Breaking Down New York State Budget Fiscal Year 2024

Dan Clark: Welcome to this week's edition of New York Now. I'm Dan Clark. The clock has now started on the New York state budget. And I know it sounds boring, but it's the most important thing that happens in Albany every year. Just for context, last year's state budget was $220 billion. That's more than Florida and Pennsylvania combined. This year, we're expecting it to tick up again. Governor Kathy Hochul rolled out her plan for the state budget this week with a price tag of $227 billion. And she said that plan was crafted with a potential for an economic downturn this year.

Kathy Hochul: The majority of economists are predicting a recession, but the good news is we're prepared. It's also one of the reasons we will not be raising income taxes after we just expedited middle class tax cuts a year ago. Because it's not a newsflash that New Yorkers already believe they pay too much.

DC: Most of Hochul's budget plan was already in her State of the State address last month. So we won't rehash all of it. But there were a few small surprises. Like on charter schools, Hochul wants to free up more slots in New York City, so more of those schools can open. But that might be a tough sell for Democrats in the legislature, who are mixed on charter schools. Senator Shelley Mayer, who chairs the Senate Education Committee, already came out against Hochul's proposal. And Assembly Speaker, Carl Heastie, said it could be difficult in his chamber, as well.

Carl Heastie: You know, charter schools has traditionally been a, a tough issue in the conference, but, you know, with that being said, there are members who support charters. But again, I haven't seen the full proposal. She mentioned it, you know, last night, but I have to talk, talk to the members.

DC: So, now, hearings on the state budget will start next week. Kicking off the next few months of negotiations between Hochul and the legislature. And we'll circle back to the policy side of the budget a little later. But first, let's look at the numbers with Patrick Orecki from the Citizen's Budget Commission. Thank you, Patrick.

Patrick Orecki: Thanks for having me.

DC: So, let's look at the big number first. All funds spending is at $227 billion under Hochul's budget plan. Last year's budget was agreed to at $220 billion, but spending has gone up to about $221 billion. So, the gap that we're looking, the, the increase, is somewhere in the $5 billion range according to their administration. Is that typical for a budget year, you think?

PO: Yeah, that's fairly average. That's about two to 3% growth which is typical in, in all funds. There is still a lot of federal money involved right now that the state is still spending out, which, which brings the figure up a little bit. But, the same was the case last year. So that year-to-year figure is pretty consistent.

DC: Do we know when that federal money will run out, like, definitively? It, it, that's such an interesting thing to me, because last year's budget was almost more complicated because we had so much money from the federal government, I think. And people wanted a lot of different things, and wanted to use the money on those things.

This year, there's this interesting dynamic where the budget office is saying we have a surplus of $8.7 billion. I hadn't heard that before. Why do we have that?

PO: Yeah, that's really just to close out this current year. So, we still have eight weeks left in fiscal year 2023 to deal with, to close out, before we get into next year's budget. There's about $8.7 billion in extra cash right now. So, that was sort of expected. Receipts have been coming in consistently high. We knew there would be some there, as well as timing of payments, the way that the state changed the tax code to allow taxpayers to work around federal changes. It goes on and on. But, the bottom line being, we knew there would be extra cash. It was how much it was, and what the state was gonna do with it this year.

DC: Now, when we talk about the state budget, there are some big areas of spending. And, I'm hoping that you can clarify for me. So, we spend a lot of money on Medicaid. And in the past, I believe it was a third of the budget, but I, I don't know if that's accurate. Is that true?

PO: Yeah, Medicaid is the single largest program in that $227 billion pie, especially because there's a lot of federal money involved. So, it is over a third of the budget total, approaching a $100 billion over the next few years. So, a really, really big piece of the puzzle.

DC: On all funds, the division of budget said that Medicaid spending is going up more than 7% this year. Is, is that typical for that? Because I know, it, it grows so much every year, and I'm, it's unclear to me why it grows so much every year. Maybe you have an idea?

