What to expect in the state’s first round of spending cuts

Regular viewers of Gov. Andrew Cuomo’s daily coronavirus press briefings have heard the governor say time and again that New York state is broke. Revenue projections are way down and the state is facing a budget deficit that is set to grow even wider as the economic fallout of the pandemic is realized. Cuomo has repeatedly made appeals to the federal government to provide unrestricted aid to the state, lest he be forced to make deep spending cuts to schools and other programs.

The first round of those cuts are expected to be announced in the coming days based on data from the first month of the fiscal year. The Cuomo administration has said it plans to cut $8.2 billion in aid to localities. That could include decreases in education and Medicaid funding. Even with federal aid, cuts will likely be unavoidable because the budget gap is only expected to grow in the coming years. While details are scant, the state has ways that it can reduce the impact of the budget cuts on the state’s most vulnerable people.

The state budget gave Cuomo’s budget director, Robert Mujica, the ability to reassess the state’s financial outlook three times during the year and make changes in the amounts allocated to aid to localities. The first period ended on April 30, and the administration is expected to release detailed cuts around May 15 that reflect the new fiscal reality. The state Legislature would then have 10 days from the release of the executive proposal to counter with its own plan to balance the budget.

Right now, the Cuomo administration estimates that tax revenues this fiscal year will be $13.3 billion less than what it had originally estimated in January. According to the updated state financial plan that was released in late April, the state has about a $10.1 billion hole it needs to fill through “budget control actions.” Additional federal aid, state agency budget reductions and other savings account for the other more than $3.1 billion. Unlike the other budget adjustments, the nearly $8.2 billion in cuts to aid to localities still has no details. Categories like “School Aid,” “Medicaid/Health” and “Social Services” have “tbd” where the dollar amounts should be.

Localities are playing a waiting game to see where the cuts will take place and by how much. And the picture is grim. Without unrestricted federal aid – Cuomo is asking for $60 billion over three years, a sum that seems unlikely – the financial plan reads that “nearly every activity funded by state government in the aid to localities budget … will face steep cuts.” The plan also explained that the size of any particular cut would depend on how much is cut from other programs. If the state left school aid and Medicaid alone, for example, the average cuts to the remaining programs would likely range from 40% to 50%. If cuts were imposed on school aid and Medicaid, which make up about 80% of aid to localities, those average cuts in other categories would decrease to 20%-30%.

Given that calculation, neither school funding nor Medicaid is likely to avoid steep cuts. “You cannot reduce the New York state budget without reducing school aid to start with,” said E.J McMahon, research director at the conservative think tank Empire Center for Public Policy. Although the budget cut more than $1 billion in state spending on school aid, the federal government offset that amount through the Coronavirus Aid, Relief and Economic Security Act, keeping funding for districts essentially flat compared to the previous year. This was already set to squeeze many districts where costs have increased in the past year, and McMahon said that “absolutely, in no way, shape or form” will districts across the state actually receive the amount of aid currently budgeted.

With that in mind, David Friedfel, director of state studies at the Citizens Budget Commission, suggested that it would be prudent for the state not to make uniform cuts to all school districts. He said that to avoid the most severe impacts, the Cuomo administration should target the most wealthy districts – those that rely the least on state aid – and cut the most from them. Simply cutting spending by 20%, which is what Cuomo suggested on April 20, Friedfel said the reductions would hit the poorest districts hardest. “It’s important that in making these cuts … (the state) focuses on ensuring that districts have enough to fund a sound, basic education,” Friedfel said. Districts that can achieve that standard with minimal state aid, he said, should be at the front of the line for budget cuts. Friedfel added that wealthier districts also have more ability to increase local school taxes to help recoup some of what they would lose in state aid.

As far as the other big spending category goes, McMahon said that cutting Medicaid will likely be trickier. He said state school funding is like a faucet that the state can turn on or off, whereas Medicaid has many moving parts that will make any sort of across the board cut difficult. The state’s enacted budget already included $2.2 billion in savings identified by Cuomo’s second Medicaid Redesign Team. And broad restructuring is prevented under federal legislation that provided the state with additional emergency Medicaid funding that currently represents about $1.4 billion in state savings.

