Earlier today, after Governor Kathy Hochul presented the FY 2023 Executive Budget, Division of the Budget Director Robert Mujica hosted a media availability.
AUDIO of the event is available here.
PHOTOS of the event are available on the Governor's Flickr page.
PRESENTATION SLIDES from the event are available here.
A rush transcript of the Director’s remarks are available below:
Good afternoon, everyone. The Governor just presented the executive budget. I think everyone should have it. And it's posted on the website right now. I'm going to go through the financing plan and talk through how both the investments and how we finance it as a follow-up to the Governor's presentation.
It's helpful to start where we were a year ago. Last January, the state was looking at a revenue shortfall of $39 billion over a four year period. We had a, the blue line here is the pre pandemic projection. And then the yellow line was the projection, post pandemic or in the middle of the pandemic.
This was largely resulting from the economic impacts of the shutdowns, and also the surges that were actually happening in January of last year. So in January, what we faced was we had uncertainty, federal funding was uncertain when we put out the executive budget last year, vaccinations had started, but the question was would they actually work?
Would they be enough? Restrictions were in place, both in New York State and across the country that obviously impacted economic activity, not just. New York, but all across the country. Then COVID cases again, were surging nationally.
Today we find ourselves in a very different place in January of 22. COVID cases are surging, but as the Governor has been talking about, we're starting to see meaningful declines. Pandemic restrictions also are significantly reduced from what they were and their impact on economic activity is significantly decreased on the funding side, billions of dollars in federal aid has materialized and has started to move.
We now know that the vaccinations are abundant. People now have first, second and third shots. And we know that the vaccinations are working to decrease the severity of COVID-19. So that's also helped the economy move forward and come back from where it was in January of last year.
State revenues are also recovering far faster than anticipated. This is a national trend, but in New York, because of the impact of the financial sector, we're seeing it probably a little bit more profoundly. But we also saw a bigger decline than in other parts of the country, but we're in a strong financial position now as a result of the increase in strong tax receipts, a very strong stock market and the federal aid from the pandemic, all of which were unanticipated in January of last year. There are still risks, but we start off well positioned from a budgetary perspective.
The economic outlook, real U.S GDP surpassed its pre-recession peak. So we were talking about whether it was going to be a V-shape recovery, U shaped recovery, and depending on, there's obviously an uneven recovery, which we'll talk about. But overall, GDP was very strong and grew past its pre-pandemic position after contracting 3.4 percent in 2020.
The federal fiscal stimulus went out. It helped, but it is starting to diminish over the course of 2021. So this also helped GDP growth, both in New York and nationally. But again, that stimulus is declining and we are seeing that, also that impact of that. It also impacted inflation, which we'll talk about.
We have labor shortages, supply chain, disruptions, energy prices that are growing. So these are all additional risks that are impacting our plan.
The fiscal stimulus has contributed to CPI growth of 4.7 percent. And this is the highest rate of inflation that we've seen in 30 years since 1991. As of November, New York's economy has gained 62.6 percent of the private sector jobs lost in March and April of 2020. New York State's employment is projected to grow by four and a half percent in 2023 and private sector growth is expected to grow by five percent.
State wage growth actually fell in 2021, right. But New York state wage growth is projected to increase by 11.4 percent in 2022. And that's mostly due to strong bonus payments and rebound from the unemployment losses in the prior year.
The fiscal stimulus again is starting to wane, right? And we expect that there will be interest rate hikes in 2022. So we have modest growth in 22 of 1 percent, and 1.1 percent for personal income. But that's coming off of large increases this year.
So, if you look at just real U.S and GDP growth and our employment, right, you see the dramatic decline that occurred and you also then see the recovery. This chart shows both the U.S GDP and the unemployment rates. So both of them, the unemployment rate dropped dramatically, but then you could see just as dramatically is recovering and GDP growth again is surpassing where it was pre-pandemic.