PO: Yeah. Well, recently, it's, it's been a, a big area of spending growth for a few reasons. First of all, it's just changing how people use services, et cetera. During the pandemic, there's been federal rules that have allowed enrollees to stay in the program longer than they other, otherwise would have. So, there's about a million extra people in the program right now compared to what you would expect pre-pandemic. So, we're at about 7 million New Yorkers in Medicaid coverage right now.

DC: That's interesting. And, and just looking at the budget in terms of the, have you had a chance to look at the changes of Medicaid? It's okay if you haven't.

So, what is going on there that would make these costs go up?

PO: Yeah, part of it is that enrollment dynamic. So one of the big federal aids that the state has been benefiting from over the last nearly three years has been enhanced Medicaid funding, which is good because it offsets some of the state's costs. It did put new rules on the program from the federal level and, and also increased enrollment for the last couple of years. So, that's kind of one of the reasons that the picture is changing a lot there. That federal aid is going to be phased out over this year, which means the state picks up its kind of regular, greater share of the program.

DC: Now, in, in a press release after the governor's budget was released, CBC said that there was a structural budget gap exceeding $12 billion. How, how, how does that happen, I guess? If, if we're hearing from division of budget $8.7 billion surplus, how do we get to the $12 billion plus structural gap?

PO: Yeah, I think we've kind of gotta break it up into three different time periods.

The first is this surplus that we're talking about over the next eight weeks, what to do with that. The second is what we do over the next three to four years. So, the budget as proposed is balanced next year, 2024. But there are big gaps in '25, '26 and '27. Those are about $7 to $9 billion annually. Beyond that point, we have the expiration of the personal income tax increases that the state passed two years ago. Those are worth about $5 billion. So, it's that seven for the budget gaps in 2027, plus $5 billion for the taxes expiring is what we're referring to as a structural budget gap.

DC: Do we have any, maybe, revenue generating ideas in this budget that could avoid those gaps? I, I know the governor is not raising, or is not planning to raise, income taxes in this budget. Do we see any other revenue streams that could help out the state?

PO: Yeah, there is one big revenue action, which is an extension of the corporate tax surcharge that was enacted in 2021 along with the personal income tax changes. So the governor proposed extending that for another three years. That's worth about a billion dollars a year.

DC: And then, in terms of, you mentioned the, the income tax on high earners, is that the one you were talking about where it generates 5 billion?

You said that sunsets this year or next year?

PO: Tax year '27.

DC: Okay, so that's, we don't even have to worry about that right now.

I mean, there are advocates who are upset that the governor does not want to raise taxes higher. What do you think about that idea? I know in the past some fiscal groups have said that that may drive high income earners out of the state, which is really important because they make up a lot of our income tax revenue. So what do you think about that idea?

PO: Yeah, I, I think, you know, speaking to that exact figure, the top 1% of, of income tax payers pay about 20% of total state funds spending just from the personal income tax liability alone. So we do have a, a very kind of top heavy, very progressive income tax structure. That does mean that we're super, super sensitive to any changes in their income, or where they're earning their money. So it's a, a really kind of big concern, and we see that when even there's a, a mild recession that there can be a multi-billion dollar impact on state receipts. It's very, very volatile.

DC: Do you have any insight on how bad this recession is looking? I mean, I feel like I get a lot of different opinions from different people about what it looks like. Do you have any insight on that?

PO: Yeah, it's been brewing for a little while, and it's just kind of at the point where consensus among economists is that something is likely. A short and shallow disruption, but it's a big impact on the state budget. Speaking about kind of what the employment changes would be, there's still small growth in kind of personal income, and, and employment, but the unemployment rate they have going is high as about 5.2% in a year and a half's time. So, it's not a, a massive recession where you get up to close to 10% unemployment or something like that, but it's still a, a big disruption and a hole in the budget.

DC: Yeah, 5.2% doesn't seem, I mean, it doesn't seem high to me because I feel like I just lived through COVID and our unemployment was at like 10% then.

Is 5.2% something to worry about in unemployment?

PO: Yeah, I, and I think it, the main thing is that it's a good thing that the division of budget is being kind of cautious and recognizing that this is more likely than not. Of course, the recession scenario could not play out, which would be great. I think that's what we're all rooting for. That makes things easier. But it could also be deeper or, or longer than what's expected right now. So, it's really important that we're forward looking and realistic that this could happen and planning for it right now.