Friedfel said that the most likely course of action for the state, with those restrictions in mind, is to cut Medicaid reimbursement rates across the board. Although he wouldn’t say definitively the impact that change would have, the hospitals that see the most Medicaid patients and thus rely on those state payments – public hospitals – stand to lose the most.

Although the financial plan focuses largely on slashing aid to localities, there are still other areas where the state can find savings to reduce the size of cuts to the major areas of school aid and Medicaid. One example is further reductions in state operations, the state’s third-largest expense. While Cuomo has threatened a 20% reduction in school aid, he has only cut state operations by 5.3%. “If you look at the way (savings) targets played out, (Cuomo’s) actually sparing his own state agencies compared to what is in local,” McMahon said. The financial plan said the state has imposed a hiring freeze and placed limitations on new contracts or purchases. But a freeze on April 1 salary increases only will last three months. Withholding raises for a full year would result in $260 million in savings during the current fiscal year that would “offset the need for reductions elsewhere in the budget,” according to the financial plan. Friedfel also said that potential furloughs should also be a part of the state’s playbook, even if they potentially come with their own complications.

Ron Deutsch, executive director at the labor-backed Fiscal Policy Institute, warned against further cuts to state agencies, since funding to those agencies has been flat for years. He said that would further squeeze agencies that he said are already at “bare-bone capacity.” Deutsch suggested that the state should engage in short-term borrowing from the Federal Reserve Bank of New York in order to offset some of the steepest immediate cuts before the arrival of potential federal aid or new revenue streams that may be approved by the state Legislature. As of now, the financial plan includes $4.5 billion in “liquidity financing” – short-term borrowing to offset a 90-day delay in the income tax filing deadline. Friedfel warned that the state should avoid short-term debt now because of the possibility that it could become long-term debt, requiring taxpayers to pay off this year’s budget for decades.

All three budget experts agreed, however, that the state could eliminate or defer payments for any number of economic development programs, tax credits and subsidies. Although the budget tweaked the state’s film tax credit slightly, it was still funded at $420 million for film and television productions that shoot in New York. “Maybe we should be rethinking a lot of these subsidies that New York offers corporations,” Deutsch said. “To me, that makes a lot more sense than, if you’re looking for things to cut, than cutting education or health care during a pandemic.”

Friedfel also said that the state could consider delaying capital projects, a part of the budget that the governor has great control over, and shifting those funds to other state expenditures to avoid cuts. The financial plan said “all current and planned capital projects will be reviewed and prioritized” by the state Division of Budget and the executive chamber. It didn’t offer more details, but suggested that the state could reallocate money away from low-priority projects.

Of course, any decisions on cuts will be influenced by what comes out of Washington. The more money the federal government gives, the less New York needs to slash. McMahon predicted that the Cuomo administration will propose the most severe cuts imaginable in a further escalation of his attempts to force Congress’ hand to provide $60 billion in unrestricted federal aid to New York. U.S. Senate Majority Leader Mitch McConnell has vehemently opposed what he called a “blue state bailout,” while House Speaker Nancy Pelosi has been working on a new relief bill that would include $500 billion to $1 trillion in direct aid to state and local governments. Whatever compromise is reached likely won’t be as much as Cuomo wants, an amount that would have allowed him to avoid any cuts. And while a smaller amount might help the state avoid immediate cuts this fiscal year, budget gaps in future years – $60.5 billion total through fiscal year 2024 – would likely necessitate cuts as the economic impact of the coronavirus crisis grows.

Deutsch said the state should pass new taxes on the ultrawealthy, saying that New York took similar action in 2001 after the 9/11 terror attacks and in 2008 during the Great Recession. McMahon warned against new taxes, pointing to the elimination of the federal state and local tax deductions, and the state’s already high tax rate. Friedfel agreed that new taxes would make sense, but said that since the 2008 millionaires tax is still in effect, rich New Yorkers may be wary that any new taxes would not be temporary either, and the move could cause some to relocate. Deutsch rejected this idea, stating that the fact that the state hasn’t seen a mass exodus of millionaires since the imposition of the 2008 millionaires tax, one now seems unlikely. But even Deutsch admitted that it would take a perfect combination of federal aid and new taxes to avoid spending cuts altogether, given the state’s grim financial outlook.