Gotham Gazette

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After Overstating Budget Deficits, Cuomo and De Blasio Get Big Federal Bailout

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Governor Cuomo and Mayor de Blasio (photo: Ed Reed/Mayor's Office)

Governor Andrew Cuomo and Mayor Bill de Blasio have spent many months warning New Yorkers about cratering tax revenues because of the coronavirus pandemic, outlining yawning budget gaps that could force them to make drastic spending cuts to state and city services and lay off thousands of government workers. But while the fiscal future remains uncertain, their worst predictions did not come to pass — revenues were higher than expected and significant federal aid has flowed to New York, even as major direct funding to shore up state and local government budgets was elusive. And now that is set to change thanks to parts of an immense $1.9 trillion federal package that appears imminent.

Despite shifting evidence to the contrary even before the aid now moving through Congress, the governor and mayor have nonetheless presented doomsday scenario narratives and budgets for the next fiscal year as they have sought to draw the maximum amount of federal aid possible. Throughout the past months, since shortly after the state went into lockdown last spring, both Democratic leaders, especially Cuomo, have often exaggerated the budget deficits, underplaying the billions of dollars in federal aid that was already coming into the state and giving limited acknowledgement to the relative bright spots in revenue.

By all early indicators during the pandemic, New York State and City were bound to suffer. As the early epicenter of the outbreak, strict restrictions eventually went into place. Businesses closed, some for good, and unemployment skyrocketed (and remains high). It was the end of a honeymoon for the state’s and city’s economies, which had seen an unprecedented nearly decade-long streak of continuous growth.

But the state’s and city’s finances differ in one crucial way. The state is heavily dependent on personal income taxes for revenue, which seemed as if they would plummet as more than a million people lost their jobs, and the city largely relies on property taxes, which were expected to be relatively stable. The inverse occurred. As white-collar workers mostly remained employed and many upper-income earners actually saw their income increase, personal income tax collections were higher than most predictions, even surpassing the previous fiscal year, while in the city, property taxes are anticipated to fall by $2.5 billion in the next fiscal year, the largest drop in decades.

Currently, Congress is on the verge of finalizing passage of President Joe Biden’s $1.9 trillion American Rescue Plan, which includes $350 billion for state and local governments. After initial passage in the House of Representatives, then modifications and passage in the Senate, the package now goes back to the House for final approval.

Senate Majority Leader Chuck Schumer of New York celebrated the Act’s imminent passage on Sunday, outlining what he said is $100 billion in benefits it will deliver to New York, including $23.8 billion in fiscal relief funds for the state, localities, and the MTA. Of that, $12.5 billion in direct relief will go to the state government while another $6 billion will be sent to New York City alone. “The deal we reached with the help of a new president, and a new Democratic Senate marks real relief to the tune of $100 billion for workers, families, healthcare, small businesses, including our hard-hit industries like restaurants, and New York — the things we need to support in order to weather this crisis and then work to recover,” Schumer said in a statement. Much of the aid to New York will go do individuals, businesses, nonprofits, and other entities, while government entities are receiving roughly one-quarter of the sum.

Though it behooves both the state and city to extract as much as they can out of the federal government – after all, New York is a ‘donor state’ that sends more tax money to Washington, D.C. every year than it receives back in funding – fiscal experts warn that federal aid is being employed as a handy excuse for the state and city to avoid serious structural budgetary measures. Federal funding is also a bandaid on a wound that will take years to heal, they point out, and administrations at both levels still need to better prepare for an uncertain future that may include large budget deficits and no additional federal money to plug them.

The governor repeatedly made dire threats about cuts to services, particularly in aid to localities for health care and education, if the state’s $15 billion initial projected budget gap for the current 2021 fiscal year alone was not filled by federal aid. He withheld a chunk of funding and took other emergency fiscal measures given expanded powers he was granted by the Legislature, and even cautioned that the state could see a $60 billion gap over four fiscal years.

But, as revenues came in higher than expected and the state took other measures, including borrowing billions and reducing spending, that budget gap slowly whittled down. Cuomo’s $193 billion executive budget proposal in January estimated the gap at $4.7 billion for fiscal year 2021 and $10.2 billion for fiscal year 2022, which begins April 1 of this year, gaps later amended to $3.1 billion and $9.5 billion, respectively. Meaning the two-year budget gap sum dipped below the initial current-fiscal year estimated gap of $15 billion.

The governor’s office and the state Legislature even reached a new consensus on revenue forecasts for the 2022 fiscal year, projecting it would be nearly $2.5 billion higher than what the executive budget proposal expected.