DC: Yeah. All right. Well, I appreciate your insight. Thank you so much for coming in. Patrick Orecki from the Citizen's Budget Commission. Thank you.

PO: Thanks, sir. Thanks for having me.

DC: But back to the news of the week with Michael Gormley from Newsday, and Elise Kline from Lilly Broadcasting. Thank you both for being here.

Michael Gormley: Pleasure.

Elise Kline: Pleasure.

DC: So, this state budget was an interesting state budget. Mike, what stood out to you?

MG: Well, as you know, Dan, one of the many strange things about Albany is the toughest budgets are not in hard times. They're, when there's a, a surplus.

And you got an $8.7 billion surplus, it's gonna be a difficult budget session. But, keeping that in mind, the constitution gives the governor extraordinary leverage in, in this budget process, in crafting this budget. And that's why she's got some proposals in there that are gonna draw some criticism in the legislature. She's got some criminal justice issues, she's got affordability issues, including housing. All of which oddly sound like the Republican platform from last year.

DC: Yeah, that's very interesting. It's everything that Lee Zeldin campaigned on, probably seen through a democratic lens, not so much a Republican lens.

But it's very clear that she's trying to make in-roads on public safety and affordability. Because I think we've seen from polling, those are the two top issues for New Yorkers most of the time. And, honestly, if you lose an election by about five points statewide in this state, you know you're in some hot water, I think. Elise, what stood out to you?

EK: I think her proposals for mental health really stood out to me. You know, she promised in her State of the State to expand access and a lot of people are struggling right now with access to mental health services in a variety of state agencies. So I think, you know, her proposals that there were some in there for expanding programs for developmental disabilities, and I think those were really interesting.

DC: Yeah, the mental health component is really interesting. I'm not remembering the dollar amount on what would be there, but she's looking at new beds for people with mental illness, and then new supportive housing, which is this interesting type of housing where you have direct services on site for the residents there. So, while they're kind of transitioning away from homelessness, or a bad situation, they can get the help that they need.

MG: I agree, at least completely that the mental health component is, is huge. And the part that jumped out at me was to try to force more mental health services into schools. That is an, is an extraordinary measure that's been sought for a long time, but now it's got a governor behind it.

DC: Yeah, exactly. And it's interesting because in the past few years, I think mental health has been a big issue because of COVID, and you know, everything that's happened in the past few years. So, a commitment on mental health I think is important, kind of politically, I don't really see it as a political issue to be honest with you. But I think that it does paint her in a positive light in that regard. Looking ahead, Mike, there are some conflicts. As you said, she has a proposal on charter schools that would lift the regional cap on charter schools, which would allow more charter schools, if I say charter schools one more time, to open in New York City. And, so this is, such a wonky issue that I can't get all the way back into the weeds of why we have a cap in all of that.

But Democrats in the legislature, some of 'em have already come out against that proposal. Do you see that as a big fight?

MG: The, the governor's approaching this in an interesting way. Just to back up quickly.

Charter schools are public schools, but they're run by private organizations. The Democrats in, particularly in the city, are opposed to charter schools because it's, they see it as competition for traditional public schools. So, what the governor's doing is not trying to raise the cap, which would probably be a non-starter.

What she's trying to do is eliminate the regional caps. Upstate, New York City. And that would, in effect, allow more charter schools to be created. And, as you said, Assembly Speaker Carl Heastie has already said that's gonna be very difficult. And I think that was an understatement.

DC: I think so too. I mean, we saw in the last decade, charter schools really gained a lot of power in Albany. I think because, before Democrats took the Senate, Republicans held the Senate. And Republicans were big backers of charter schools. They also had, kind of, Andrew Cuomo on their side on that issue in some ways.

So, I think that's something really interesting to watch. In some ways, it's kind of a repeat of the Hector LaSalle situation, where you see the governor come out with a proposal that she hasn't really floated before and you see the legislature immediately come out against it. Speaking of those types of things, Elise, bail reform is gonna be an, an issue this year and probably for the rest of my life, I'm assuming at this point. Where do you see that fight headed?

