interviews newsmakers. Karen previously worked for WINS Radio, New York, and has written for numerous publications, including Adirondack Life and the Albany newsweekly Metroland.