Still, Cuomo has continued aggressively making a $15 billion demand from the federal government in direct aid for the state government. That amount would now be sufficient for covering the current fiscal year gap -- including repayment of the short-term debt it took on -- as well as the projected gap for next fiscal year, which begins April 1, though that number is expected to be significantly lower given all that has transpired, including ongoing covid vaccination and the likely impact of so much federal relief and stimulus across the state. Cuomo has even threatened to sue the federal government if it doesn’t deliver the total amount, though that appears to be off the table even as aid looks like it will come in below the $15 billion at about $12.5 billion.

Cuomo presented two scenarios in his executive budget. One where the state receives $6 billion in federal aid, necessitating major cuts, certain tax increases and potential borrowing in the billions. The second scenario would see the state receive the full $15 billion. “Revenues coming in higher than expectations is good news, but we're still contending with devastating revenue losses -- $17.5 billion over just two years -- caused entirely by the pandemic that we need the federal government to offset so we can continue to fund baseline services over two years,” said Freeman Klopott, a spokesperson for the State Division of Budget, in a statement. “These new revenues will be used to reduce revenue shortfalls and replace federal funding, which is a non-recurring resource."

Fiscal watchdogs say the governor’s misleading representation of the budget figures could be detrimental in several ways. In fact, the updated financial plan from his own state Division of Budget noted that assuming the state were to receive $6 billion in federal aid and takes the budget steps outlined, it will actually end the year with a $1.6 billion surplus, and a $676 million surplus in the next fiscal year.

“He has consistently distorted, inflated and twisted numbers,” said E.J. McMahon, founder and senior fellow at the Empire Center for Public Policy, a think tank. “He has totally obfuscated the true nature of the situation.”

McMahon noted that the governor’s rhetoric could backfire in two ways. “He's been inflating the number under the assumption that it impresses someone in Washington. I think we're well past the time where far from impressing anybody, it's annoying people in Washington, including Democrats,” he said. But more ironically, he said, the progressive left has also used the $15 billion figure and its resulting and potential cuts to services as a rhetorical cudgel against the governor and to push for the Invest in Our New York Act. The package of legislation would raise as much as $50 billion in revenue each year by establishing new and increased taxes on the ultrawealthy, corporations, Wall Street, inheritances and gifts, according to its proponents.

“That number is so preposterous, it normally would actually undermine your credibility right from the start,” McMahon said of the $50 billion projected revenue from the Invest in Our New York Act. “But [Cuomo] has thrown around like helium balloons the number $60 billion early on as the size of our deficit, which it never was...He's grossly exaggerated it and in some ways that exaggeration is feeding advocates of policies he claims to oppose.”

The main challenge, McMahon said, is the “immense structural problem” that will resurface after federal aid is expended. He said the state should have already been restraining spending last year rather than starting off on the wrong foot, when Cuomo and the state Legislature adopted a budget that was $10 billion higher than projected revenues, agreed upon in the depths of the spring covid outbreak, April 1, 2020, and amid many more unknowns than knowns.

It’s analogous to the Great Recession of 2008-09, when the state did not do enough to reduce expenditures even as it got by with federal aid, McMahon said. “Generally, what happened was Cuomo inherited a $10 billion budget gap when he took office a decade ago because the federal stimulus had gone away,” he said. “And they then had to deal with the shortfall that the recession had created, which they had not dealt with. They're now setting themselves up for the same situation.”

But the governor’s push for $15 billion also allows him a convenient alibi, McMahon said. “Ask for too much under the assumption that you’ll get more than you would have otherwise. And then because they won't meet your price, you could then blame them,” he said.

On Sunday, in a conference call with the press, Cuomo celebrated the federal help apparently on the way, but said tax increases on the wealthy would still be on the table despite the massive federal aid package. “The $12.5 billion is very, very helpful. But as you know, because I've said it 150 times, we needed $15 billion, in my opinion. So we do have a gap there and tax increases are on the table,” he said, continuing to avoid acknowledging the more positive reality of the state’s fiscal picture.

State Comptroller Tom DiNapoli last week urged the governor and Legislature to take steps in the budget to address long-term structural problems rather than pursuing short-sighted solutions such as deferring costs to future years and suspending statutory debt limits. “There are signs our economy is rebounding,” the comptroller said, pointing to robust growth expected for employment and wages in the next fiscal year, “and the federal government will soon provide aid to suffering New Yorkers and devastated communities. But this recovery is fragile, and I urge state leaders to consider the long-term impact of this year’s actions to avoid tougher choices later.”

While New York City also benefited from higher personal income taxes, its budget is heavily dependent on property tax revenue, which is expected to fall by $2.5 billion in the next fiscal year, beginning July 1, because of plummeting values of office buildings and hotels which have largely been empty since the pandemic hit.

