New York's new $212 billion state budget approved earlier this month boosts aid for schools and health care as well as rental assistance at a time when the state's residents are still reeling from the COVID-19 pandemic, though the economic conditions are steadily improving.
But the budget also carries increased risks for New York, including a deferral of payments for the Medicaid program, the failure to deposit any money into the state's rainy day fund and a circumvention of the state's ceiling on debt essentially "rendering the cap meaningless," according to a report released on Thursday by Comptroller Tom DiNapoli.
At the same time, the state is relying heavily on revenue from the personal income tax and revenue from the state's wealthiest residents. Rates were increased on those who earn more than $1 million, with the money being used to increase direct aid for schools to historic levels.
The new budget is nearly a 10% increase in spending due in part to an infusion of federal aid meant to bolster the state's finances following the evaporation of tax revenue last year as the pandemic began.
Democratic lawmakers who control the state Senate and Assembly sought to boost revenues this year in order to shore up spending, a stark departure from more austere budgets in the previous economic downturn more than a decade ago.
Taxing wealthy people is politically popular, and state lawmakers argued the move would provide New York with a clear source of revenue in the coming years. But the revenue from the personal income tax tends to also can gyrate, given the whims of the economy.
"The income of these taxpayers tends to be very volatile, as it is more dependent on unearned income — such as dividends and capital gains — which can fluctuate considerably from year to year. In addition, some taxpayers have the ability to determine when such income will be realized," the report found. "This occurred in 2013 when the Bush-era tax cuts expired, and in 2018 when the federal Tax Cuts and Jobs Act was enacted; in these cases, taxpayers delayed or expedited certain income in order to avoid higher tax rates."
The state is deferring $3.5 billion in Medicaid payments. It did not add any new cash to a reserve fund it can tap into during emergencies, and that fund remains at $2.5 billion. The state is in a strong cash position, but the debt cap has been circumvented again.
Still, there is good news as the state's economy is rebounding faster than expected and tax revenue is coming in stronger than initially estimated.
New York shed millions of jobs a year ago as businesses, schools and other public gathering places closed down last year to halt the spread of the virus. The state's unemployment rate, however, remained about 8% in February, higher than the national average.