The coronavirus created a fiscal crisis. How should New York handle it?
The coronavirus created a fiscal crisis. How should New York handle it?
The coronavirus crisis has many wondering how bad the economy will get. In New York, state officials warn that the budget gap may balloon to $15 billion, and could get even worse in coming months. In New York City, Mayor Bill de Blasio has taken the unusual step of calling for $1.3 billion in agencywide cuts to brace for the impact.
For insight on the state of the economy and what New York City and state should do address the worsening economic situation, City & State turned to four experts on the matter: New York City Comptroller Scott Stringer, New York State Comptroller Thomas DiNapoli, Citizens Budget Commission President Andrew Rein, and E.J. McMahon, founder and research director for the Empire Center for Public Policy. The responses have been edited for length and clarity.
How bad is the economic situation in New York as a result of the coronavirus pandemic? How will it compare to past economic downturns?
Scott Stringer: My office estimates a tax revenue loss of between $4.8 and $6.0 billion – between $1.3 billion and $1.5 billion in the current fiscal year, and between $3.5 and $4.5 billion next year.
Compared to the recession of 2008-09, this isn’t quite as bad. But everything depends on how quickly the virus is contained and economic activity can resume. A longer or deeper recession would mean even greater losses. Already we’ve seen at least 68,000 layoffs or furloughs in the hospitality industry, and there will be others, especially in the cultural and retail sectors.
So it’s very clear the stakes are high for New Yorkers. We can’t wait to tackle this looming economic crisis until some later date – we have to take action now for the sake of our businesses, our workers and the services our most vulnerable rely on.
Thomas DiNapoli: One of the biggest problems is that, while we fully expect significant damage to the economy, businesses are closing and people are losing their jobs faster than most traditional indicators can measure quickly. The economic impact will ultimately be driven largely by the public health impact. How long will businesses need to be closed or at reduced capacity? How many won’t be able to reopen? No one can predict exactly how long COVID-19 will remain a major threat. All of this means that the economic and budgetary uncertainty is among the worst we have seen in decades.
In several past recessions we saw employment declines in New York of more than 4%, and we need to prepare for a serious downturn again. There is some reason to hope that the expected recession can be relatively short lived. The federal relief and stimulus legislation should help to soften the impact, although the extent of that remains to be seen.
Andrew Rein: Short answer, the immediate impact has been very significant – swift, deep and fairly broad. The potentially bigger issue is we still don’t know how much worse it will get or how long it will last. Every downturn is different, and this one appears particularly unprecedented in recent history. The state and city fiscal situations are rapidly deteriorating. Our analysis of prior recessions indicates that a first-year shortfall is typically $9 billion for the state, and would be $5 billion for the city in fiscal year 2021; early estimates from the state budget office and state comptroller indicate the first-year state impact may already be greater. While the future still is uncertain, our estimates place the potential three-year impact based on a typical recession at up to $20 billion for the city and $34 billion for the state.
E.J. McMahon: It appears to be at least as bad as the Great Recession. But the 2007-09 recession unfolded over a year or more, while this economic shutdown happened in the space of a couple of weeks. Chances of a “V-shaped” recovery range from slim to none. The question is how low deep and prolonged the “U” of this recession is. Will he recovery be robust, or faltering? There seem to be more grounds for pessimism than optimism at the moment.
What should city and state officials do to address the worsening fiscal situation?
Thomas DiNapoli: The state and New York City must fully recognize and address the emerging budgetary risks, including the likely revenue impacts not only in their next fiscal year but in the following year as well. Spending decisions should reflect the new economic and fiscal realities. The sovernor and the state Legislature face the difficult challenge of enacting a new budget by April 1, when we will still have more questions than answers about the economic and revenue outlook as well as related upward pressure on spending. In the coming year, there should be ongoing, public analysis of revenue and spending trends and the impact on the state’s financial plan to enhance transparency and accountability during a time of elevated uncertainty and concern. I have long urged that the state bolster its rainy day reserves to levels more similar to those of other states, and the current crisis reminds us that we absolutely must make a commitment to do so.
Scott Stringer: As a first step we as a city have to get our own fiscal house in order. That’s why I’ve said we urgently need to order all city agencies to identify savings. The mayor has taken a good step forward by mandating his agencies find $1.3 billion in savings to begin with. That’s money we need to protect our city workers and the social safety net. We also need to deliver support to small businesses who are bearing the brunt of this crisis – suspend collection of fines, waive fees, expand loans and grants, and explore a sales tax holiday.
