Beyond the health and safety concerns related to the COVID-19 pandemic that our state and nation are grappling with, the state’s financial situation, significant deficit and looming budget cuts are top-of-mind for most individuals and organizations right now.
Below we have prepared an update to serve as both a refresher on the enacted state budget and “super powers” granted to the Governor and Division of Budget authorizing off-budget spending adjustments, and to provide the latest state of play for what is being considered by government officials to address the more than $13 billion deficit facing our state since enactment of the final budget in early April.
SFY 2020-21 Enacted Budget
In the early morning hours of April 3rd, the State Legislature completed passage of final state budget bills for State Fiscal Year 2020-21. Later that day the bills were signed into law by Governor Cuomo. At the beginning of 2020, the State had a $6 billion deficit, $2.5 billion of which the Governor attributed to Medicaid overspending. The enacted budget totaled approximately $178 billion and closed the budget deficit through a series of actions including some Medicaid reforms.
However, at that time Comptroller DiNapoli and Budget Director Mujica stated that the deficit could balloon to $15-$16 billion as a result of the COVID-19 pandemic due to the shutdown economy, increased unemployment, deferred tax payments, the direct pandemic costs and other factors. Given this uncertainty the enacted budget granted the Governor and Budget Director “superpowers,” allowing for the adjustment of spending levels throughout the fiscal year.
The budget states that spending reductions can be taken at certain intervals if on a cash basis of accounting, a General Fund imbalance occurs. That is when actual state operating funds tax receipts are less than 99% of estimated state operating funds tax receipts, OR actual state operating funds disbursements are more than 101% of estimated state operating funds disbursements OR both, during a period.
The intervals are measured as the difference between actual state operating funds tax receipts and estimated state operating tax receipts, as follows:
- April 1-30, 2020: First Period
- May 1-June 30, 2020: Second Period
- July 1- December 31, 2020: Third Period
If an imbalance occurs, the Budget Director is authorized to adjust or reduce any general fund, state special revenue fund appropriation and related cash disbursement by an amount needed to maintain a balanced budget. This could include across-the-board or more specific cuts. Prior to making any cuts, the Budget Director must notify the Legislature which would then have ten days to prepare its own plan (passed by both houses). If the Legislature fails to act, DOB’s reductions would take effect immediately. Such reductions may be restored if actual state operating funds tax receipts through 2/28/21 are not less than 98% of estimated state operating funds tax receipts or if the federal government provides funding sufficient to address the imbalance.
The final budget contained some exemptions from any spending reductions including public assistance payments, reductions that would violate federal law, debt service payments and payments that the state is required to pay per court orders. The final budget also gives DOB the authority to withhold all or some funding if such action is necessary to respond to direct and indirect economic and social effects of the COVID-19 pandemic. Notice to the Legislature is required for these reductions.
New Medicaid Authority
The enacted budget also gave NYSDOH new authority to adjust Medicaid payments as well if program spending exceeds the Medicaid cap due to revenue changes or cost increases. The budget requires that such adjustments be applied equally across service categories unless data demonstrates that spending increases are driven by a particular area.
First Period (April 1-30, 2020)
In late April, DOB released its NY COVID-19 Preliminary Economic Impact Assessment, which discussed the state’s significant revenue shortfall ($13.3 billion or 14% drop in the forecast, equaling $61 billion over the financial plan period of FY 2021 to FY 2024). The report described a financial climate far worse than post 9/11 or other deficit years, and the need for significant reductions in spending if federal funding is not received to offset the shortfall.
During daily briefings in late April, the Governor stated that spending reductions could mean cuts to local governments, education and hospitals and health care by 20%, absent federal assistance.
Despite DOB’s report, the Governor’s remarks and warnings from Comptroller DiNapoli, the Administration did not release a spending reduction plan and instead has focused strong advocacy on the federal government seeking another relief package for state and local assistance to address pandemic-induced deficits. In addition, the state has been working to manage its cash flow by deferring expected state worker pay raises through October 1st, putting new contracts on hold, delaying payments to certain contracted organizations, reducing payments to counties, and borrowing $3.5 billion in Revenue Anticipation Notes (RANs), among other measures. Note, the final budget authorized the Administration to borrow up to $11 billion without requiring legislative authority. To date the State has issued over $8 billion in RANs and has scheduled additional borrowing throughout the year.
Second Period (May 1-June 30, 2020)
While the second measurement period just ended yesterday, it remains very unclear whether DOB will exercise its authority to enact broad spending reductions. During a daily briefing today, Governor Cuomo stated that he thinks the federal government will act on the next round of COVID-19 relief by the end of this month. Both the House and Senate are in Washington for much of July prior to taking an August Recess and yesterday, Senate Majority Leader McConnell stated that Republicans are willing to move swiftly on another coronavirus relief package but no specifics have been provided at this time. In mid-May, the House passed its own recovery package, which included several billions in aid to cash-strapped state and local governments.
It appears that DOB will attempt to hold off on pursuing budget cuts in hopes of federal relief and if a package is put forward would then evaluate whether further actions would be needed to address the state’s over $13 billion deficit.
