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‘Possibility of a Prolonged Recession’: Coronavirus Could Wreak Havoc on City, State Budgets

de Blasio Cuomo budget coronavirus

Major challenges now & ahead for Mayor & Governor (photo: Rob Bennett/Mayor's Office)

New York has weathered financial storms before, including after the 2008 recession and the September terror attacks in 2001. But the COVID-19 pandemic threatens to eclipse the scope of both those emergencies. The fiscal impact on the economy is impossible to predict with any certainty but suffice it to say, it will put a major dent in the city’s and state’s budgets for the coming fiscal year.

In January, Governor Andrew Cuomo proposed a $178 billion executive budget for the 2021 fiscal year that begins April 1, which includes $105.8 billion in state operational spending (the rest comes from federal funds). In New York City, Mayor Bill de Blasio’s own preliminary budget proposal was for $95.3 billion for the fiscal year that starts July 1.

But state and city resources are expected to be taxed to their limits as officials mobilize to combat the spread of the coronavirus, while tax revenues to all levels of government plummet. Bars and restaurants have closed. Hotels are empty. Broadway is shuttered. Tourism is at a standstill. The cumulative impact on city and state tax receipts is expected to be in the billions, particularly as the pandemic could also trigger an economic recession that experts had already been expecting in some form.

New York State Comptroller Thomas DiNapoli released an estimate of the fiscal impact on state revenues on Tuesday, at the request of Governor Cuomo. He predicted that “the most optimistic revenue scenario” would be that tax receipts to the state are $4 billion lower than executive budget projections (of roughly $88 billion) and, if the stock market continues to decline and a recession sets in, that figure could be $7 billion. “Definitive estimates of the COVID-19 impact on the economy and State revenues are not possible, in part because the ultimate health and social impacts of the virus are currently unknowable,” the comptroller wrote.

DiNapoli noted that it would be tough to quantify mitigating actions by the federal government that could have a positive effect such as increasing unemployment insurance or assuming a greater share of state Medicaid costs.

“[O]ur budget as we prepared it is possibly overly optimistic,” Cuomo said in response to the comptroller’s projections on Tuesday, at his daily briefing on the coronavirus. State budget director Robert Mujica also noted that the comptroller’s estimate was done before a major stock market sell off on Monday and that the state will also have to wait to see whether the federal government decides to extend the date for filing personal income taxes, which make up the major share of state revenue.

“It really goes back to, essentially, the federal government will have to step in here to deal with this because we will have our own liquidity issues if we don’t get some relief,” Mujica said.

He said any state budget adopted during the pandemic would need to be adaptable. “We don’t know how long this is going to we need a budget that’s in place that gives us the flexibility to hold payments back, modulate things, move payments ahead of time for health care.”

Cuomo said that if revenues continue to slow as he expects, “we have to have a built-in mechanism to adjust the expenditures.” (The governor has in the recent past pushed through measures to give himself more budget flexibility.)

The projections are dire, particularly as the state budget season already began with an expected budget gap of $6.1 billion, mostly from rising Medicaid costs that the governor hoped to close through another overhaul of the state Medicaid program. The state’s reserves are also a paltry $2.5 billion (which includes $428 million that is planned to be added by the end of the current fiscal year).

In the city, Comptroller Scott Stringer estimated that, conservatively, the coronavirus would lead to a $3.2 billion loss in city revenue over the next six months based on declining sales in restaurants, retail, and real estate, and falling occupancy rates at hotels.

Stringer called on the mayor to aggressively take steps to cut $1.4 billion in spending across city agencies, with lower savings mandates for social services agencies and exemptions for the Department of Health and Mental Hygiene and NYC Health + Hospitals, which are obviously on the frontlines of fighting the virus and its medical aftermath. He also urged measures to protect small businesses and the non-profit human service providers that the city contracts with for many vital programs.

“As we brace for the economic fallout of the COVID-19 pandemic, we must protect our children, our seniors, our small businesses, and the arts and cultural organizations that are core to our economy and our identity as a city,” Stringer said in a statement. “We’re facing the possibility of a prolonged recession — we need to save now, before it’s too late, if we’re going to weather the downturn ahead.”

The city does have a fairly robust well of reserve funding – nearly $6 billion – but Stringer and other watchdogs like the nonprofit Citizens Budget Commission have warned the de Blasio administration for years that those funds would be insufficient to survive a prolonged recession, which seems more likely by the day.

Across the entire state, a confluence of factors may wreak havoc on jobs and income. The economy gets a large portion of revenue from Wall Street, which has been roiled by the effects of the coronavirus on global markets. Out-of-work employees not only won’t be paying taxes, but there’s already been a surge of applications for unemployment benefits that will itself tap state resources in a significant way. And the largest growing employment sector has been health care, which accounted for 40% of job growth in New York City in 2019. Within that, home health services accounted for 78% of health care jobs added and is one segment where providers and clients will be particularly vulnerable to the virus itself.

For fiscal watchdogs who have raised red flags about increasing state and city spending for years and warned about stormy weather on the horizon, the rainy day they expected is here albeit in a form than they imagined.

