By E.J. McMahon
Founding senior fellow, Empire Center for Public Policy
New York has the nation’s second largest state budget, exceeded only by California’s. By any measure, New York State taxes and spends considerably more than Florida or Texas, whose populations are larger and have been growing faster.1See National Association of State Budget Officers, State Expenditure Report, Table A-1, page 122, at https://www.nasbo.org/mainsite/reports-data/state-expenditure-report. NASBO’s data for 2022 fiscal years pegged state funded expenditures excluding bonded capital at $121 billion in New York, compared to $309 billion in California, $60 billion in Florida and $70 billion in Texas. The Census Bureau’s Annual Survey of State Government Finances similarly shows New York’s state tax collections exceeding those of all states except California. https://www.census.gov/programs-surveys/state.html. In fiscal 2022, bolstered by extraordinary injections of federal aid, the total New York State budget exceeded $200 billion for the first time.
Even more than most states, New York experienced a severe economic and fiscal disruption following the COVID-19 outbreak in March 2020. Governor Cuomo’s broad emergency-order lockdown of “non-essential” business and social activity triggered the virtually overnight loss of nearly 2 million payroll jobs and a double-digit spike in unemployment among New Yorkers. For a time, the shock waves seemed very likely to vaporize a chunk of tax revenues and precipitate a fiscal crisis. But early predictions of massive deficits quickly dissipated amid waves of federal relief aid—along with unexpected increases in the state’s tax revenues in fiscal year 2021.2New York’s budgetary accounting system has four different categorical approaches to measuring cash disbursements (spending) and receipts (revenues): All Funds, the most inclusive, which includes spending from all revenue sources including federal grants and the proceeds of capital bonds; State Funds, which covers spending from all revenue sources except for federal grants; State Operating Funds, which excludes capital projects but includes all disbursements supported by state revenues (taxes, fines, fees, and tuition), including revenues dedicated to a particular purpose, such as Lottery aid to schools; and the General Fund, which is spending funded by all state revenues except those statutorily earmarked for a particular purpose.
Two years later, the pandemic crisis and its fiscal aftermath have given rise—temporarily—to a state budget trend unique in New York’s history: rapid growth in revenues, spending, and surplus reserves. Within two years of the pandemic’s start, New York’s state spending had been inflated by tens of billions of dollars in federal pandemic COVID-19 relief aid, further buttressed by surging income tax payments on capital gains generated by a strong stock market recovery—topped off by the proceeds of significant tax increases, enacted in the spring of 2021, targeted at New York’s highest-earning individuals and corporations.
After growing by slightly more than two percent a year between fiscal years 2011 and 2021, cash disbursements from state operating funds surged 13 percent in FY 2022 and were projected to increase by an additional 20 percent over the next four years.3New York’s state government fiscal year runs from April 1 to March 31; fiscal year or “FY” notations throughout this volume refer to the calendar year in which the fiscal year ends.
Albany’s supercharged post-pandemic spending trend is unsustainable in the long run. How this fiscal cycle ends—in a soft landing, or a crash that prompts even more tax increases—will be determined by the budgets of the next few years. Before it’s too late, New York’s governor and Legislature should embrace fiscal policies grounded in the three Rs of restraint, responsibility, and reform. Spending should be reined in, taxes reduced, and economic competitiveness restored as a top priority.
The state’s budget-making process—rushed, secretive, and increasingly cluttered with extraneous issues in recent years—needs to be more efficient, more transparent, and more accountable to taxpayers.
THE STATUS QUO
From fiscal years 1987 through 2023, New York’s state operating funds spending increased by a compound average of 4.2 percent a year, considerably above the average inflation rate of 2.8 percent during the same period. As shown in Figure 1, state spending exceeded inflation in 27 of those 36 fiscal years, including a dozen years in which disbursements grew at least two to three times inflation as measured by the Consumer Price Index.
