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State Budget Crisis Part 2: Budget Cuts Loom As DC Aid Stalls, But NYS Can Fill Gap Without Tax Increases

Despite pleas from New York Governor Andrew Cuomo and state and local government leaders across the nation for major new federal help for budgets devastated by the COVID-19 recession, there is still no clear path to Washington acting quickly to provide financial relief.

Although on May 15 the House of Representatives, with its Democratic majority, passed a $3 trillion aid bill for the country that included $1 trillion for state and local governments, President Trump announced he would veto the bill if passed in both houses of Congress and many Republican senators, who hold the majority in that chamber, were quick to announce the House bill dead on arrival. When serious negotiations on a new relief package will occur, or when an aid package might ultimately get passed, is not clear.

State Cutbacks are Coming, No Doubt
It’s been seven weeks since New York leaders adopted the state budget on April 2. That budget anticipated implementing $10 billion in spending cutbacks from what had been the original $105 billion budget submitted by the governor in January for the 2020-21 fiscal year.

The state has yet to act on those massive cuts despite reaching a benchmark set in the budget that would trigger them, holding out hope for federal action.

Where New York is Now: Tax Receipts Plunge by 70%, 2 Million File for Unemployment
The state’s first benchmark was made public on May 15 by State Comptroller Tom DiNapoli and it is ugly.

STATE COMPTROLLER APRIL CASH REPORT

STATE FUNDS Executive Budget
April Estimate
April
Actual
Drop from
Estimate
% Drop from
Estimate
TOTAL TAX RECEIPTS
TOTAL
$11,746.0 $3,583.9 -8,162.10 30.5%
DISBURSEMENTS $7,479.0 $4,373.0 -3,106.00 58.5%

This benchmark, presented in the table above, involved comparing New York’s actual tax receipts in April 2020 to an estimate constructed in the governor’s Executive Budget for that month. The table shows the Comptroller’s cash report for April 2020 compared to the Executive Budget estimates. The Division of the Budget was authorized to begin implementing spending reductions if receipts were less than 99% of estimates. The receipts were 30% of estimates, according to the Comptroller’s May 15 report.

Tax receipts plunged about 70%, more than $8 billion, compared to the adopted budget projection, which used April 2019 as a normal baseline.

The problem is two-fold. The economic downturn in New York is massive; more than 2 million New Yorkers have filed for unemployment in the last 8-eight weeks, about 20% of the state’s workforce. And the ordinary April 15 deadline for filing returns for both federal and state income taxes was extended to July 15, leaving New York bereft of normal tax revenues for months. The state is borrowing money for the short-term, but that won’t offset the overall plunge in revenue associated with the economic downturn.

New York State Faces Unprecedented Financial Challenges
New York state government now faces unprecedented challenges in attempting to manage a risky, uncertain set of dynamics that include:

1. Not knowing how much federal aid may come to the rescue, or when, or how deep New York’s own problems may be.

2.Not knowing how to use much of the federal aid already provided by Congress in the initial rescue packages because the U.S. Treasury’s guidelines for use of the funds has been unclear.

An analysis by the State Comptroller indicated that although New York State can utilize some funds provided by Congress for education and Medicaid, $5 billion allocated to New York in the first plan sits in limbo while New York awaits use guidelines. But with so many new expenses associated with the virus in health care and emergency response, much of that money could be unavailable for general budget relief.

3. The possibility that the job losses will drive up enrollment in the Medicaid program, increasing health care costs far more than currently anticipated and increasing the size of the state budget deficit.

The governor and Division of the Budget are undoubtedly still holding off because they know immediate implementation of cuts would be devastating. The governor’s daily press briefings display warnings of cuts to schools, hospitals, and local governments in the 20% range, meaning very large job losses for teachers, health care workers, transit workers, cops, firefighters, and other front-line government personnel. They are holding off despite realizing that too long a delay in making the cuts could make the situation worse for the providers of services that might be affected if little federal aid is forthcoming. Anyone getting a cut in their budget is better off knowing sooner rather than later so they can make plans to cope.

New York’s Current Plan to Mitigate Budget Cuts (short-term)
The state’s Financial Plan, issued April 25, showed that the state had backloaded about 40% of its $10 billion in spending cuts to next year, the final quarter of the state’s fiscal year, from January 2021 to the end of March 2021.

Congress also permitted the state to defer payment of Social Security and other payroll taxes for its own workforce to save $1 billion or more, providing additional cash flow relief.

The state’s Financial Plan indicates an effort to borrow $4.5 billion in May and June to cover initial revenue losses due to the tax filing extension and the recession. However, the adopted budget permits the state to borrow up to $11 billion short-term during the fiscal year (ending March 2021), and even permits the state to convert the short-term borrowing to long-term bonding. That means the state is permitted to borrow to cover operating deficits.

The State Comptroller’s analysis of the adopted state budget indicated the state could also re-evaluate its capital budget to defer nonessential projects to save cash and re-allocate financial settlement funds not yet spent for economic development projects. This could hurt recovery efforts in the future, however.

New York Can’t Count on Federal Help
A May 19 hearing in the United States Senate featured competing views on rescuing the economy. Federal Reserve Board Chair Jerome Powell said failing to help state and local governments could result in hundreds of thousands of layoffs and further damage to the economy. Steve Mnuchin, the Treasury Secretary, claimed the best way to help the economy was for the states to ‘reopen’ by easing social distancing restrictions and let people go back to work. It was also reported that President Trump met with Senate Republicans to strategize about new federal legislation, but remained circumspect about what he would support. The House returns to work after Memorial Day, from May 27-29, but many Senate Republicans want to wait longer than that.

Many states dominated by the Republican Party are already reeling from state and local government financial problems. The Center for Budget and Policy Priorities is tracking state fiscal problems and has produced an analysis showing major problems in Louisiana, Kansas, Arizona, Missouri, Kentucky, Wisconsin, and Oklahoma. An update to the Center’s report says Georgia has just announced across-the-board state budget cuts of 14%, and Texas announced state agency budget cuts of 5%.

One hopes additional federal aid will arrive soon, but it seems unlikely to be anywhere near as generous as the House bill provides.

Should New York State Borrow Money to Cover Operating Expenses? Yes
The state budget permits New York to convert up to $11 billion in short-term borrowing, envisioned to deal with the extension of filing tax returns to July 15, or possibly longer if the Federal government grants another extension, to long-term bonding. In other words, the state could sell bonds for 5 years, 10 years, 20 years, or 30 years, to pay for its operating deficits this year. This, of course, would avoid some or even a large part of the spending cuts.

Bond raters, budget watchdogs, fiscal experts, ordinary people, and even I agree that borrowing long-term to cover your operating expenses is ordinarily a mistake. However, the alternative — eliminating tens of thousands of jobs including hospital workers, teachers, cops, transit workers, and emergency responders as the pandemic continues, has severe consequences for both those workers and the tens of millions of New Yorkers who depend on them.

New York should make a firm decision it will borrow some of the money it needs to sustain public services in a pandemic-induced near-depression if it can’t get covered by the federal government.

Governor Cuomo, at one of his press conferences, said if the state had to make cuts and later received federal aid, he would restore the cuts. New York could still make modest cutbacks and hope ultimately the Democrats in Washington will be successful with a new round of assistance for the American people, in part through state and local governments. But if needed New York should borrow a large portion of the money to cover its operating expenses this year while addressing the long-term problems created by COVID-19.

***
Jim Brennan was a member of the New York State Assembly for 32 years, where he chaired four committees. On Twitter @JimBrennanNY.

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