Yesterday Governor Andrew Cuomo released the Fiscal Year 2020 Executive Budget, the first budget of his third term. It addresses some policy priorities, such as congestion pricing to fund the Metropolitan Transportation Authority (MTA) and conservative estimates of potential marijuana revenues, in a prudent manner; however, it fails to adequately control spending and build reserves needed to address potential economic and fiscal risks.

The $175 billion budget supports recurring spending increases with a five-year extension of the income tax surcharge on millionaires. The budget decreases fiscal year 2020 revenue forecasts by $1.6 billion, but state operating funds spending will grow by 3.1 percent.  The State’s rainy day funds grew slightly to $2.3 billion but fall far short of what would be necessary to contend with an economic slowdown or recession.

Areas of Greatest Concern

Continued Use of Fiscal Gimmicks

After accounting for reclassifications of spending and cost shifts between fiscal years, State Operating Funds spending will grow by 3.1 percent, and not by the 1.9 percent reported. 

Inadequate Reserves

The budget increases the State’s rainy day funds by almost $500 million over two years, which is the first increase since fiscal year 2015; however, the $2.3 billion balance is 3 percent of general revenues and falls far short of reserves needed to withstand an economic recession. The past three recessions have multiyear revenue losses totaling more than $20 billion each time.

Unwise Extension of the “Millionaire’s Tax”

The budget extends the 8.82 percent top marginal tax rate on high-income earners for five years to support large increases to priority areas, such as Medicaid and education, rather than to exercise greater spending restraint. The surcharge was enacted originally to help weather the Great Recession, but it has been extended continuously to support greater levels of spending. State revenues are overly reliant on a small group of higher earners: 0.6 percent of filers generate 40 percent of State personal income tax revenues. High earners, which tend to recognize a larger share of earnings from capital gains, have more volatile incomes and have been most negatively affected by the federal cap on state and local tax (SALT) deductions. Extending the higher rates would make New York less competitive and make its personal income tax revenues more susceptible to economic downturns.

Continued Failure to Target School Aid

Rather than restraining growth in education aid and reallocating substantial funds to high-need districts to fund a sound, basic education, the budget proposes a nearly $1 billion increase to school aid, including increases to wealthy districts. The budget would require certain school districts to alter the distribution of funds within the district; this does not address the fundamental issue that State aid should be reallocated among districts. The State could fund a sound, basic education statewide with a smaller annual increase if State aid was better targeted.

Cost Shifts to New York City

The budget cuts reimbursements and aid to New York City by approximately $100 million. More worrisome is the requirement that New York City fund half of the MTA capital plan not covered by new congestion pricing revenues. This would be an onerous shift to New York City taxpayers who already pay an estimated 74 percent of the MTA’s dedicated taxes and subsidies.

Expanded Executive Authority

The Governor again proposes to expand Executive authority in the case of revenue shortfalls of more than $500 million. This would defer making difficult choices as part of the budget process, and instead grant unilateral authority to the Division of the Budget to cut local aid, with certain exceptions. The best way to address potential risks is to build reserves, control spending, and make changes as needed in the budget process.

New Economic Development Spending

The State has allocated more than $28 billion to economic development since Governor Cuomo came into office with lackluster results; the Executive Budget would add even more spending without clear criteria to measure success. The Governor stated that Empire State Development will develop a database of deals to make economic development spending more transparent, and the Offices of the Governor and State Comptroller (OSC) entered into an agreement to restore OSC oversight of certain economic development spending. While positive steps, the new reporting and restored oversight should be established by statute to ensure that both continue under future administrations and that needed data are reported. Moreover, additional reforms to program design and transparency are necessary to ensure accountability to taxpayers, including a unified economic development budget, standardized metrics, and improved program design.

Positive Aspects
 

Reduces Reliance on One-time Revenues for Recurring Expenses

Unlike past years, the budget does not allocate significant one-time settlement funds to pay for operating expenses; however, it continues to rely on revenues from the conversion of a health insurer to a for-profit entity.

Congestion Pricing

The Governor’s congestion pricing proposal imposes a fee for entering Manhattan’s central business district and appropriately dedicates the revenues for the MTA’s capital needs.

Conservative Revenue Estimates from Marijuana Legalization

The Governor is conservatively forecasting revenues from legalizing recreational marijuana. The budget includes nothing in fiscal year 2020 and only $83 million in fiscal year 2021.Unfortunately, the Executive proposal lists specific purposes to which revenues could be dedicated. Instead these funds should be deposited to the general fund and allocated to priorities as determined in the budget process.

Expands the Sales Tax Base to Include All Online Retailers

This proposal will broaden appropriately the sales tax base and yield $250 million annually for the State and produce similar revenues for local governments. It will level the playing field for brick and mortar retailers.

Addresses Other Postemployment Benefits (OPEB)

The Executive Budget includes a number of reforms to provide needed long-term savings, including ending reimbursement of Medicare premiums for high-income earners and capping Medicare reimbursement at current rates. Taken together, these proposals will reduce the State’s $90 billion OPEB liability by $4 billion.