After heavy New York State spending, experts warn of deficits

ALBANY — After a post-pandemic economy that provided big increases in tax revenues and prompted record spending on education and health care, the state's latest fiscal report says big deficits are looming.

Gov. Kathy Hochul's administration projects deficits totaling $36 billion over the next three years, worsened by a $5 billion reduction in projected tax revenues. The administration's analysis was released June 9, nearly 40 days after the $229 billion state budget was increased by $2 billion and adopted by the State Legislature.

“Albany’s three-year spending binge … can’t be sustained,” said Ken Giardin of the fiscally conservative Empire Center think tank in Albany.

The numbers were surprising, even for state government where deficits for the near future aren’t uncommon, although they're rarely this large after flush times, experts said.

The shortfalls must be addressed in coming state budgets, and the fallout could bring smaller school aid increases, higher income taxes, more state mandates on local governments that could affect property taxes and diminished public services.

"Counties are very concerned about this bleak fiscal outlook," said Steven Acquario, executive director of the Albany-based New York State Association of Counties, which represents the state's 62 counties.

"The state’s future spending gaps will require new fiscal restraints," Acquario said.

"Unfortunately, when the state is in this position, instead of cutting spending, they typically shift more costs to counties and local taxpayers to help close their own budget deficits," Acquario said. "This is not sound fiscal policy. Local taxpayers should not be on the hook for the state’s unsustainable growth in spending.”

There was no immediate comment Monday from Nassau and Suffolk counties.

“The magic in any budget is to align spending with recurring revenue,” said Thomas DiNapoli, New York State comptroller. “If you have a shortfall, you have decisions to make of whether you cut back on spending, raise taxes or borrow to avoid cutbacks and taxes … The state is already a very indebted state, so I would say the borrowing option is the least attractive option.”

Next year, DiNapoli said, "the budget is going to present many more challenges."

There are many reasons for the projected deficits. This year, Hochul and the State Legislature increased spending by billions of dollars for schools and hospitals, which have employee unions that are among the most active campaign contributors in New York State.

Also, inflation is driving up costs, state income tax and sales tax revenues are weak, the stock market on which state revenues are so dependent is no longer in overdrive and some of the state’s wealthiest residents have moved to states with lower taxes. The national economy is lagging as well.

DiNapoli and the nonprofit watchdog Citizens Budget Commission both have issued warnings about the volatile stock market and softening tax revenues over the past several years.

“In enacting this budget, the governor and Legislature added billions of dollars in fiscally unsustainable recurring spending, which widened the gaps,” said Andrew Rein, the commission’s president. “Revising tax receipt estimates downward $5 billion annually widened them further.”    

Rein continued: “Some may argue that the new, lower receipt estimates are too cautious — that the problem is not dire. Make no mistake; even if receipts are a few billion dollars higher, the state’s finances will still be unstable.”

Analysts say the outlook would be much worse but for Hochul’s insistence on paying some debts early using federal aid, and building up reserves.

The “rainy day funds” total $19 billion — far less than the projected state deficits but still more than under past governors. Former Gov. Andrew M. Cuomo is credited with beginning to build reserves, after decades in which independent analysts criticized paltry reserves that proved insufficient during recessions.

“To ensure New York is properly positioned for uncertain economic downturns, the governor has made it a priority to increase reserves,” the Hochul administration’s Division of the Budget said in a statement.

Hochul set a goal of reserving 15% of the state’s direct spending on operations.

The goal “was achieved two years ahead of schedule, and resulted in New York possessing its highest levels of reserves in history both in absolute terms and as a percentage of spending,” the budget division said. “The state will continue to balance future budgets while making transformational investments in housing, mental health, public safety, education and health care.”

Fiscal analyst applauded the improved reserves.

“I credit the governor and Legislature for heeding one of our calls,” DiNapoli said. “So even if we hit some rough waters, we’re prepared for it.”

Maria Doulis, deputy state comptroller for budget and policy analysis, said "the reserves are significant. That provides enormous flexibility in the short term to contend with the budget gaps coming up, but the question is, what is the future outlook?’" She warned against short-term fixes that can't be sustained with revenue and could create future deficits.

Even Hochul's fiscal plans warn of “heightened risks” from economic downturns” that are highly unpredictable.

“These reserves are jeopardized by the looming gaps,” said Rein, noting the financial plan was released 39 days after the budget was passed. “Basic financial plans should have been released with the budget agreement … New Yorkers should not have had to wait this long to learn these simple, but concerning, facts about the state’s precarious fiscal condition.”

By Michael Gormley

michael.gormley@newsday.com@GormleyAlbany

Michael Gormley has worked for Newsday since 2013, covering state government, politics and issues. He has covered Albany since 2001.