Cuomo's delay strategy will worsen New York State's fiscal woes, analysts warn
New York Gov. Andrew Cuomo's decision to not address a widening revenue gap until after the election, will delay resolution of the state’s deep fiscal challenges, and make balancing the budget tougher, analysts said.
Cuomo recently said he would postpone major fiscal policy decisions until after Election Day in hopes of a Democratic victory that would spearhead a COVID-19 pandemic relief package for states. Without that aid, the Democratic governor has said, tax increases and spending cuts will be necessary to combat $30 billion of projected revenue shortfalls through the 2022 fiscal year.
“It is hard to imagine a federal aid package that would be large enough to close the state’s gaps, particularly on an ongoing basis,” said David Friedfel, director of state studies for the Citizens Budget Commission, an independent fiscal watchdog. “The longer the state waits, the harder it is to balance the budget and will make next year even harder to close those gaps if federal aid doesn’t come.”
Cuomo's belief that the Democrats taking the White House and Senate will result in a fast-tracked stimulus bill, similar to the American Recovery and Reinvestment Act of 2009, might not be the panacea the governor hopes for, said E.J. McMahon, founder and research director for the conservative-leaning Empire Center for Public Policy.
President Barack Obama signed that bill less than a month after he assumed office, but McMahon cautioned, that only carried New York for a short period. He said New York should learn from this past experience under previous Gov. David Patterson that relying on federal aid to solve budget obstacles will result in more long-term challenges.
“Even when the most generous stimulus bill of its era happened in 2009, that money lasted two and a half years and it was gone. It was a big reason Cuomo inherited a big budget gap when he took office in 2011,” McMahon said. “This pandemic has opened up a recurring structural budget that is $8 to $10 billion larger in the state budget and the Feds are not going to make that up in perpetuity.”
New York State was already confronting fiscal headwinds before the COVID-19 pandemic took hold in March, with an estimated $6 billion budget gap tied largely to rising Medicaid costs. The New York State Division of Budget now projects a $14.5 billion revenue shortfall for the current 2021 fiscal year, which ends March 31, compared to what was budgeted. The Cuomo administration has warned the state’s revenue gap will grow to $62 billion over a four-year period without aid from Washington.
While the state has managed to reduce its budget deficit to around $9 billion largely through $4 billion of spending cuts from a hiring freeze and suspending pay raises, Friedfel said, more long-term measures are needed without relying on Congress. Even if the Democrats are able to assume control of the White House and Senate in January, he said, there is no guarantee an aid package would arrive in time for the Empire State’s 2022 fiscal year that commences April 1.
“There may be a greater need for New York to have the package passed quicker as opposed to other states,” Freidfel said. “As important as New York is, 47 other states have a July 1 fiscal year start, so there will be a lot more pressure for July 1 than April 1 to have the package approved.”
Freeman Klopott, Cuomo’s budget spokesman for the NYS DOB, said some of the temporary measures taken by the governor — including reduced spending and 20% lower state aid payments to municipalities — may become permanent without federal action.
Progressive-leaning Democratic lawmakers in the state legislature have proposed a series of taxes on the wealthy, such as higher income taxes on millionaires and a stock-transfer tax, to help combat the revenue challenges, but Cuomo has opposes those proposals.
Friedfel has suggested other avenues to confront New York’s revenue gap, such as freezing planned middle-class tax cuts scheduled to take effect in January, which could generate around $400 million of revenue in fiscal 2022. Suspending New York’s sales tax exemption on clothing costing less than $110 would generate around $2 billion of new revenue by 2024, he said.
McMahon said the state should focus on permanent spending cuts now rather than wait. County governments, which have December deadlines to enact 2021 budgets, are especially vulnerable to delays, he said.
Moody’s Investors Service downgraded New York State’s general obligation bonds one notch to Aa2 from Aa1 citing the state’s inaction in addressing its large budget gap. The lower Moody’s rating is a notch below Fitch Ratings, S&P Global Ratings and Kroll Bond Rating Agency, which rate the state's GOs at AA-plus.
Fitch revised New York’s credit outlook to negative from stable last April. S&P and Kroll both assign stable outlooks.
“The negative outlook reflects the risk either that the economy is pressured for a significantly longer time frame or that their budgetary management will weaken with one-time solutions and structurally unsound choices,” said Fitch analyst Doug Offerman. “There is still this huge unknown between now and March 31 about how the state’s budget situation is going to play out.”
Offerman said whether New York receives stimulus funding by early 2021 will be one factor when considering a downgrade. The state has financial tools to weather revenue near-term hits including the authority to issue up to $8 billion in short-term debt in fiscal 2021, he said. The state previously sold $4.5 billion in short-term notes in May when it faced liquidity challenges from three-month postponement of the tax-filing deadline.
S&P credit analyst Timothy Little said New York's financial plan is "reasonably achievable" because of its flexibility to enact expenditure cuts absent federal aid. He noted the budget back-loaded possible spending cuts to the last two quarters of the fiscal year in order to determine whether federal assistance will arrive.
Rachael Fauss, senior research analyst at Reinvent Albany, said New York’s municipalities and school districts are caught in limbo as they await clarity as to how Cuomo plans to attack the budget gap. State aid has been withheld from local governments, she said, despite the governor sitting on 54% more cash at the beginning of October compared to a year-ago, according State Comptroller Thomas DiNapoli’s recently released cash report.
“Local governments and vendors waiting for state funds don't know if their state aid has been permanently cut or is just delayed,” Fauss said. “This may work politically for the governor, but it stinks for local governments and state contractors facing their own budget shortfalls.”