One question lurks behind many of the others at stake in the last weeks of Albany’s budget negotiations: should New York save or spend?
Governor Hochul has proposed a budget that would boost the state’s reserves to record levels, adding over $5 billion in savings next year and another $5 billion by 2025.
Legislative leaders want instead to use most of that money to go beyond the governor’s spending agenda and enact a raft of additional social programs, including greatly expanded child care, health insurance for undocumented New Yorkers, and housing vouchers for homeless individuals.
State Comptroller Thomas DiNapoli and other fiscal watchdogs have long argued that New York should increase its savings to prepare for future economic downturns. They lauded Hochul’s commitment to savings, though they criticized the primary savings vehicle she proposed, which would put few restrictions on when the money could be spent.
“We agree that something needs to be set aside for a rainy day. But it’s kind of pouring out right now in New York,” Assemblymember Harvey Epstein (D-Manhattan) told New York Focus.
“Not a Hypothetical Exercise”
New York did not draw on its reserve funds as it weathered the pandemic in 2020 and 2021, unlike other blue states including California, New Jersey, and Massachusetts. Instead, former Governor Cuomo proposed significant cuts to services including K-12 education, state courts, assisted living programs, local governments. The final 2020 state budget included billions in reduced spending. Almost all states approved budget cuts during the pandemic, including California, New Jersey, and Massachusetts.
Many fiscal watchdogs say that reserve funds help avert the need for cuts in economic downturns. And they argue that in future crises, New York won’t be able to count on the enormous federal aid it received during the pandemic to hold dramatic cuts at bay.
“Two years ago, the plan was ‘We'll probably have to raise taxes and maybe cut as much as 20% out of certain programs because we don't have money saved right now,’” said Patrick Orecki, director of state studies at the fiscally conservative Citizens Budget Commission. “It’s not a hypothetical exercise.”
“Revenue declines during previous economic downturns have forced New York leaders to enact painful spending cuts, tax increases, increases in borrowing and other undesirable actions,” wrote Comptroller DiNapoli in a 2019 report. “Disciplined action to build these reserves is essential.”
Progressives counter that there’s a better way to respond to downturns: by raising revenue. Last year, New York was one of the few states to raise taxes during the pandemic, hitting the rich with $4.3 billion in new taxes. That money, progressives say, was meant to help New Yorkers struggling in the pandemic.
“We raised it to spend it,” Epstein said. “The idea that we should just put the money aside and not spend it really hurts the people on the low-income scale.”
As for DiNapoli’s recommendations, State Senator John Liu (D-Queens), who himself served as New York City’s comptroller, said there’s a reason that the comptroller doesn’t have a direct role in budget negotiations.
“The comptroller doesn't necessarily have the same kinds of pressures that the budget-negotiating parties have from constituents,” Liu said. “How many working moms are pounding on the comptroller's door demanding that we finally have a plan for real child care in New York State?”
Progressive advocates share that attitude. “New York's unemployment is still one of the highest in the country, housing prices are at an all time high, and affordability is at an all time low. And so taking half of our budget surplus out at that time doesn't make a lot of sense,” said Charles Khan, organizing director of Strong Economy For All, a progressive labor coalition.
By April 1, the state will likely have added over $5 billion to total cash reserves, bringing them to $8.9 billion. Hochul’s three-year plan would more than double that figure to $19.4 billion.
That would come out to 15% of annual state operating expenses—slightly above the national average of 14.2% in 2019, the most recent year for which nationwide data is publicly available.
A Nebulous Fund
Hochul’s proposed budget would place two-thirds of savings into the “Economic Uncertainties Fund.” That fund, created in 2019, is not a separate reserve, but rather a label attached to a certain cash pile sitting in the state’s general treasury. It has no restrictions on how or when it can be used, unlike the state’s two formal reserve funds.
Fiscal watchdogs say that makes it less effective as a safeguard against economic downturns, since it can be spent down even in flush years.
“The state legislature is not known for its spending restraints. So if there's money that can be spent at any time for any reason, they're probably going to spend it,” said Peter Warren, director of research at the Empire Center, a conservative think tank.
In a report responding to Hochul’s budget proposal, DiNapoli said that Hochul’s proposal “disproportionately utilizes” the Economic Uncertainties Fund, which he said “do[es] not have the same stabilizing value” for the state’s finances as the two formal reserve funds.