The longest stretch of relative budgetary restraint in Albany since the early 1980s was the decade leading up to the pandemic, when state operating funds disbursements increased an average of 2.1 percent a year, compared to average annual inflation of 1.5 percent. The budget’s nearly flat inflation-adjusted trajectory from FY 2011 to FY 2021 reflected Governor Cuomo’s avowed commitment to holding state operating funds spending growth to two percent a year.
To be sure, the official numbers are misleading, since the two percent benchmark was not achieved without the help of book-keeping gimmickry—most notably through the pre-payment of debt service and some other expenses in most years. In addition, starting in the spring of 2018, the Medicaid program was beginning to burst the limits of the program’s supposed “global cap.” To conceal that over-spending, the Cuomo administration delayed some Medicaid payments from March, the end of the fiscal year, to April, the beginning of the next.4By early 2020, Medicaid was running 16 percent over budget—opening a $4 billion deficit in the state’s financial plan. See “Albany’s Self-Inflicted Medicaid Crisis” by Bill Hammond, City Journal, January 2020. https://www.city-journal.org/new-york-medicaid-crisis However, even adjusting for debt prepayments and Medicaid cash-flow rollovers, the average spending increase before the pandemic appeared relatively low by historical standards, in the neighborhood of three percent.
Rising capital debt
Not included in the state operating funds budget is capital projects spending, largely funded by long-term bonds. Article VII, section 11 of the state Constitution explicitly prohibits the issuance of state debt unless approved in a voter referendum, and further limits such referendums to one “single purpose” at a time. Yet generations of governors and legislatures have circumvented this requirement by authorizing public authorities to borrow on the state’s behalf without involving voters, and the Court of Appeals has upheld such arrangements.5The court rulings effectively upholding backdoor borrowing came in a series of unsuccessful legal challenges filed in the 1970s by Leon Wein, a Brooklyn Law School professor and, most recently, in Schulz v. State of New York, 84 N.Y.2d 231 (1994) Out of $62 billion in state debt outstanding as of FY 2022, only $2 billion (three percent) consisted of voter-approved general obligation bonds.6State of New York, FY 2023 Enacted Capital Program and Financing Plan, p. 98.
Although New York’s constitutional restriction on state debt is exceptionally stringent, the state’s total long-term debt burden measured as a share of state GDP is 50 percent heavier than the national average, and more than those in seven of 10 DOB-designated “peer states,” as shown in Table 1.
Relative to population, New York’s total long-term debt load of $5,134 per capita was more than double the national average. Even using DOB’s narrower measure of tax-financed “state-related” debt, New York’s total is higher than six of its peers and almost twice the national average. New York’s relatively heavy state debt load by both measures is noteworthy given the unusually large, separately financed capital budgets of its county and municipal governments—especially New York City, which is fiscally and demographically larger than all but a few states.
New York State’s 2023 capital financing plan forecasts a significant increase in state-related debt over the next several years. Having averaged $55 billion over the previous decade, outstanding state-related debt jumped to $62 billion in FY 2022 and is forecast to hit nearly $88 billion in FY 2027.
The largest share of the state government’s capital spending perennially has been devoted to transportation, principally the Department of Transportation (DOT) five-year capital program for highways and bridges (see Chapter 7).
Governor Hochul’s FY 2023 Capital Program and Financing Plan projected a big increase in capital spending, with the average annual total rising from $14.3 billion in FY 2020 to FY 2023 to $18.6 billion from FY 2024 through FY 2027. Transportation capital spending was projected to average of $8 billion a year, a 28 percent bump from the FY 2020-2023 average of $6.5 billion.
In a notable shift, economic development is projected to displace higher education as the second largest capital projects category in FY 2023-27, averaging $2.2 billion in annual disbursements, more than double the average from 2010 to 2022. Most of this money will be funneled through the Empire State Development Corp. (ESDC), New York’s umbrella agency for economic development, whose five-year projected spending through FY 2027 comes to nearly $11 billion, with the lengthy list of planned ESDC capital disbursements including $1.4 billion for urban and rural broadband access, $500 million for offshore wind development, and a $600 million state contribution to the $2 billion cost of building a new Buffalo Bills stadium.
