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Anatomy of an Albany Budget Blowout

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Anatomy of an Albany Budget Blowout

The blame belongs mainly to Governor Andrew Cuomo. Summer 2021
Economy, finance, and budgets
Politics and law
New York

In early April, Governor Andrew Cuomo and his fellow Democrats in New York’s legislature agreed to a record $209 billion budget that will raise taxes by billions of dollars a year on the state’s top earners and most profitable corporations—even though higher taxes were no longer needed to make up for pandemic-driven revenue losses.

Buoyed by nearly $13 billion in unrestricted federal stimulus aid—plus billions more in funding targeted directly to school districts and local governments—Albany’s budget for fiscal year 2022 raised the baseline of recurring state operations spending by nearly 8 percent, to a level that won’t be sustainable once the federal cash is exhausted in a few years. For the first time ever, New York is projecting balanced state budgets across two consecutive fiscal years. But the fiscal hangover, dawning in the second half of the 2020s, could be a brutal combination of large deficits and eroding revenues—even assuming a continuous expansion of the national and regional economy.

Conventional wisdom holds that New York’s budget jumped the rails this year because Cuomo, known for his (relative) fiscal restraint since taking office in 2011, had been weakened by self-inflicted political wounds. During the two months following the release of his Executive Budget proposal, the governor was the target of multiple investigations (including a formal legislative impeachment inquiry) into his concealment of Covid-19-related nursing-home deaths, alleged sexual harassment of subordinates, and use of state resources to help produce a self-aggrandizing pandemic memoir for which he received $5 million. In early August, the Assembly began moving faster toward an impeachment vote after state Attorney General Letitia James released a report concluding that Cuomo sexually harassed 11 women.

But blaming the outcome on these (serious) distractions lets Cuomo off the hook too easily. The governor’s own decisions—dating back to before the pandemic—set the stage for Albany’s budget blowout. It was the predictable result of a framework that Cuomo had laid out in his own budget proposal, following a year of delay and dissembling.

Even pre-pandemic, Cuomo’s self-imposed 2 percent annual lid on state spending growth had sprung a serious leak. The governor had balanced his fiscal 2019 financial plan by quietly sliding $1.7 billion in Medicaid payments a few weeks into the following fiscal year—an overrun caused in part by his 2018 election-year gift of a rate increase for the politically supportive nursing-home industry.

Meantime, even after a decade of healthy revenue growth—padded by an extraordinary $14 billion in civil penalty payments from state-regulated financial institutions—New York’s budgetary reserves were perilously small by national standards.

Among leading public officials from President Donald Trump on down, Cuomo was hardly alone in failing to spot the public-health threat emerging from Wuhan, China, until it was too late. But he had a clear warning of how the novel coronavirus was likely to disrupt the state’s finances. Reacting to the spread of Covid-19 from Asia into Europe, stock prices dropped 10 percent in the final week of February 2020—the market’s worst five-day stretch since the 2008 financial crisis. This should have set off alarm bells in the governor’s office. Given Wall Street’s importance to New York’s tax base, a stock-market crash would undermine the state’s personal income tax, its largest revenue source, which heavily relies on capital gains and investment income of the highest-earning taxpayers.

Cuomo’s reaction was to downplay the issue, focusing on the emerging Covid-19 health emergency. New York’s chief executive employs a sizable professional budget staff as well as a public-health bureaucracy, but the fiscal situation was barely mentioned during the daily briefings that he began holding in March. By March 27, 2020, with passage of the fiscal 2021 budget just days away, Cuomo said that the state had “lost about $10 billion to $15 billion in revenue” stemming from lockdowns and the stock-market crash. In the next breath, he complained—preposterously—that the federal government had given New York State “zero, nada, niente, zilch” in relief aid.