E.J. McMahon, founder and research director of the Empire Center for Public Policy, urged in a blog post on Tuesday that the state should swiftly pass a budget that gives the governor the flexibility to which Cuomo alluded. McMahon pointed out that, as currently written, the law limits how the governor can adjust spending once a budget is adopted. He can either cut from agency spending, which makes up one-fifth of the budget or cut local assistance funding by 1% of state operating funds, which would amount to just over $1 billion.

“Even assuming the governor squeezes 10 percent out of agency operations, the further cuts allowed by the discretionary provision would fall $1 billion short of DiNapoli’s best-case revenue scenario, and $4 billion short of the worst case,” McMahon wrote. He said the longer it takes to resolve the budget, the worse the problem will be and it will fall squarely at the governor’s feet regardless.

DiNapoli is also pointing out that if the federal government takes what appears to be a likely step of allowing people to file their taxes at a new deadline past the typical April 15 date, that could impact the state’s receipts, even temporarily, and cause cash flow issues.

New York City, with its reliance on property taxes, may be more steady over the next few months than New York State. Maria Doulis, vice president of Citizens Budget Commission, said it’s unclear “whether this is sort of a blip and then economic activity rebounds or whether it is going to punch us into a more prolonged recession.” She pointed out that in previous recessions, the city lost between $15-20 billion in revenue over three years compared to projections. “What the city has available to deal with that is just a fraction of that amount,” she said.

Doulis said it was surprising that the mayor has not already announced a Program to Eliminate the Gap, which would mandate savings and efficiency targets at city agencies. Unlike the state, the city’s budget is required by law to be balanced so that expenditures match revenues. “While the response [to the coronavirus] is going to necessitate greater spending on certain areas, it's all the more important to tighten the belt in the other areas of the budget,” Doulis said.

“This is something that's affecting all state and local governments and it's not clear that New York will be disproportionately favored in any federal government response,” she said.

Nicole Gelinas, senior fellow at the Manhattan Institute, believes the city may be hit harder than what the comptroller has estimated. She noted that taxes dropped by nearly $3 billion “almost overnight” after the 2008 recession, about an 8% reduction. “If we were to lose 8% of tax revenues this time, looking at next year's budget, we'd be looking at a $5 billion tax revenue drop,” she said.

Gelinas noted that the coronavirus pandemic is also unlike the effects that the recession or the September 11, 2001 terror attacks had on the city’s economy. The attacks did not lead to an extended virtual shutdown of the city and most businesses outside of ground zero that did close were soon back up and running. After the recession, the tourism industry helped the city rebound faster than other municipalities.

“This is a very different case. I mean, we have huge swaths of the economy just shut down,” Gelinas said.

The emergency might require drastic budget measures, she said, noting that spending has gone up by $20 billion under de Blasio. “We didn't enter this from a very good condition but the fact of the matter is now it's a pretty big emergency. So I don't think we're gonna get out of this just by cutting back the workers that de Blasio added to the payroll, which in itself is a difficult thing to do,” she said of the mayor’s massive expansion of the city workforce.

The city may also have to take unpopular steps to contend with the crisis, including by potentially instituting a wage freeze for municipal employees who have received raises through union contracts. “This is certainly going to rival the 1970s fiscal crisis in terms of the immediate cash crunch that it gives us,” she said.

Gelinas also worries that the property tax base would be hit by restaurants, retailers, and commercial tenants seeking moratoriums on their rent.

James Parrott, an economist at the New School, told the Wall Street Journal that the city could lose as many as 500,000 jobs by the end of the month, while Gelinas believes that number is also an understatement. She noted that the leisure and hospitality industries employ 450,000 New Yorkers and nearly 60% of those are likely facing temporary layoffs. Retail has another 340,000, which won’t be as badly affected, but will probably see “double digit percentage declines” nonetheless. And the financial industry will probably also see layoffs with markets cratering.

And though the city budget may not be affected by it, Gelinas also noted that the MTA will “run out of cash very quickly” as New Yorkers stop using mass transit during the pandemic (transit authority leadership asked the federal government for a $4 billion bailout on Tuesday).

Ronnie Lowenstein, executive director of the city’s Independent Budget Office, echoed Gelinas on the unique aspects of this current fiscal emergency. She noted that the city was already heading into a downturn when the September 11, 2001 attacks happened, and while the federal government pumped aid to the city, the state relaxed financial rules for the budget. “And the city fought its way back,” Lowenstein said.

The 2008 recession, on the other hand, was precipitated by the subprime mortgage crisis, which had less impact on a city that’s mostly home to renters than some might assume, and again the federal government soon intervened to bail out some Wall Street banks. Jobs contracted but at a far lower rate than previous recessions and even far lower than the national average.

“It's hard to see how New York could be so lucky a third time in a row,” Lowenstein said.

Assuming the state does not suspend the requirements that the city balance its budget, Lowenstein said there are three options, which may all leave the city at the mercy of the state and federal government: “Tap into other levels of government for aid or find ways to raise revenues either permanently or temporarily, almost all of which, except for the rate on the property tax, has to go to Albany.”

by Samar Khurshid, senior reporter, Gotham Gazette

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