Capitalizing the pork barrel
During the late 1990s, the Legislature began creating new, wide-ranging categories of comprehensive capital project funding for a variety of state and local projects, many (but not all) supporting economic development grant subsidies. By 2005, these programs—essentially slush funds—had funneled more than $1.7 billion on capital grants benefitting a wide range of recipients including “professional sports teams, corporations, local governments, universities, churches, libraries and Little League groups,” with another $1.5 billion allocated but not yet spent at that point, as the Center for Governmental Research reported.7Kent Gardner and Erika Rosenberg, “Capital Pork: How State Politicians Divvy Up Billions for Favored Capital Projects,” Center for Governmental Research, March 2006. www.cgr.org.
The FY 2012 state budget included a new lump-sum pot, the State and Municipal Facilities Program (SMFP), initially with an appropriation of $385 million, which was repeatedly increased until it reached nearly $2.4 billion in FY 2022.8Most SMFP grants fund local amenities such as skateboard parks, walking trails, school athletic fields, and improvements to municipal buildings, along with some large economic development grants to private developers and corporations, but some of the largest have been steered to private businesses.
As state Comptroller Thomas DiNapoli pointed out in a 2016 report, lump-sum appropriations for SMFP “include little or no detail regarding the process for allocating funds, or the purposes for which such funds are to be used, and the agency or authority that will ultimately administer the funds is not identified.”9“Unfinished Business: Fiscal Reform in New York State,” Office of the State Comptroller, May 2016. https://www.osc.state.ny.us/files/reports/budget/pdf/budget-fiscal-reform-2016.pdf
Reshuffling the tax deck
From FY 2011 to 2021, the state enacted several high-profile state tax cuts, including a reduction in personal income tax rates in middle- and upper middle-income brackets, and reductions in corporate taxes that included the elimination of tax on incorporated manufacturing operations in upstate New York. The net change in New York’s total tax burden during this period was minimal, however, because the revenue lost to tax cuts was effectively offset by repeated extensions of New York’s single largest state income tax increase since the early 1970s.
In 2009, as part of the FY 2010 budget deal between then-Governor Paterson and the Legislature, the top income tax rate was raised from 6.85 percent to 8.97 percent. Although the rate took effect at incomes of $500,000, it was widely referred to as a “millionaire tax,” and scheduled to expire at the end of 2011. However, in a December 2011 special session, Governor Cuomo and the legislature agreed to extend the tax increase in modified form, as an 8.82 percent rate applied to incomes starting just over $1 million for singles and $2 million for married joint filers. This extension was linked to rate cuts on incomes between $40,000 and $300,000 and “indexing” of tax brackets to reflect inflation.
The 2011 millionaire tax extension, initially set to expire in 2014, was extended three more times, most recently to 2024. Meanwhile, the initial tax rate cuts for middle- and upper middle-income brackets were succeeded by a broader plan of rate cuts enacted in 2016. That tax cut was to be phased in over eight years, from 2018 through 2025.10As part of the FY 2023 budget, the remaining phases of this tax cut were accelerated to take full effect in calendar year 2023.
By shifting a larger share of the state income tax to millionaire earners, the state accelerated a longer-term trend. Over the past 35 years, New York State’s budget has become more reliant than ever on personal income tax revenue disproportionately generated by a relatively small number of very high earners whose incomes are both volatile and highly portable. The upshot: personal income taxes now make up fully two-thirds of the state’s total tax revenue, up from 50 percent when Governor Mario Cuomo left office in the mid 1990s (see Figure 2).