In fact, the state had just received two big funding boosts from Congress. The federal Families First Coronavirus Relief Act, passed early in the month, initially expanded New York’s federal Medicaid reimbursements for the year ahead by more than $5 billion. At the end of March, the $2.2 trillion federal Coronavirus Aid, Relief, and Economic Security (CARES) Act handed New York $1.1 billion in temporary elementary and secondary school funding, which provided an equal amount of state budget savings. Even by Albany standards, $1 billion in budget relief couldn’t be termed “nada,” much less “zilch.” (The CARES Act also allocated $5.1 billion to New York from a Coronavirus Relief Fund for state governments—most of which, thanks to permissive “guidance” from the supposedly hostile Trump administration, Cuomo ultimately earmarked to offset normal state payroll costs.)

Despite what they had every reason to believe was a looming crash in revenues, Cuomo and the legislature agreed in early April 2020 to enact a budget that called for spending roughly the same amount as in the previous year. The governor hailed it as “an extraordinary accomplishment”—and, in the next breath, demanded federal aid to make it balance.

The fiscal 2021 budget made two important concessions to post-pandemic economic reality: it gave the governor added authority to reduce local aid across the board or to withhold spending in some categories; and it gave him broad discretion to borrow up to $11 billion, if necessary.

“I’m broke. . . . I don’t have two nickels to rub together,” Cuomo complained in mid-April 2020, when he still had an unspent cash balance of nearly $10 billion. He continued grossly to misrepresent the federal relief bills passed in March, saying that they “didn’t give us anything” except “some Medicaid money” (which, in fact, would save the state billions).

Throughout the summer, Cuomo repeatedly claimed that New York faced a $15 billion deficit—while his own official financial plans consistently showed an initial shortfall closer to $8 billion, without fully counting the offsetting impact of CARES Act funds.

As it happened, 2020 also brought Cuomo’s turn to serve as vice chair of the bipartisan National Governors Association, which endorsed a massive proposal by congressional Democrats that would have set aside $500 billion for states; allocated on a per-capita basis, the deal would have handed New York $30 billion. At the height of the pandemic, Cuomo began the fiscal year by temporarily withholding pay hikes for state workers, promising to make good on the raises if the feds came through with more aid. In late summer, after Congress had defied expectations by failing to agree on a sixth stimulus bill, the governor temporarily “withheld” scheduled local aid payments to municipalities and nonprofit service providers—cash-strapped groups with little lobbying clout in Albany. But he never pulled the trigger on oft-threatened school-aid cuts; in fact, when some districts began to plan staff reductions in September, Cuomo’s budget director scolded them for acting prematurely.

Cuomo was playing a dangerous game of budgetary brinksmanship, which might have forced him to fall back on deficit borrowing if his initial dire economic and revenue forecast had proved accurate. But he was saved, in large part, by Wall Street. After dropping more than 30 percent from late February through March 2020, stock prices had fully recovered to previous highs by Labor Day. As the market rebounded, so did New York’s fiscal outlook. The state’s tax receipts through September, the halfway point in the fiscal year, were up more than $1 billion from the governor’s initial forecast. Based on those results, Comptroller Thomas DiNapoli projected in early November that tax receipts for the year would exceed Cuomo’s initial projections by nearly $4 billion. Cuomo nonetheless made no change to his revenue projection and kept harping on his “$15 billion deficit” claim.

In December, the lame-duck Congress passed yet another stimulus bill—a $900 billion “supplemental appropriations” measure, of which New York’s share included $5.3 billion in public school funding. This brought the state’s total 2020 pandemic relief haul from Washington to $183 billion, including $40 billion in aid to government entities—of which $27 billion flowed to or through Cuomo’s financial plan. The CARES Act and the Medicaid reimbursements alone provided more than $10 billion in offsetting subsidies for state operating expenditures.

Nonetheless, when he presented his Executive Budget on January 19, 2021, Cuomo was still crying poverty, still citing a $15 billion deficit, and asserting that nothing less than $15 billion in unrestricted aid would represent “fair funding” in the Biden administration’s anticipated stimulus bill to make up for New York’s mistreatment by “a federal administration [Trump’s] that was hyper-political.” A New York Times headline perfectly encapsulated the governor’s budget narrative: “Cuomo Offers Doomsday Proposal to Attack a Possible $15 Billion Deficit.”

