Report on the State Fiscal Year 2019-20 Executive Budget February 2019 Message from the Comptroller February 2019 State tax revenues in December and January fell far short of earlier projections, making the process of adopting the new State budget more difficult than in the recent past. Employment and personal income are expected to continue growing in 2019, although somewhat more slowly than last year. While the Division of the Budget (DOB) also expects higher tax receipts in State Fiscal Year 2019-20, it has reduced projections for the current and next year by a combined $5.7 billion from the estimates issued in November, before proposed actions. There is still uncertainty about all of the factors underlying recent revenue developments. Lingering effects from federal tax changes are likely a significant part of the picture; for example, the new limit on federal deductions for state and local taxes may be changing high-income taxpayers’ timing of certain tax payments. Wall Street volatility in late 2018, including a sharp stock market decline in December, may be affecting financial firms’ bonuses and related non-wage income. It is difficult to quantify those impacts. In addition, information that will provide important insights about how these factors affect Personal Income Tax receipts going forward will not be available until after the start of the new fiscal year on April 1. In light of the unknowns, an exceptionally high degree of caution regarding revenue expectations is advisable this year. While DOB plans $488 million in deposits to rainy day reserves, a good first step, I urge the Governor and the Legislature to make the prudent choice of building these reserves even further to prepare for the inevitable next economic downturn. As always, key issues for my office include those related to oversight, accountability and transparency. Appropriation language in the Executive Budget would restore the Office of the State Comptroller’s independent review of certain contracts, and funding is proposed for an online database of economic development projects – both positive steps. However, the proposed Budget also raises concerns, including those regarding accountability and transparency, as outlined in the following pages. In addition, this report examines issues such as the impact of the Executive Budget proposals on fiscal reserves and out-year gaps, the level of spending increases in State Operating Funds, projected increases in outstanding debt and annual debt service, and continuing risks to federal aid. I hope readers will find the information and analysis in this report useful in this year’s budget debate in the upcoming weeks. Thomas P. DiNapoli State Comptroller Table of Contents I. EXECUTIVE SUMMARY ........................................................................................................ 1 II. FINANCIAL PLAN OVERVIEW ............................................................................................. 5 State Fiscal Year 2018-19 ............................................................................................................. 5 State Fiscal Year 2019-20 ............................................................................................................. 7 Structural Imbalance .................................................................................................................... 10 Non-Recurring and Temporary Resources .................................................................................. 12 Settlements .................................................................................................................................. 13 Reserves ...................................................................................................................................... 14 Risks to the Financial Plan .......................................................................................................... 17 Transparency, Accountability and Oversight Issues ................................................................... 18 III. ECONOMY AND REVENUE ............................................................................................... 23 Economic Outlook ........................................................................................................................ 23 Revenue ...................................................................................................................................... 24 IV. DEBT AND CAPITAL ......................................................................................................... 30 Debt Outstanding and Debt Service ............................................................................................ 31 Capital Program and Financing Plan ........................................................................................... 34 New State-Supported Debt Authorizations .................................................................................. 35 Debt Management and Potential Savings ................................................................................... 36 V. PROGRAM AREA HIGHLIGHTS ........................................................................................ 38 Education ..................................................................................................................................... 38 Higher Education ......................................................................................................................... 40 Health/Medicaid ........................................................................................................................... 42 Mental Hygiene ............................................................................................................................ 46 Human Services / Labor .............................................................................................................. 48 Transportation .............................................................................................................................. 50 Economic Development ............................................................................................................... 53 Housing ........................................................................................................................................ 54 Environment and Parks ............................................................................................................... 55 Agriculture .................................................................................................................................... 57 Energy.......................................................................................................................................... 58 Public Protection / Criminal Justice ............................................................................................. 59 Lottery and Gambling .................................................................................................................. 61 State Workforce ........................................................................................................................... 62 General State Charges ................................................................................................................ 63 Local Governments ...................................................................................................................... 64 New York City .............................................................................................................................. 67 Metropolitan Transportation Authority ......................................................................................... 67 Public Authorities ......................................................................................................................... 68 Other Issues ................................................................................................................................ 71 I. Executive Summary Revenue projections in the initial Executive Budget for State Fiscal Year 2019-20 reflected a substantial shortfall in Personal Income Tax (PIT) receipts in December, relative to November projections by the Division of the Budget (DOB). DOB’s Financial Plan issued in January reduced estimates (before revenue actions) for General Fund tax receipts in the current fiscal year and SFY 2019-20 by a total of nearly $2 billion. Actual PIT receipts for the month of January were $2.5 billion below the Executive Budget projections. In its updated Financial Plan issued with the 30-day Executive Budget amendments in mid-February, DOB assumes that $2.3 billion of that shortfall reflected PIT estimated payments, and that approximately $1.4 billion in such receipts will be recovered in April 2019 when many taxpayers make final payments for the 2018 tax year. In view of these and other factors, DOB has reduced projections of tax receipts for the current and next fiscal year by a combined $5.7 billion from the estimates issued in November 2018. These downward revisions arise amid expectations of slower economic growth, volatility in financial markets, risks to federal aid, and projected declines in the General Fund balance this year and in coming years. The full ramifications of the troubling revenue developments are not yet clear. Such uncertainty will linger past the start of the new fiscal year, in part because many high-income taxpayers’ final payments on their 2018 tax liabilities are