New York’s personal income tax code has long been among the most progressive of any state’s, placing a much heavier burden on high incomes than low- or moderate-income households.11Frank Sammartino and Norton Francis, “Federal-State Income Tax Progressivity,” Tax Policy Center, June 2016. https://www.taxpolicycenter.org/sites/default/files/publication/131621/2000847-federal-state-income-tax-progressivity.pdf
In 2020, the highest-earning one percent of New Yorkers (with incomes starting at $655,835) reported 32 percent of adjusted gross income but paid 46 percent of income taxes paid by full-year state residents, as shown in Figure 3. And as shown in Figure 4, even prior to the most recent increases for top earners and cuts in lower brackets, the effective tax rate paid by the highest-earning one percent of all New Yorkers was more than double the rate paid by middle-income filers.
The state raised marginal tax rates further in 2021, as part of the changes enacted with the FY 2022 state budget.12The same revenue bill included a temporary three-year increase, from 6.5 percent to 7.25 percent, in state tax on business income above $5 million and increase in the capital base tax estimation method for non-manufacturers. As detailed below in Table 2, the personal income tax changes added three new brackets on incomes starting just above $2 million for married joint return filers (or $1 million for singles), translating into higher tax payments of nine percent to 24 percent. For New York City residents, the combined rates on millionaire incomes are now the highest in the country, exceeding California’s statewide rate of 13.3 percent.
New York’s higher income tax rates, originally projected to generate $4 billion a year in added revenue by 2025, are scheduled to expire in 2027. The FY 2022 revenue bill also eliminated the 2024 sunset on the 2011 millionaire tax hike, making it permanent. This change by itself constituted New York’s most significant permanent-law income tax increase since the 1960s.
The state financial plan assumes that high-income households will remain literally and figuratively unmoved by the most significant hike in marginal rates since the early 1970s. In fact, however, between 2010 and 2020, Internal Revenue Service data show New York’s share of the nation’s millionaire earners decreased from 12.7 per-cent to 8.9 percent, the lowest level on record.13E.J. McMahon, “New York lost more high-earning taxpayers in pandemic-wracked 2020,” Dec. 19, 2022, post at https://www.empirecenter.org/publications/new-york-lost-more-high-earning-taxpayers-in-pandemic-wracked-2020/
State personal income tax data from the first tax year affected by the pandemic disruption indicate that New York was continuing to lose high earners in the wake of the March 2020 Covid-19 outbreak.14NYS Department of Taxation and Finance, Personal income tax summary datasets through tax year 2020, https://www.tax.ny.gov/research/stats/statistics/pit-filers-summary-datasets-beginning-tax-year-2015.htm In 2020, the state’s personal income tax base included 54,824 full-time New York resident with incomes of $1 million or more, which was down slightly from the 2019 total of 55,308. During the same period, the number of full-year nonresident and part-year resident New York taxpayers rose from 70,222 to 73,899 filers in the $1 million-and-up bracket.15Nonresidents must pay New York income tax on any wage, salary or net profits earned from work or business activity in the Empire State, but not on capital gains and other investment- and savings-related income. Millionaire earners living in Florida accounted for the largest share of new full-year nonresident filers; there were 7,218 Floridians who owed some New York income tax in 2020, compared to 6,471 in the previous year.
Despite the continuing decline in the number of high-earning New York residents, and massive job losses in the early months of the 2020 pandemic, the Empire State’s personal income tax collections rose a healthy $1.3 billion, or 2.4 percent, in the fiscal year ending March 31, 2021. The higher-than-expected tax revenues were due mainly to the unexpectedly strong recovery of stock prices in the second half of 2021, which boosted the capital gains component of New York’s income tax base to $132 billion—up 58 percent from the previous year to a new all-time high, exceeding the previous record set in 2007. The increased net capital gains of New York’s income millionaires generated at least $3 billion in added state tax revenue, more making up for the decline in total taxes paid by lower-earning households.
