Five Uneasy Pieces in New York State’s Covid-Era Budget Puzzle
Over the past 10 months, the coronavirus pandemic has taken more than 39,000 lives across New York State. It has also run roughshod on the state’s economy and fundamentally reshaped how New Yorkers work, conduct business, and go about our daily lives.
Next week, Governor Andrew Cuomo is expected to present a new proposed State budget that will try to account for these dramatic changes and anticipate how they’ll play out in the months ahead.
Even in prosperous, predictable years, the State budget presents a complicated puzzle with many intricate pieces – and that’s definitely not the kind of year we’re in now. By April 1st, the governor and State Legislature are legally required to get to “yes” on the budget. Here are five key factors to keep in mind as that process unfolds.
The long tail of Covid-19’s economic impacts: New cases, hospitalizations, and deaths have surged across the state over the past two months. While probably not reaching the grim heights of the pandemic’s peak last spring, they will likely go on rising for some time. That means that the simultaneous administration of vaccines notwithstanding, it will still be months before social distancing restrictions are relaxed, and many more months beyond that before most people feel comfortable about resuming the full range of their pre-pandemic activities. The economic effects of Covid-19 will linger past even that point. The State Budget Division recently estimated that private sector employment will have fallen by 9.7 percent by the end of 2020. In October, total employment in the state was down nine percent from pre-pandemic levels.
Nationally, October’s total employment level was 5% below the pre-pandemic February level, but New York State’s job level was 9% lower.
Since thousands of small businesses have closed their doors and are not likely to be readily replaced, unemployment and underemployment likely will remain elevated for at least the next two to three years, and possibly longer.
However, we’re not all in the same economic boat: In fact, the pandemic’s effects have been extremely lopsided. On the one hand, employment and worker earnings in restaurants, retail establishments, hotels, and in the arts and entertainment fell sharply with the onset of the pandemic, and have, on the whole, recovered very slowly. That’s a big reason why the Budget Division expects overall wages to fall by 5.4 percent in Fiscal Year 2021 (which ends March 31st).
On the other hand, many of New York’s high-wage industries have emerged relatively unscathed. For example, a recent State Comptroller’s report noted that profits for Wall Street were up by 82 percent during the first half of 2020 over the same period in 2019, and were the best since the record-high profitability of 2009. And while the securities industry accounts for less than five percent of employment in New York City, it’s responsible for 20 percent of all the city’s private sector wages paid. Higher profits should mean an increase in the Wall Street bonus payments typically received between December and February.
State spending and revenues have taken big hits: Falling employment and earnings have put heavy new burdens on safety net programs. There has, for example, been a sharp rise in New Yorkers turning to Medicaid and other public health insurance programs. Three months into the current fiscal year, State officials projected a 500,000-person enrollment increase for all of FY2021 in Medicaid, Child Health Plus, and the State-subsidized Essential Plan. Three months later, they raised that projection by another 500,000. Federal relief funds enacted in early March have only partially offset FY 2021 costs associated with rising Medicaid enrollment.
In the new legislative session, there will be pressure to provide additional Covid-19 relief, including: protections for renters once the new extended State moratorium on evictions expires; aid for workers excluded from various forms of Federal economic assistance; and reforming New York’s flawed partial unemployment insurance program for workers called back to jobs on a part-time basis.
On the revenue side, the best that can be said is that things haven’t been quite as bad as were feared at the pandemic’s onset. Through the first eight months of the current fiscal year, revenues were coming in higher than the forecast at the time of budget enactment, largely because of higher than anticipated income tax collections and a softer hit on sales tax collections. (The lopsided nature of the pandemic’s effects on the economy contributed to this less-bleak picture; so did emergency Federal supplements to unemployment benefits.) Nevertheless, total tax collections through the first eight months of Fiscal 2021were 5.8 percent below the same period in FY 2020, with personal income taxes down 3.2 percent.
Bottom line: In late October, State budget officials were projecting a FY2022 gap of $8.7 billion between expected revenues and projected State spending of about $101 billion. (However, this gap projection assumed that $8 billion in local aid cuts proposed in the enacted budget would recur in future years.)
What happens if budget pain flows downhill? The main unsettled part of the FY2021 State budget is the unallocated $8.2 billion in cuts in local aid – State funding for a range of program areas affecting cities, counties, school districts, and other local bodies, as well as contracts with local social services providers. The State Budget Division has taken the position that until there is a new infusion of Federal aid to state and local governments, a minimum of 20 percent of most local aid payments will be withheld.
Such Federal aid had been a non-starter with the U.S. Senate’s Republican majority. With Democrats assuming control of the Senate as a result of victories in the January 5th Georgia runoffs, however, expectations are that Congress will greenlight Federal fiscal relief in the next month or two. Until then, the withholding of State aid and reduced local sales tax collections have led several local governments around the state to cut their own budgets and lay off workers. In some cases, local legislatures also are contemplating overrides of the State’s two percent limit (effective in all localities outside of New York City) on local property tax increases; a 60 percent majority is needed for overrides.
Will State taxes go up – and, if so, how much and for whom? On more than one occasion, the governor has said that even if Congress approves a new round of fiscal relief, the magnitude of the State’s budget problems will require gap-closing that combines spending cuts, borrowing, and tax increases. He has not, however, indicated what tax increases he would support. Many members of the State Legislature have also stepped up calls for tax increases. In the November elections, Senate Democrats won enough additional seats to give them (along with Democrats in the lower house, the State Assembly) the two-thirds majorities needed to override a gubernatorial veto – increasing their budgetary leverage.
Given the extreme lop-sided nature of the pandemic’s effects in magnifying the need for greater economic relief for hundreds of thousands of New York families losing their livelihoods, expect calls for progressive tax increases to dominate Albany budget discussions over the next few weeks.
Economist James A. Parrott is the director of economic and fiscal policies at the Center for New York City Affairs at The New School.
Photo by: Diana Robinson