How NY state closed the projected $4.4 billion budget deficit

In his January budget address, Gov. Andrew Cuomo warned about the impending budget deficit with dramatic effect.

“In many ways, this is going to be the most challenging budget that we've had to do,” he said, thanks to a $4.4 billion deficit and the threat of funding cuts from the federal government.

Cuomo and state lawmakers finalized a $168.3 billion budget last week, and were able to fill the budget gap this year, although the lack of long-term solutions to New York’s fiscal problems may mean that future deficits may be wider, and more difficult to close.

So how did they do it? Not by raising taxes, but through avoiding spending increases and adding some measures to raise revenue. Morris Peters, a spokesman at the Division of the Budget, said that the state achieved “many of the savings proposals put forth in the executive budget, such as actions to hold state agency spending flat, containing Medicaid growth within the Global Cap, and service consolidation and reorganization.” The governor’s budget proposal had included consolidating redundant health care resources to increase savings.

Albany also got lucky: The budget gap was partially able to be closed because projected revenues were higher than expected. This was discovered during the revenue consensus process, which occurred at the beginning of March, when the executive office and both chambers in the state Legislature calculated individual revenue forecasts.

According to David Friedfel, director of state studies at the Citizens Budget Commission, they concluded that there would be $750 million in additional funding coming through pre-existing revenue streams such as personal income tax receipts. This extra $750 million cut down the deficit before the budget was even negotiated. Friedfel also said that funding to close the deficit came from spending reductions, settlement funds from agreements, primarily with financial industry operators, and revenue increases.

Cuomo had proposed $1 billion in taxes and fees to help fill the gap as part of his executive budget. He said in his budget address that no legislator would be interested in cutting health care or education funding to fill the gap, so he suggested “revenue raisers.” State Senate Republicans rejected the majority of these proposals, including a requirement for online marketers to charge a sales tax and a surcharge tax on health insurance companies.

One of Cuomo’s “revenue raisers” that did make it in the budget was the state’s ability to tax opioid manufacturers. Although not technically a tax, but an assessment, the measure will force opioid manufacturers to pay a combined $100 million per year to the state proportional to their sales in New York. The funds will go to the state’s drug treatment programs.

“It's not actually increasing the money that the state's going to spend on drug treatment, it's mostly replacing what they already spent. That's pure budget balancing,” said Bill Hammond, director of health policy at the Empire Center, a conservative think tank.

Hammond said that another major contribution to closing the budget gap would come from the state’s capture of $2 billion from the sale of Fidelis, a nonprofit health insurance company, to the for-profit insurer Centene – including $1 billion in the first year.

Fidelis was founded by the Roman Catholic Diocese in Brooklyn, and it currently has 1.6 million members. It initially only offered state-sponsored managed care such as Medicaid.

“Their entire revenue base was the state paying them premiums to cover New Yorkers that were on these programs,” Hammond explained, adding that Fidelis became the largest provider of Medicaid managed care, and the only provider that is in every county.

Although the church had hoped to use the funds from the sale to Centene to create a charity foundation to provide health care for the needy, Cuomo argued that the state should be able to recoup the cost because Fidelis initially made its money through state funding. The governor eventually proposed that the state should be able to capture 80 percent of the sale, with 20 percent going to create a foundation.

As the church needs permission from the state Department of Health and Department of Financial Services to make the sale, it ultimately agreed to a compromise whereby the state will capture Fidelis’ “excess reserves” from the sale. This will amount to $2 billion over four years, with $1 billion in the first year.

As with the tax on opioid manufacturers, the state will be obtaining funds through different means than initially proposed by Cuomo, but with the same result.

“The original governor's proposal relied on half a billion dollars per year for four years from the conversion. The adopted budget instead basically grabbed some of Fidelis' reserves in the first year, and then the state would give money in the out years based on a conversion, assuming it takes place,” Friedfel explained. “So that money basically was replaced from the same source through a different mechanism.”

“You could say it's closing about a quarter of the overall gap,” Hammond said about the funds that New York will capture from the sale. In an article for the Empire Center, Hammond suggested that this could set a precedent, as it allows the state “the right to claw back money it pays to private companies for services rendered.”

Budget deficit hawks may also worry that one-time revenue boosts such as this won’t solve the imbalance between costs and revenues in the years ahead.

Friedfel noted that Cuomo, for the most part, kept to his trend of spending reductions across many departments, although there was the notable exception of education spending, which increased by 3.9 percent. Although the governor initially suggested $300 million in Foundation Aid to schools, he later doubled that number to over $600 million, with a nearly $1 billion addition of total aid to schools.

Friedfel suggested that by increasing education spending, the state had missed an opportunity to reform the way schools are funded in the state. New York already spends more per student than any other state.

“They could have provided additional revenues to high-need school districts without increasing beyond was in the executive budget or actually even decreasing compared to the executive budget if they had targeted those increases better,” Friedfel said. Although the state was able to close its budget shortfall and increase education funding, this higher spending could have a negative effect on future financing, as the state’s long-term financial prospects were not improved.

“They closed the gap for this year, but by adding money for education, by using settlement funds in order to backfill the general fund, it makes it so that out-year deficits are going to be larger and also harder to close,” Friedfel said, referring to the years that occur after a given fiscal year. “I think the big takeaway is that using short-term revenues or one-time revenues to fill ongoing expenses will make the out-years more challenging.”