But investment income is highly volatile. For example, New Yorkers’ net capital gains fell by 67 percent, from $62 billion to $20 billion, in the two years following the dot-com crash of 2000. Over the next five years, the S&P 500 recovered to just above its peak 2000 level, and the capital gains component of the state tax base soared to $116 billion. But stock prices then fell 56 percent from October 2007 to March 2009, and New Yorkers’ net capital gains crashed by 75 percent. In FY 2023 terms, a capital gains decline of even half that magnitude would translate into a revenue decline of roughly $4 billion.
The pinch of SALT
The impact of state tax increases in high-income brackets has been compounded by the $10,000 cap on federal deductions for state and local taxes (SALT), enacted as part of the Tax Cuts and Jobs Act (TCJA), which took effect in 2018. Despite New York’s higher average SALT deductions under previous law, the other major provisions of the TCJA resulted in net tax cuts for most New York taxpayers, including a majority of middle-income residents who previously could claim a SALT deduction for their high property taxes. The negative impact of the SALT cap is overwhelmingly concentrated among New York’s highest earners—especially those with incomes topping $1 million a year, nearly 30 percent of whom are paying higher taxes under the new law.16See summary of Empire Center analysis on the SALT cap’s impact in New York, “The SALT Story: Washing Away the Brine,” at https://www.empirecenter.org/salt/
For taxpayers claiming it, the pre-2018 SALT deduction functioned as a discount, reducing the effective impact of the statutory state and local rate. In 2011-17, for example, the SALT cap reduced New York’s top rate 8.82 percent to 5.3 percent; even in the early 1970s, when the state’s top income tax rate was 15.35 percent, its effective cost was just 4.6 percent. With no federal deduction, the state’s current top rate on the same earners starts ranges from 9.65 percent to 10.9 percent, by far the highest effective rates in New York’s history.
The state sought with a series of workarounds designed to preserve the deduction for at least some taxpayers. The most significant by far has been the Pass-Through Entity Tax, or PTET, created by the FY 2022 budget, which effectively allows owners of many closely held businesses to claim federal tax deductions and state tax credits for net profits that “pass through” to them as personal income.
Where the buck stops
Under New York’s Executive Budget system, the governor shapes budget priorities and is the dominant, agenda-setting player in the budget-making process.
The governor’s budget authority is laid out in Sections 1 through 6 of Article VII of the state Constitution. The first two sections require the governor to assemble departmental budget requests, to present a budget (“a complete plan of expenditures … and all monies and revenues estimated to be available therefor”) by certain dates early each year.
Section 3 describes the governor’s responsibility for submitting budget bills, his or her ability to “amend or supplement” those bills within 30 days of submission, and his or her ability, with the consent of the Legislature, to submit budget amendments or “supplemental bills” after the budget has been adopted. Budget bills are a unique category of legislation, introduced automatically without sponsorship in the Assembly and Senate.
Section 4 prevents the Legislature from altering appropriations language “except to strike out or reduce items therein.” It further provides that, once passed, appropriation bills become law without further action by the governor—except that both the legislative and judiciary budget “and separate items added to the governor’s bills by the Legislature” are subject to the governor’s approval or veto.
Section 5 restricts the Legislature’s ability to appropriate money before the governor’s executive budget bills have been “finally acted upon.” Section 6 includes a crucial “anti-rider” clause, which stipulates that the provisions of the governor’s appropriations bills must be “specifically” related to “some particular appropriation” in those bills.
The constitutional provisions are buttressed by State Finance Law, which requires the governor to update the state’s financial plan within 30 days of the close of each fiscal quarter.17Finance Law Section 24.3 The Budget Reform Act of 200718Chapter 1 of the Laws of 2007. further amended the Finance Law to ban the Legislature from adding lump-sum appropriations, to require the governor and Legislature to meet by mid-November for a “quick start” release of revenue projections; and to require the Legislature to present its members with reports detailing the impact of changes to the governor’s budget before the final adoption vote. The 2007 law also required the governor to provide more itemization of some programs in budget bills and banned the Legislature from making lump sum appropriations.