Khan put the point more sharply. “The Economic Uncertainty Fund is not a rainy day fund, it's a slush fund,” he said.
State law specifies two reserve funds: the Tax Stabilization Fund, which has its roots in New York’s response to the Great Depression and can only be used to make up budgetary gaps caused by lower-than-expected tax receipts, and the Rainy Day Reserve Fund, which was created in 2007 and can only be used during economic downturns or other major crises.
The Assembly agreed to Hochul’s proposal to deposit over $900 million this year into the two formal reserve funds. But it proposed canceling Hochul’s planned deposit into the Economic Uncertainty Fund, and using it, along with $1.1 billion from the fund’s $5.6 billion holdings, to pay for its additional spending.
Asked by New York Focus why Hochul is directing most of her savings towards the Economic Uncertainty Fund, Division of Budget spokesperson Shams Tarek cited state law limiting the maximum deposits to the two formal funds to roughly one percent of annual state spending, and the overall balance that they are allowed to hold to about seven percent of annual state spending.
Hochul’s budget proposal suggested raising both limits, but Tarek said that the governor will continue to assume the current limits until the legislature agrees to raise them. Under the present limits, the $920 million deposit proposed by Hochul is near the maximum allowable deposit to the two formal reserve funds.
Asked whether Hochul would redirect her proposed Economic Uncertainty Fund deposit to the formal reserve funds if the legislature agrees to raise those limits, Tarek said, “That’s the idea. Why would she propose to increase the cap if she doesn’t intend to use an increased cap?”
Orecki said that there’s no reason the executive budget proposal couldn’t have planned to direct the cash to the rainy day funds, given that it also proposed raising the deposit limit. Hochul’s proposed budget “includes projected spending related to many provisions that haven't been enacted,” he noted.
In their budget proposals, the Senate accepted Hochul’s request to raise the deposit and balance limits but the Assembly rejected it.
A “Secret Pot of Money”?
Proposed spending from the Economic Uncertainties Fund must be approved by the legislature—the fund does not allow the governor to pursue pet projects without legislative sign-off. “The concept of unilaterally spending money without the legislature—it’s just false,” Tarek said.
But there are certain workarounds.
Hochul’s budget proposal contained requests for the legislature to authorize the governor to unilaterally spend billions of dollars in unspecified state funds at an indefinite point in the future. That money could come out of the Economic Uncertainties Fund.
“That's exactly why we think that the savings deposits should go to a larger Rainy Day Fund rather than the Economic Uncertainties Fund,” Orecki said.
Citizens Budget Commission and other watchdog groups from across the political spectrum sent legislative leaders a letter urging them to reject the requested spending authorizations and the “extraordinary budget powers” they would give the governor.
Both houses of the legislature rejected the proposed spending authorizations in their own budget proposals.
Michael Kink, the executive director of Strong Economy for All, said that Hochul’s moves are reminiscent of policies enacted under Cuomo, who used emergency measures passed at the beginning of the pandemic to win unprecedented unilateral control over state funds. Kink noted that Hochul’s budget director, Robert Mujica, is one of the few holdovers from the Cuomo administration, and worked as a top aide to Republicans in the state Senate for nearly twenty years.
“Rob Mujica worked for [Republican Senate Majority Leaders] Joe Bruno and Dean Skelos and Andrew Cuomo to create a lot of secret pots of money, and this looks like yet another one of those efforts,” Kink said.
After this article was first published, Tarek sent New York Focus a statement describing emergency spending authorizations as necessary for an effective response to future variants of COVID-19. (Hochul requested $2 billion for a "Reserve for COVID-19 Public Health," which the watchdogs' letter noted she could use "for almost any purpose" unless the legislature added clearly defined purposes and oversight.)
"While we have made great progress combating this pandemic, the impact of the Delta and Omicron variants on New Yorkers and our economy shows the need to remain prepared against any new variant that may emerge," the budget department's statement read. "While we are committed to discussing these proposals with the legislature as part of the budget process, a wholesale rejection of the ability to do emergency spending would seriously hamper the State’s ability to respond swiftly and decisively to protect public health and safety during the next crisis."
This article has been updated to include a statement by the budget department sent after initial publication.