Not Enough Budget Sun in Albany, With Lingering Clouds at City Hall
(What do State and City budgets released last week mean for New Yorkers? Budget mavens at the Center for New York City Affairs break it down.)
In Albany, James A. Parrott Sees a Stronger Budget Hand Played Too Cautiously
Covid-19 changed a great deal in New York. That includes a striking role reversal between Albany and New York City Hall. Since the pandemic, the State’s finances have been in relatively better shape than the City’s – a major switch from the previous 20 years or so.
The State’s next fiscal year begins April 1st. Disappointingly, if not surprisingly, on January 16th, Governor Kathy Hochul proposed a cautious and unremarkable budget plan – with the significant and welcome exception of offering an additional $2.4 billion to cover costs that New York City is largely bearing arising from the influx of some 165,000 asylum-seeking migrants.
At $227 billion, overall spending in the proposed budget would be about two percent less next year than this year. That’s shaped by somewhat offsetting trends. On the one hand, Albany is now seeing a complete wind down of pandemic-era Federal aid. On the other, State-funded spending would go up 4.5 percent, a slowdown from the seven-to-eight percent increases in the previous two years. Given the consensus view among economic forecasters that Federal Reserve interest rate increases brought inflation down with a “soft landing” for the U.S. economy rather than a once-widely anticipated recession, the governor’s budget raised estimated tax receipts for this year and next, as we noted was likely in a 2024 outlook report earlier this month.
Perennially, Medicaid and school aid are the biggest State spending items – and both go up in the proposed new budget. Medicaid spending would rise nearly 11 percent. That’s largely driven by increased utilization of publicly funded programs and rising home care costs. During the pandemic, State Medicaid rolls surged by nearly 1.6 million to nine million persons. The expiration of the federal public health emergency last May mandated a reenrollment process under which New York’s experience to date indicates a higher-than-projected retention of those new enrollees. (New York’s retention is also higher than in other states.)
The budget also projects modest new investments to expand access to mental health services for children and teens, and to reduce infant and maternal mortality. While State aid to local schools would go up by 2.7 percent, the commitment to phase in full funding of Foundation Aid boosted school aid by nearly 7.7 percent annually from FY21-FY24.
With the exception of asylum seeker assistance, the governor’s other budget initiatives, while important, didn’t carry substantial price tags. Nor do they address urgent social and economic needs created by the pandemic and the highly lopsided nature of the state’s post-pandemic recovery, marked by growing income polarization.
Those seeking new resources to head off rising evictions, for example, or to improve compensation for poorly paid child care providers will be disappointed. The Executive Budget also provides a paltry 1.5 percent cost of living adjustment for underpaid human services workers.
Additionally, the governor remains silent on fixing a chronically under-financed unemployment insurance (UI) system and a $7 billion UI trust fund debt. As a result, UI benefits, the costs of which fall far too hard on employers of low-wage workers, would remain at what were already inadequate 2019 levels.
(The governor has, however, addressed the long-neglected need for an increase in short-term disability benefits, frozen at $170 a week since 1989. She has proposed to phase in an increase, so that by 2029 benefits equal two-thirds of an employee's average weekly wage.)
Let’s put all this in a larger context. Today, the State retains $22 billion in budget reserves. For the past decade and a half, it has been reducing operating funds spending relative to the size of the state’s economy. This suggests a measure of under-investing in State spending that could support equitable growth.
If just a third of the reserves was allocated to address rising poverty, rental assistance, and other needs, the ratio of State spending to New York Gross Domestic Product (GDP) would still be well below the average for 2000-2010.
At City Hall, George Sweeting Sees Budget Brightening, But Not Exactly Happy Days
The last two weeks have brought a major reset in expectations about New York City’s fiscal health.
Eight weeks ago, Mayor Eric Adams explained required budget modifications by stressing large and growing gaps between expenses and revenues, beginning with City Fiscal Year 2025, starting July 1st. Even after five percent cuts in City-funded spending in all agencies (with two more rounds of similar-sized cuts projected before July 1st), the outlook was for a FY 2025 budget gap of $7.1 billion.
But then this month, before the January 16th release of the City’s preliminary budget, the mayor reversed some November cuts (which are known in budget-making jargon as “programs to eliminate the gap,” or PEGs). He also forestalled some other cuts as no longer needed to balance the 2025 budget.
What changed between November and January? There was, as noted above, a welcome new commitment from Governor Hochul to provide significant additional New York City aid to offset shelter costs for asylum seekers in FYs 2024 and 2025. (The State is also increasing funding for some migrant-related services directly, outside the City budget.)
But more importantly, the administration raised its tax revenue forecast. It’s now relying on more up-to-date projections than those used in November (which were premised on forecasts that were already clearly out of date at the time). It also reduced the estimated cost of sheltering asylum seekers by $1.3 billion in FY 2024 and $2.0 billion in FY 2025, based on a falloff in the number of new arrivals and lower costs of shelter.
So, does the new good news portend an easy budget this year? Maybe not. The wild swings between November and now may have strained trust between the mayor and the City Council, which will have to approve next year’s budget this spring.
And budget problems still loom. The restorations in the preliminary budget totaled $149 million, but $1.8 billion of cuts from November remain embedded in the 2025 budget. That includes cutting $120 million from the early education program – also subject to a new cut of $50 million in the preliminary budget. And while the public libraries will be exempt from the January round of PEGs, a $21 million November cut remains, forcing most branches to reduce service by one day.
As for the new and less-gloomy tax revenue forecast: The City now expects collections to be essentially flat, instead of falling, in the current Fiscal Year 2024. But while OMB now forecasts 2.6 percent revenue growth in FY 2025 (led by personal and business income taxes), the outlook for real estate transaction taxes keeps darkening, reflecting a weak residential market. OMB also expects property tax revenue to grow by only 1.6 percent.
The preliminary budget includes commitments of City funds to replace some, but not all, expiring Federal Covid relief funds. And in two areas the City hasn’t fully acknowledged the costs of meeting new policies and mandates. One is a State mandate to reduce public school class sizes that will likely require hiring thousands of teachers. The other concerns New York’s seemingly never-ending affordable housing crisis. Recent City Council legislation has expanded eligibility for rental assistance from the City. While the Adams administration’s preliminary budget includes $442 million in new rental assistance spending for 2024, the budget plan adds nothing for 2025 through 2028.
James A. Parrott is director of economic and fiscal policies at the Center for New York City Affairs at The New School. George Sweeting is a Senior Fellow at the Center, and was until last year acting director of New York City’s Independent Budget Office.
Photos by: taxfoundation.org and live.staticflickr.com