While the Legislature cannot alter appropriations bill language, it can add separate line items for any purpose—and if the governor vetoes these items, a two-thirds majority can override those vetoes. In addition, the Legislature effectively has its own budget veto, in the form of its Section 4 power to “strike out or reduce items” in an Executive Budget appropriations bill before the bill is passed.
The extent of the governor’s authority under the Executive Budget law has been tested in a series of court battles between the governor and the Legislature, dating back to the late 1920s. The latest two landmark rulings by the Court of Appeals stemmed from two of Governor George Pataki’s second-term budgets.19Pataki v New York State Assembly, 2004 NY Slip Op 09320 [4 NY3d 75] December 16, 2004. A video of the arguments before the Court of Appeals is posted at https://www.nycourts.gov/ctapps/news/Pataki-vNYSAssembly.html
The first, Silver v. Pataki, arose when the Legislature followed up its adoption of the governor’s 1998-99 appropriation bills by enacting single-purpose, non-appropriation Article VII language bills changing the purposes for which the money could be spent. The second case, Pataki v. Assembly, stemmed from Pataki’s 2001-02 budget bills, which among other things incorporated the governor’s proposed changes to the local school aid formula in appropriations language, rather than following the previous practice of putting formula changes in a non-appropriations budget bill.
The two cases were jointly decided by the Court of Appeals in December 2004, with a 5-2 majority upholding the governor’s executive budget powers in both cases. Within the majority, there was broad agreement with Judge Robert Smith’s opinion that, in both budgets, the Legislature had “altered the Governor’s appropriation bills in ways not permitted by the Constitution.”
Over-reaching budget bills
Any changes in state law required to implement the annual Executive Budget—for example, creation of a new fee, or an increase or decrease in an existing tax—are submitted by the governor in what are commonly referred to as “budget language bills,” or “Article VII bills.” Typically organized by subject matter, these measures are strictly separate from appropriations bills, which are a constitutional category unto themselves.20At the time of introduction by the governor, appropriations bills customarily are grouped into five categories: State Operations, Aid to Localities, Capital Projects, and Legislature and Judiciary (in the latter case, the governor cannot alter appropriations sought by the other branches of government). Separate Article VII bills typically are introduced in at least five core subject areas: Revenue; Education, Labor and Family Assistance; Public Protection and General Government; Health and Mental Hygiene; Transportation, Economic Development and Environmental Conservation.
To a far greater extent than any of his predecessors, Governor Andrew Cuomo sought to include non-budget items—including such major policy changes as a statewide $15 minimum wage—within his non-appropriation Article VII bills. He and legislative leaders also negotiated budget deals in which non-budget policy items were added to the bills before passage. A particularly glaring example of this practice was the inclusion of controversial criminal justice “reforms”—including elimination of cash bail for many crimes (see Chapter 2)—in a 266-page Revenue Bill enacted with the FY 2020 budget in April 2019.21The changes were contained in Parts JJJ and LLL, respectively, of Ch. 59 of the Laws of 2019, available at: https://www.nysenate.gov/legislation/laws/CPL/A245 Likewise, three years later, amendments to those criminal law changes were bundled with numerous other non-budget items in FY 2023 budget legislation, this time as subparts of the 313-page Education, Labor and Family Assistance budget language bill.22Ch. 56 of the Laws of 2022.
Critics of New York’s executive budget system cite such instances as evidence that the governor has too much power to change state laws through the budget-making process. However, neither the original Executive Budget law nor the more recent Court of Appeals decisions empowered the governor to force legislative action or insist the Legislature act on any supposedly budget-related measure outside of appropriation bills. The Legislature remains free to reject, rewrite or supplement any non-appropriations Article VII bill provision, as long as the effect is not to alter language in appropriations bills.
Legacies of lateness
For an almost unbroken period of 25 years prior to 2011, New York State’s budget was not enacted before the start of the April fiscal year. In some years, the final deal was not reached until several months past the March 31 deadline. Unlike some other states and the federal government, New York State never experienced an actual government shutdown due to its failure to enact a timely budget, since Governors Mario Cuomo and George Pataki routinely submitted temporary budget extender bills to meet payrolls while negotiations dragged on.