CPI, also, we're seeing the highest levels of inflation again in 30 years. We expect that to wane off as we get into 23. And that is largely the result of the end of the stimulus spending, the recovery spending from the federal government.
The percent change in employment we had seen very significant decreases in employment in New York State. New York State suffered more than the rest of the country, largely because of it started here. And then also the result of the density of the cities and cities across the nation saw similar impacts of COVID. We are now recovering in jobs, but New York is lagging the rest of the country.
There is actually two parts to it in New York City, compared to the rest of the state. If you look at the rest of the state outside New York City, the job recovery is tracking more closely to the rest of the nation, while New York City's employment recovery is lagging. It is lagging mostly in the low wage sectors service industry, travel and tourism.
So if you look at employment related to 2019, All right. We'll see, 2021 and 22 are plotted on this table. You can see the recovery and jobs in 22, right? In most industries. But you look at leisure, hospitality and other services. It's almost on the bottom of this table. You'll see they were impacted the most, nearly 30% job losses and they are recovering the slowest.
So the impact and that sector is important to across the state, but in the downstate region, particularly. So we're watching those. This is in contrast to the wage growth we're seeing. And that's largely because the rage growth is directly related to the financial sector and parts of the economy that did not, while people were impacted in their offices, they were able to work from home.
Sectors that where you had to show up and face to face. Those areas suffered the most. So here's the unemployment rates plotted again, and you can see it peaked New York State and U.S. Both New York State and the U.S are seeing sharp declines in unemployment which are starting to decline at a slower rate.
And again, New York's blue line here is still higher than the rest of the nation, but that is largely because of the anchor of New York City right now, in terms of unemployment, not in terms of wages.
So New York state income and the employment outlook here. Again, we are showing a recovery, both in employment, personal income and wages returning to more of a normal period of growth as it was in the pre pandemic period.
And again, there are risks associated with these forecasts, but as you can see, most of the other sectors are projecting growth in almost every sector, every sector actually even travel and tourism. But we're seeing a lot of growth in the finance and insurance industry. New York's was more dependent on finance and insurance industry sectors or fire sectors, over the last 10 years our revenues have diversified significantly, so we're not as dependent on that sector. However, the financial sector is driving a lot of the growth. So we go into the 2023 financial plan, overall.
So in the mid-year financial plan update, the Governor set aside 15 percent or started to set aside 15 percent of spending in reserves. The idea was where the recovery is uncertain, how we're recovering from the pandemic is uncertain, and the level of revenue is unprecedented and the state's reserves were lacking. So the intent in the financial plan was to begin saving money and putting money into reserves so we were better prepared for future risks.
And you all recall when the pandemic hit we did not have enough reserves, obviously to make it through the pandemic. So, if it wasn't for the federal funds, we would have had to do reductions of up to 20 percent last year. I think the executive budget last year showed a reductions of up to 20 percent.
Once we got the federal funds, we were able to remove those cuts. If we had reserves then we would be able to have done the same thing in the absence federal funds. As a result of the revenue increases, we are putting 15% into reserves, and we are able to eliminate our out year gaps.
In the mid-year, in this executive budget, this will be the first time that the Division of Budget has published a financial plan in New York State with zero out-year gaps; so that we know out-year gaps in the plan period.
We are also adding 26 and 27 to the financial plan to also show that there are no gaps as far out as 2027. That's just to demonstrate that as the federal funds fall off, we still have no out year gaps even without the federal funds. We spread out the federal funds over multiple years to avoid a fiscal cliff.
Since the time of the mid-year, we've had more forecast revisions, and again, revenues have climbed even further. Tax receipts are expected to close in the current year about close to $4.9 billion above even the mid-year forecast. The meteor assumed plan deposits into reserves, now the receipts forecast is about $4.9 billion higher than that.
I'll go through how we spend that additional $4.9 billion. Also, the spending in school aid claims as a result of schools not being open all the time. So some of the expense based claims have been reduced. The stock market has contributed to the pension spending for the State going down and local governments. That service we've seen better rates.