That projected drop has raised the specter of budget gaps of more than $4 billion over the next three fiscal years that could be hard to cover without significant cuts.

Unlike the state, New York City is required by law to balance its budget with the revenues it expects to raise – the city cannot borrow for operational expenses like the state. The mayor’s $92.3 billion preliminary budget proposal for the fiscal year beginning July 1 manages to close a $5.5 billion gap with $2.7 billion in surplus from the current year, drawing $1.15 billion from reserves, and finding $1 billion in unspecified labor savings, among other measures. What it crucially does not include is any estimate of federal aid, which is all but assured and will likely mean that the mayor will have significantly more on hand to spend. There is, however, a risk of nearly $2.4 billion in cuts, reductions in expected aid, and cost shifts from the state.

When the city budget picture looked most dire, de Blasio had sought authority from Albany to borrow for operating expenses and threatened tens of thousands of city government employee layoffs. Neither turned out to be needed despite the mayor’s many please for the former and threats of the latter, even before the billions now apparently headed to the city’s coffers, in part because of the steps the mayor did take and the higher-than-expected revenues, as well as billions that flowed to the city from Washington to cover liberally-defined covid-related spending.

On Monday, de Blasio applauded the federal stimulus package. “Now we can finally start to imagine what a full recovery looks like because we have the missing piece,” he said. “Now, we have the one thing that was held back from us for months and months and months when it was needed most...So, this now supercharges our recovery. This is the thing we needed. So, that's tremendously good news. And we'll be talking about it more in the days ahead as we wait, of course, for it to be 100% signed, sealed, and delivered with the president's signature.”

The next phases of the discussion will likely be complicated and contentious, as the city and state decide exactly how to allocate the funding headed their way, budget for the here and now as well as the future, and try to advance policy goals that will also be the subject of debate.

“The real imperative is to use federal money wisely because we're not out of the woods and we've got a long-run problem,” said Andrew Rein, president of Citizens Budget Commission, a nonprofit fiscal watchdog group. He said the state and city should spend those funds on direct relief and costs stemming from the pandemic, while also using it to bridge gaps across future years and restructuring their finances. Otherwise, “we have the budget problem that is staring us in the face today, just another year or two down the road,” he said.

“Stabilizing the finances allows us to take care of New Yorkers over time and doesn’t just kick a bunch of problems down the road,” he added.

CBC has for years been calling on the mayor to identify deeper efficiencies and recurring savings at city agencies to restrain spending. But while the mayor has made some attempts at savings programs, even instituting a Program to Eliminate the Gap (PEG) last year and for the coming fiscal year, they have been criticized as insufficient by watchdogs like CBC, the City Council, and City Comptroller Scott Stringer.

In his analysis of the preliminary budget, Stringer pushed the mayor to strategically use federal funds to “jumpstart” the city’s economy and provide immediate aid to the neediest residents. Among his proposals were canceling rent, providing relief to undocumented immigrants, bailing out taxi drivers who are deep in debt, funding an emergency food program, and others. “The challenges of the pandemic and the economic crisis aren’t yet behind us. From a slowed economic recovery to a rocky vaccine rollout, our city still has a difficult road ahead,” he said in a statement. “We need to strategically use our long-awaited federal stimulus funds to rebuild and recover, and the most vulnerable New Yorkers that have been hit hardest must be centered in our recovery.”

At a Council hearing on the preliminary budget last week, Speaker Corey Johnson sounded a note of optimism. “This budget isn’t nearly as grim as I thought it would be. After the CARES Act, the second stimulus package, and now with the Biden Administration in the White House and the Democrats in control of the Senate—it looks like we’ll be getting the help we need,” he said.

But he also raised the concern that the city may not be responsible with federal aid. “I’m also concerned that this budget is going to take advantage of new federal money to just do the bare minimum,” he said, as he pushed the administration to find more savings while ensuring there aren’t cuts to essential city services. De Blasio and the Council must come to an agreement on the city budget by that July 1 start to the new fiscal year, and hearings on de Blasio’s initial spending plan are ongoing.

In essence, the fiscal crisis also presents an opportunity, said Nicole Gelinas, senior fellow at the Manhattan Institute. “We should be using this time to think about making ourselves more competitive, not just sort of saying, ‘Oh, yay, we got bailed out by the federal government and we'll just push these problems off for another year,” she said. She said the state and city should look for ways to reduce certain taxes – a temporary sales tax holiday, for instance – and to restore Midtown Manhattan as the core of the city’s businesses, or otherwise risk remote workers moving permanently to other states and jurisdictions.

by Samar Khurshid, senior reporter, Gotham Gazette

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