The estimated $237 billion Enacted Budget for State Fiscal Year (SFY) 2024-25 increases spending for vital state services like Medicaid and school aid and includes new funding and policy changes to spur the creation of much needed housing, but the state’s financial outlook includes several risks, according to a report by State Comptroller Thomas P. DiNapoli.
“This year’s state budget was adopted in an improved economic environment, with state tax collections outperforming projections,” DiNapoli said. “However, the state faces several revenue risks which may make current spending levels for essential programs and services difficult to sustain. The budget also includes troubling provisions that limit transparency and accountability and relies on backdoor borrowing and other practices that bypass statutory debt limits. These actions create risks and raise concerns for the state’s long-term fiscal standing.”
Revenue Risks
All Funds revenues for SFY 2024-25 are projected to total $227.2 billion, a decline of $7.3 billion, or 3.1%, from the prior year. The decrease is primarily attributable to projected reductions in investment income, gaming receipts, and other special revenue fund receipts, as well as the expected depletion of funds from the federal American Rescue Plan. In addition, fiscal pressures may build as revenue streams that have been critical to maintaining budget balance are scheduled to expire in the years ahead, including temporarily higher Personal Income Tax (PIT) and Corporate Franchise Tax rates.
Reliance on Personal Income Tax
In SFY 2023-24, just over half of All Funds tax revenues were from the PIT. These revenues rely on a small number of taxpayers whose sources of income are subject to significant volatility. For tax year 2021, those with incomes over $1 million comprised 1.6% of the PIT filers but paid 44.5% of New York’s PIT. They also comprised nearly three-quarters of the unearned income reported that year (capital gains, dividends and interest); the amount of income reported from these sources increased by 54.2% due to the record financial market levels in 2021.
Based on preliminary data for the 2022 tax year, total unearned income declined by 43.6% in SFY 2023-24 for those earning over $1 million. As a result, taxes paid by these high-income filers fell by over 37%, contributing to the overall lower PIT collections during the fiscal year.
Major Spending and Policy Actions
Projected All Funds spending of $237 billion for SFY 2024-25 would be a nearly 1% increase year-over-year following a period of significant spending growth. When comparing the actual spending from SFY 2023-24 to the actual spending from SFY 2019-20, spending increased 33% in the General Fund, 25.8% in State Operating Funds, and 35.8% in All Funds. School aid and Medicaid drove much of the growth.
The budget is estimated to provide $36 billion in total school aid for School Year (SY) 2024-25, an increase of $1.6 billion from $34.4 billion in SY 2023-24 (4.7%). This includes a year-over-year increase of $934 million (3.9%) in foundation aid to $24.9 billion in SY 2024-25. School aid has grown 29.4% since SFY 2019-20, largely reflecting the three-year pledge to fully fund the foundation aid formula, which was completed with adoption of the SFY 2023-24 budget. The budget contains $2 million for a study on the foundation aid formula to provide perspective on the future of school aid.
The budget provides $35.7 billion in Medicaid spending for SFY 2024-25. Budget actions are expected by the Executive and the Legislature to produce savings of $768 million in SFY 2024-25 and nearly $1.2 billion per year from SFY 2025-26 through SFY 2027-28. The budget also increases Medicaid payments for hospital services by $525 million and for nursing homes by $285 million, in addition to increases for safety net hospitals of $500 million, to $844 million, and $300 million in funding for the healthcare safety net transformation program. This program is intended to improve the financial sustainability of safety net institutions, including hospitals, nursing homes, clinics and home care providers.
The state has had difficulty containing costs in the Medicaid program, and has routinely taken actions to circumvent the global spending cap. The state continued to defer Medicaid payments across state fiscal years, pushing $1.4 billion that was due to be paid in March 2024 to April 2024. The budget also includes $1.2 billion in state Medicaid funds through SFY 2027-28 to support increased Medicaid enrollment. Medicaid enrollment could trend higher than Financial Plan projections, a risk with fiscal implications identified by the Office of the State Comptroller in several reports. Federal approval of a tax on managed care organizations is also not assured, yet the state assumes $350 million in revenue from the tax.
Reserve Funds
At the end of SFY 2023-24, statutory rainy-day fund balances totaled $6.26 billion. In addition to the statutory rainy-day funds, the Executive indicates that informal reserves will be maintained, and combined reserves will total 15% of State Operating Funds spending. The recent improvements in reserve fund levels and statutory authorization are encouraging but weaknesses remain. As DiNapoli has recommended, deposits should be regular and consistent during prosperous economic times. Moreover, greater emphasis should be placed on statutory reserves rather than informal reserves. Informal reserves such as the “economic uncertainties” fund can be used by the Executive for any purpose, with no requirements that they be replaced.
Debt Structuring & Short-Term Borrowing
The budget reauthorizes 50-year maturities for state-supported bonds issued for MTA purposes for another three years, an exception to the Debt Reform Act’s otherwise 30-year maturity limit for all state-supported debt. To date, the use of this authorization has increased taxpayer costs by nearly $1.2 billion, trading marginal short-term budget relief for considerably higher total long-term fixed costs. DiNapoli’s Roadmap for State Debt Reform shows how caps and other debt restrictions set in statute have not worked to rein in state debt or stop inappropriate borrowing practices, and proposed comprehensive and binding constitutional state debt reform to restore accountability to taxpayers.
Transparency and Independent Oversight
The SFY 2024-25 budget includes a number of troubling actions that remove oversight by DiNapoli’s office as well as normal competitive procurement requirements, as has been done in prior budgets. At least $367.6 million is exempt from the Office of the State Comptroller’s oversight and normal competitive procurement requirements. In addition, the contract for the statewide Fiscal Intermediary for the Consumer Directed Personal Assistance Program, whose value is not captured in this figure, is also exempt from these requirements. An additional $1.5 billion is exempt from normal competitive procurement requirements; and another $1.9 billion is to be distributed at the discretion of the Executive or the Division of the Budget and may not follow normal competitive procurement requirements.