Possible Revenue Raisers
While the Governor has been reticent to pursue new taxes during his tenure, many in the Legislature have signaled a strong preference for raising taxes versus cutting programs. Below is a list of taxes/ revenue raisers that may be under consideration.
Broad Based Tax Options
- Personal Income Tax Rate Increase (Currently introduced as S.4511-A/ A.8532)
- Adopts 3 Additional PIT brackets and rates
- § 8.82% for incomes $2.2 to $5 million
- § 9.32% for $5 to $10 million
- § 10.32% on income above $100 million (brackets for joint filers)
- Adopts 3 Additional PIT brackets and rates
- Tax Surcharges (Currently no legislation is pending)
Specific Industry Revenue Options
- Tax on Data and Tax on Digital Products
- S.8166/A.10321 Sales tax on advertising on “digital interface”
- S.8056-A Tax on income for digital ads
- S.6102/A.9112 Tax on corporate gross income from use of individual’s data
- Federal “Decoupling”
- No GILTI “recoupling” legislation pending
- S.3401-B/A.10443 Decouples from federal tax credit for investments in opportunity zones
- S.8230/A.10291 Prohibits federal corporate bailout recipients who engage in stock buybacks from receiving New York state tax credits
- Tax on “Investment Management Services” (aka “Carried Interest”)
- S.303/A.3976 19% surcharge under Articles 9A and 22
- Stock Transfer
- S.6203-A Repeals the rebate for stock transfer taxes paid
- S.3315 Reduces rebate to 60%; dedicate receipts to new dedicated infrastructure investment fund
- S.7629/A.9748 Imposes 1.5% tax on value of buyback of corporate shares
- “Wealth Tax”
- S.8277/A.10414 Income tax on residents with $1 billion or more in net assets based on “Mark to market” value
- Bank Tax
- S.3456/A.8552 Reinstates separate franchise tax on banking corporations
- Sales Tax
- S.7135/A.9053 Repeals sales tax exemption for private aircraft
- S.7634-A/A.9650-A 2% additional sales tax on luxury vehicles, jewelry, clothing, etc.
- Cigarette Tax
- S. 8330/A.10418 Increases state excise tax on cigarettes by $1.89
- NYC Legislation
- S.3246/A.2743 NYC PIT surcharge of .534% on income above $1,000,000
- Pied-a-terre tax (proposed in FY 2020 Executive Budget and Assembly budget resolution but no legislation is currently pending)
Other Potential Revenue Actions
- Recreational Cannabis (Conversations ongoing, revenue not immediate)
- Sports Betting
- Carbon Pricing
- ISO wholesale market study
- Regional “Transportation and Climate Initiative”
- CLCPA-Carbon Pricing mandate
Lessons from the Past
It may be instructive to consider whether there are any lessons that can be learned from the past. 2009 was the last major financial recession experienced by New York State. In October of 2009, Governor Paterson released a two-year, $5 billion Deficit Reduction Plan to address the state’s significant budget gap at the time without raising taxes. Paterson’s plan included a total of $3.8 billion in across-the-board cuts, administrative savings, funding transfers and some new revenues (not taxes). Following weeks of negotiations with the Legislature, the Deficit Reduction Plan was enacted in December 2009 and totaled $2.7 billion in spending reductions including a 12.5% across-the-board cut to certain local assistance programs, agency reductions, fund transfers, increased Medicaid fraud targets and other actions.
A series of taxes and revenue raisers were also enacted after the 2009 recession including a MTA surcharge extension, which yielded $492 million and an increased cigarette excise tax, which yielded $250 million. Further, in 2010 “temporary” PIT rate increases (top rate 8.97%> $500 million) yielded $4 billion as well as an expanded bottle bill, which resulted in $115 million. Finally, in 2011 a 3-year business tax credit deferral was put in place and yielded $1 billion in years 2 & 3, along with a 1-year repeal of sales tax exemption for clothing under $110 totaling $330 million.
New York City Budget
Following months of negotiations between Mayor de Blasio and the City Council, an agreement was reached late yesterday on a new fiscal year’s budget. The final deal totals $88.2 billion, which was greatly reduced from when proposed prior to the pandemic (8% lower than de Blasio’s budget proposed in January) and a 5% cut from the $92.8 billion fiscal year 2020 budget. The savings will come from cuts and other savings including a $690 million reduction to the NYPD from last year’s spending level, among others. Additionally, de Blasio said that if the federal government does not provide the city with more stimulus funds, he might have to lay off 22,000 city employees starting October 1st. For those who operate in NYC and/or depend on city contracts, more information on the enacted budget and where reductions will be made should be publicly available soon.
While continuing to join the chorus of advocacy focused on the nation’s capitol to push for a significant state and local relief package, we believe it is also important for organizations that rely heavily on state and local funding and contracts to attempt to put contingency plans in place should spending reductions be imposed later this year. As seen in 2009, many proposed spending cuts were replaced with taxes and revenue raisers, but some cuts were still enacted. This month will be critical to see if and if so, how much federal relief is provided and then we would expect to see a plan from the Administration for addressing remaining deficits. We will continue to closely monitor federal and state actions in this regard and keep you updated on any new developments or information we received. As always, please do not hesitate to contact us if we can assist you in any way during this very challenging time.