Andrew Rein: The state should pass a “bare bones” budget that funds the pandemic response and sustains essential services, but significantly curtails other spending, including education aid to wealthy districts, wasteful tax expenditures and unproven economic development spending. Also, the state’s pre-existing Medicaid spending problem has not been fully solved so Medicaid Redesign Team’s work should continue. The city’s priority lies in reducing spending outside of pandemic response needs. Only bold action will preserve the fiscal stability needed to provide essential services. Since fiscal year 2014 under this administration, the city budget has grown $23 billion (32%) and headcount increased by nearly 30,000 positions (10%). The announced Program to Eliminate the Gap (PEG) of $1.3 billion over two years is too modest given the yawning gaps ahead. Spending this year must be controlled and agencies tasked with finding at least $3 billion in recurring savings that start next year. Now is the time for commissioners, managers and frontline workers to restructure operations and make strategic cuts to improve efficiency and deliver critical services in the most cost-effective manner. To be successful at this scale, labor will need to be a real partner in change.
E.J. McMahon: They should follow the adage the governor cites as his guide in other areas: Prepare for the worst while hoping for the best. That means making tough decisions now to cut spending as broadly and deeply as possible, because in all likelihood this its just the beginning of a multi-year fiscal crisis for the state and for New York City, in particular. Delay won’t pay – it will just push a bigger problem into the future.
What should city and state officials NOT do in response to the worsening fiscal situation?
E.J. McMahon: They should avoid raising taxes, reminding themselves of what was uppermost in their minds just a year ago: the tight cap on federal state and local tax (SALT) deductions. For most of the 100-year history of the state income tax, and the 54-year history of the New York City income tax, those taxes were fully or largely deductible on federal returns, which means their effective price was much lower.
For example, back in the early 1970s, when New York state’s top rate was 15%, the tax base was narrower and the effective rate after deductibility was just 4.5%. Fast forward to 2017: The effective post-deductibility rate of the state’s current “millionaire tax” rate, which was imposed during the last recession, was about 5.3%. Starting in 2018, under the new federal tax law, it’s 8.82%. That’s the net added tax price of living and doing business in New York as compared to a low-tax state.
We were already in uncharted territory when it came to tax competitiveness, with early signs of further erosion at the top of our tax base, when this extraordinary crisis hit. By making ourselves more dependent than ever on the highest-earning 1%, we guaranteed our revenues would plunge steeply in the next bear market. The bears are now here. Yes, the Dow this week had its best day since early 1933. Before celebrating, however, recall what the next seven years after 1933 were like.
Andrew Rein: Given the extent of economic instability and that costs of pandemic response and mitigation are currently unknown, at this point the state and the city should resist the most extreme measures or reaching into a fiscal bag of tricks, since these strategies often have negative future consequences. Neither the state nor the city should borrow now to cover ongoing operating costs, but it is reasonable for the state to consider issuing revenue anticipation notes to resolve cash-flow problems caused by delayed tax filing due dates. Payment delays, like the state did with Medicaid, undermine future finances, and while some tax increases may reasonably considered if the economic shock is prolonged or very deep, right now they should be avoided since they could undermine New York’s competitiveness and tax base. Dipping into various State dedicated funds for general purposes, such as New York Power Authority funds dedicated for energy efficiency, should only be done with a plan to restore those revenues over the long term. For its part, the city should focus on reducing spending by improving efficiency and not now use resources set aside in a trust fund to pay for future retirees’ health benefits.
Thomas DiNapoli: There have been times in the past when both the state and the city have ignored budgetary challenges and resorted to irresponsible gimmicks that hide the problems and avoid difficult but necessary responses. We can’t repeat those mistakes. Fortunately, leaders at both levels now are saying very clearly that we are facing new budgetary realities requiring serious and difficult steps in response. We must keep that realistic focus going forward.
Scott Stringer: The state should do no harm to New York City and other local governments. That means no cost shifts to New York City and no cuts to school aid. The city's budget this year relies on $15.7 billion in state aid. About three-quarters is for education. Similarly, now is not the time for Medicaid cuts. The governor and state legislators should reject any proposal from the MRT II that would cut funding to health care providers or restrict services to Medicaid beneficiaries. The state should also not take automatic cuts to local aid without legislative approval.
The city should not continue non-essential spending. It's time for agencies to really buckle down and make decisions about what they can live without. We must focus resources on what's essential and prepare ourselves so that we can continue to deliver frontline services to our most vulnerable residents and support our city workers.