While the budget delays created some cash-flow stress for local governments dependent on state aid payments, they had little noticeable impact on the vast majority of New Yorkers. But the chronic lateness fed the impression of terminal gridlock and dysfunction in Albany, adding to the negative financial factors holding down the state’s credit rating.
The last significantly late budget came in 2010, when state finances were stressed in the wake of the Great Recession and the impending fade-out of temporary federal stimulus aid. Like his predecessors, Governor Paterson had sent the Legislature temporary extender bills once the state began the 2011 fiscal year without adopting a final budget.
When the Senate and Assembly refused to drop spending demands beyond what the governor thought the state could afford, the governor began using the extender process to force-feed large chunks of the full annual budget bills calling for lower spending levels. A complete budget effectively was enacted in this piecemeal fashion, largely on the governor’s terms, by the end of June. Most budgets since then have been adopted by April 1 or within two weeks of that date.
A new twist in New York’s 2019-20 budget process was the unprecedented linkage between “timely” passage of the budget and a legislative pay raise—a condition imposed by a committee on compensation created by the Legislature in 2018 as part of the 2018-19 budget.23Ch. 59 of the Laws of 2018, Part HHH. The governor’s added ability to pressure lawmakers into a budget deal was compared by one member, not unreasonably, to “extortion.”24“Assemblyman says Cuomo’s using pay-raise ‘extortion’ to pass budget”, New York Post, March 3, 2019. But the Legislature itself set the stage for this situation by delegating the salary issue to a compensation committee.
The Legislature passed up an opportunity to permanently veto the resulting committee report and recommendations at the end of 2018. Even now, the entire compensation scheme—as well as the 1998 law temporarily withholding legislators’ pay when a budget is late—could be repealed by the Legislature at any time, although its constitutionality recently was upheld by the state’s highest court.25Delgado v. State, opinion at https://caselaw.findlaw.com/ny-court-of-appeals/2022923.html.
Flattening the curve of spending to put New York State’s finances on a more sustainable footing—while also, crucially, adjusting taxes to a more competitive level—will be a stiff multi-year challenge. Under the state’s nearly century-old Executive Budget system, the procedural and institutional tools exist to make these goals a reality, but both the governor and the Legislature must be willing to play their parts in using them. The to-do list of necessary policy changes and reforms is long, but would start with these priorities:
- Reduce projected spending. Efforts to find savings in a $121 billion state operating funds budget necessarily must start with Education and Medicaid, which already consume half the operating budget and are on track to grow faster than all other areas combined. As noted in Chapter 3, New York’s per-pupil spending on public schools is higher than any state’s and approaching double the national average, yet educational results are generally mediocre. The still-unfolding $4 billion increase in Foundation Aid should be suspended, reconsidered, reduced, and restructured to favor poorer districts and to programs offering more educational choice, starting with additional charter schools. The Medicaid budget has ballooned by 76 percent in 10 years, and the program badly needs the kind of structural reforms discussed in Chapter 4. There should be a renewed effort to modernize and right-size government through a revived version of the Spending and Government Efficiency Commission created in 2011, this time focusing on remote-work implications for agency operations. Additional resources can be freed through repeal of corporate tax subsidies and loopholes—starting with the $420 million a year Film Production Credit, which is the biggest giveaway of its kind in any state.
- Roll back tax increases. In early 2009, before enactment of the first temporary millionaire tax, Assembly Ways and Means Committee staff described the state’s dependence on high-income taxpayers as “inherently unstable,” “volatile” and “unsustainable.”26New York State Assembly Revenue report, February 2009, p. 40, http://www.assembly.state.ny.us/comm/WAM/2009RevRep/2009RevRep.pdf Subsequent tax policies have only made it worse. The latest income tax hike on high earners, enacted in 2021, is projected to raise $4 billion a year before its scheduled expiration in 2027—but the history of previous supposedly temporary tax hikes suggests pressure will grow for extension of the increases as the sunset date gets closer. To prevent further erosion in the tax base, the tax hikes should instead be phased out at a steady rate, starting in tax year 2023.