EK: Well, it, it's, it's hard to say. It's definitely gonna be a tough fight. I think she's gonna put policy changes in the budget plan this year for bail reform. And a lot of lawmakers feel that the standard currently, the least restrictive standard for bail reform, is, is too restrictive for, for judges to set bail. And, so I, I think that it's gonna be a fight among what level of discretion should judges have for, to set bail in, in that situation. So, I think it's gonna be challenging.

DC: How do you see that playing out in negotiations between the governor and the legislature? This is your first budget that you're covering, so you haven't seen this before and, and, it's such a silly thing sometimes, but as we're looking at that conflict between them, how do you see it working out?

EK: Well, I think it's gonna be challenging. I mean, she said she, she alluded to, back in her State of the State of the strats, that she's gonna eliminate the least restrictive standard.

But I think lawmakers have a lot of different opinions on what the standard should be. So I think it's definitely gonna be a fight. It could even, you know, strain their relationship between lawmakers and, and the governor. I think this has been a really popular issue so far in the legislature. So it's, it's definitely gonna be really heated. I, you know, I predict.

DC: I think so too. And another thing that she's trying to do in this budget is add prosecutors around the state. She wants to hire, she says hundreds of prosecutors, I don't think there's an exact number there. And then she wants to add two classes of the state police. So more state police, more prosecutors. Mike, is that an easy sell for the legislature? I don't think so.

MG: It's, it's gonna be difficult. You're right. But, again, that's why she's putting it in the budget where she has this leverage over the legislature. She also has something else, as much as she has some tensions with the legislature, she's very popular in the public. That carries a lot. So, we'll see how much she, she pushes on this, again, going back to the surplus, there's a lot of trade-offs that she can make on this. But I think she's really gonna try to get something, I think this would be the third change in the bail law and these criminal justice issues.

DC: Right. We saw the Senate Majority Leader this week say that she had not spoken to the governor since the Senate rejected her nominee for Chief Judge, Hector LaSalle. I didn't personally read into that too much because I don't really know necessarily how much they talk as much as their staffs' talk. So, I think that's always something to keep in context. But, as we move forward, I kind of see this budget as, as much as it kind of seems very straightforward now, I'm wondering if there are any surprises that come up at the last minute. What do you think?

MG: Well, there might be. There was one thing that the governor had a briefing with the speaker, the assembly, and the majority leader in the Senate the night before the budget was released. And, from what I'm being told, that went pretty well. So, they know that for them all to be successful, they have to cooperate. That stops at a certain point. And, again, it might be charter schools, or whatever, but, you know, Albany's about fighting, you know. And you know, last year, you bring up a good point, last year 'cause there was, the, the bail measure that she came up with, and the Buffalo Bills stadium funding that was late. But I would, I look more overall. Her budget last year was really very much a, a legislature's budget. Spent a lot of money.

Did a lot of policy stuff, progressive stuff. She's not doing that this time.

DC: Yeah, I don't think so. And, and I'm wondering where she's going politically right now. She has the mayor of New York City very firmly on her side. They're, they're close allies clearly. I think that she's closer with the mayor than she is with the legislature right now. I don't know if that's actually true, but I think that informs policies that she's putting in the budget. We talked about charter schools, that's really a mostly New York City issue. She's also committing to $1 billion in aid for New York City for the migrant crisis. She wants to split that funding a third, the state, a third, the city, a third, the federal government. So, I think that's really interesting. We have about 30 seconds left though, Elise. I wanna give you the last word. Anything else you're watching?

EK: I'll definitely look, be looking at the housing crisis. You know, affordability is a big issue in the state that a lot of lawmakers have come out and say that, you know, we really need to be addressing in the legislature. And I think, in addition to her, you know, talking about implementing new units, rental subsidies, and housing subsidies are a big element to the housing crisis that I'll definitely be paying attention to.

DC: Yeah, that's something big to watch. But, we are out of time. Michael Gormley from Newsday, Elise Kline from Lilly Broadcasting. Thank you both so much.