This was pure fiction. In fact, the state no longer had a deficit, and there was scant “doom” to be found in any corner of the governor’s proposed budget, even under what he called his “worst-case scenario” for federal aid (i.e., only $6 billion). By the end of the fiscal year two months later, tax receipts had bounced back to nearly equal the previous year’s level, about $7 billion above Cuomo’s original forecast. And as of May, two months into fiscal 2022, tax revenues were $4 billion higher than his just-updated projection.

The governor’s pandemic-year budget strategy—cry poverty and demand an enormous bailout—was as crude (and often dishonest) as it was transparent. He could argue, though, that it worked, since New York’s state government ended up getting a much bigger bailout than it actually needed to balance its budget: some $12.7 billion in unrestricted aid, producing a surplus that Cuomo used, in part, to pay off $2 billion in long-standing debt at the end of fiscal 2021.

The governor’s doom-and-gloom hype, however, also stoked demands for higher taxes from the legislature’s vocal contingent of urban progressive lawmakers, a group enlarged by November’s election results, giving Democrats their first-ever supermajority in both the Assembly and Senate. Anticipating their demands, Cuomo’s own budget included a supposedly temporary, three-year increase in tax rates on incomes starting at $5 million. The legislature predictably seized on that concession and insisted on raising taxes higher, kicking in at lower-millionaire incomes.

The final budget included significant further personal income-tax hikes on millionaires, who already pay a disproportionately large share of New York income taxes. For residents of New York City, where most of the state’s highest earners live, the combined state-local marginal rate on incomes starting at just over $1 million will now range from 13.5 percent to nearly 15 percent, surpassing California’s 13.3 percent, previously the nation’s highest marginal state rate. Those tax hikes aren’t scheduled to expire until the end of 2027, and the budget also erased the previously scheduled 2024 expiration date on the state’s underlying 8.82 percent millionaire tax rate—a step that Cuomo never previously had endorsed. This marks the first time since the late 1960s that New York has effectively enacted a permanent increase in any broad-based state tax.

Cuomo also agreed to a supposedly temporary three-year increase in the corporate franchise-tax rate, from 6.5 percent to 7.25 percent on profits above $5 million.

The impact of the income-tax hike will be worsened by the tight cap on state and local tax (SALT) deductions introduced under Trump’s 2017 federal tax law. Cuomo is calling on Biden and congressional Democrats to repeal the SALT cap as part of any tax hike enacted to fund Biden’s proposed “infrastructure” package. But a very expensive tax break principally benefiting income millionaires in New York and a handful of other high-tax states will be a heavy lift among Democrats as well as Republicans.

On the spending side, the state budget tapped the temporary stimulus aid to create a $2.1 billion fund to assist workers (mostly illegal immigrants) “excluded” from additional unemployment benefits and other federal assistance, plus $2.4 billion in rental assistance and a $1 billion small-business, arts, entertainment, and restaurant relief package.

But for all the political rhetoric about meeting the needs of workers and businesses hurt by the pandemic, the enduring beneficiaries of New York’s budget will be unionized public-sector employees—especially teachers, who will consume the lion’s share of a record 12 percent school-aid boost. It was no coincidence that the projected new annual revenue from the personal income-tax hike roughly matches the $4 billion projected annual cost of a greatly enriched school-aid formula that has been the teachers’ union’s top lobbying priority for years.

Summing up his budget deal with the legislature early this April, Cuomo said: “This budget will set the trajectory for the state for the next 10 years.”

He’s right. But the trajectory could culminate in a death spiral.

Photo: “I’m broke. . . . I don’t have two nickels to rub together,” the governor complained in April 2020, though he had an unspent cash balance of nearly $10 billion. (MARK LENNIHAN/AP PHOTO/BLOOMBERG/GETTY IMAGES)

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