- Move the fiscal year start date to July 1. New York’s unusually compressed budget-making schedule, allowing barely two months for legislative consideration and airing of the Executive Budget, has contributed to the hastiness and secrecy surrounding the process. Moving the start date from April 1 to July 1 would match the existing schedule in 46 states and the City of New York. It also would restore the state fiscal calendar in effect during New York’s first 15 years under the executive budget system, allowing more time for legislative analysis and consideration of a budget that the Constitution requires the governor to submit between mid-January and Feb. 1. Extending the budget process through most of the session also would eliminate any rationale for packing non-budgetary program items into Article VII budget bills, and it would allow the budget to be finalized after the final settlement on personal income tax receipts in mid-April.
- Mind the GAAP. The Constitution requires the governor to propose a balanced budget, and the 2007 Budget Reform Act requires the Legislature to adopt one. By statute, however, New York’s financial plans are calculated on a cash basis, which recognizes receipts when money is received and disbursements when money is paid out. This accounting standard makes it easier to manipulate the budget’s perceived fiscal integrity and sustainability by, for example, rolling one year’s expenditures into the next. A better standard for budgeting would be the “modified accrual” method consistent with Generally Accepted Accounting Principles (GAAP), which requires revenues to be recognized when earned, and expenditures to be recognized when a liability is incurred. The standard was imposed on New York City during the mid-1970s financial crisis to minimize the kind of accounting gimmicks that had helped drive the city into virtual bankruptcy.
- Establish a Legislative Budget Office (LBO). A nonpartisan and professionally staffed LBO, modeled on the Congressional Budget Office, could provide a much-needed source of economic and policy analysis for the public and lawmakers alike. The new agency could be funded primarily through a combination of existing appropriations for four separate fiscal committee staffs, as proposed in a bill introduced in 2019 by Sen. Liz Krueger, chair of the Senate Finance Committee.27S.3287/A.1835 of 2019-20. As summed up in her bill, the LBO’s core mission would be to “increase the legislature’s understanding of the budget and how it affects New Yorkers.” Similar joint nonpartisan committees exist in California and in New Jersey, among other states.
- Shut the borrowing backdoor. The constitution should be amended to clearly require voter approval of state capital debt issues backed by a pledge of state revenue. This would include the creation of any new categories of state-backed bonds, such as the personal income tax-backed “PIT bonds” that have proliferated over the past 20 years, which should also require voter authorization subject to borrowing caps that could only be lifted with voter approval. The constitutional amendment should also allow submission of multiple bond issue propositions in a single year.
- Ban lump sum appropriations. As proposed by the comptroller, the State Finance Law should be amended to prohibit the Executive, as well as the Legislature, from introducing or continuing any form of lump-sum appropriations, such as those used to support the State and Municipal Facilities Program. All funds should be allocated, up front, to a specific list of grantees through an open, competitive process with clear, measurable criteria, subject to regular audit by the comptroller and pre-released pursuant Freedom of Information Law at every stage.
- Enforce financial plan deadlines. Governor Cuomo routinely failed to meet his Oct. 30 Mid-Year Financial Plan update deadline, and after releasing the FY 2022 Mid-Year Update on schedule in October 2021, Governor Hochul did not release the FY 2023 mid-year report until 11 days past the due date. The Legislature, meanwhile, has in the past disregarded its own deadlines for issuing revenue estimates and meeting with the governor and comptroller to “quick start” the process. The governor and the Legislature—both houses and both conferences in each house—should live up to their responsibilities under the law, period.
E.J. McMahon is founding senior fellow of the Empire Center for Public Policy and adjunct fellow at the Manhattan Institute for Policy Research