We’ve used some of the coronavirus relief funds to offset States’ payroll. One of the eligible uses of the criminal relay coronavirus relief funds is police and other payroll expenses. The CRF funds had to be committed by December 31st of 2021, so we fully committed the $5.1 billion in the seat are CRF.
Baseline projections are showing surpluses of $5 billion in the current year -- 6.4 in ‘23, 5.3 in ’24, and 5.5 in ‘25; and that will show in this plan, what we do with those surpluses. That is after we make the deposits to the reserve funds to get to the 15% state operating funds reserve target by 2025.
The surplus can position in combination with the reserve deposits already planned, makes it possible in this year's budget to really fund new commitments and make investments to address some of the unique problems associated with the recovery from the pandemic or exacerbated by COVID-19; at the same time doing a responsibly again, we'll make those investments, which we'll talk about while making deposits in the reserve funds to get to 15% and having zero out your gaps, which again, we've never had before overall. Overall, the executive budget of an all funds basis will be $216 billion.
About 60% of it is going to goes to healthcare and education. This is on all funds basis, and the reason that healthcare is higher than education on all funds basis is because the federal funds related to Medicaid and education does not have that level of federal funds.
When you look at state operating funds, which is taxpayer dollars and other special revenue funds, you'll see Medicaid at about 25% and school aid at about 26%. So almost either. Again, that's half of the budget. Half of our state operating funds budget is Medicaid and education.
We look at the all funds -- the all funds includes federal funds and includes capital, which is not in the state operating funds numbers. So the all funds for ’22, we projected is going to close this year at about $212.9 billion. The growth rate in the governor's executive budget to last year on an all funds basis, will be about 1.6%.
The reason it's low is because a lot of the federal funds fall off, because again, on all funds basis you're counting federal funds. The federal funds fall off and that shows a 1.6% increase. On a state operating funds basis, we're looking at a $3.6 billion increase, $180.8 billion, and again, that's a 3.1% increase, which is below the projected rate of inflation for ‘23. That's driven by what's driving the increases school aid -- 7.1% increase in school aid or $2.1 billion, and that is the second year of a commitment to fully fund foundation aid.
Last year, the investment was close to $3 billion. This year, its 2.1, foundation aid portion of that is about 1.4, and it's just purely formula driven. So we're taking the foundation aid formula, we're fully funding it, which was the commitment and that the high school age growing at 7.1%. On the Medicaid side where there's a lot of investments that we're making in the Medicaid space, and in the healthcare space overall that's largely trying to deal with the impact on the healthcare industry as a result of COVID-19. Hospitals, nursing homes, home care, and the workers have all been impacted dramatically.
The governor is very focused on making sure that the healthcare system not only recovers, but we're prepared for the next pandemic because obviously there was not lack of preparation, although probably no one was, but lessons learned.
Are we going to make the investment now for the future agency operations growing by 1.2%. We do make targeted investments in both personnel and also wage investments in the current workforce. The decline is largely a result of a decline in workforce that you're seeing everywhere. The state is not immune to that.
Overall the financial plan overview -- the executive budget provides for a balanced operations in every year through 2027. There are no gaps through the entire planned period and we add an extra year just to demonstrate that there isn’t a fiscal cliff associated with the fall-off of the federal funds. Spending growth is 3.1% in 23, which is below the rate of inflation, should they believe is about three. The out year growth is driven by school aid and Medicaid. At the same time, all of these commitments are sustainable over the planned period and with the current year surplus of $5 billion, largely used to fund one-time expenses. We did not want to ramp up spending based on surpluses that then recur, and then you're not able to make those investments later.
So where does the surplus go? We make in this budget, there are about $7 billion in proposed actions that are not permanent spending. So, there are one-time costs. They don't contribute to out year gaps, but they're critically important.
$2.2 billion for property tax relief. That's taking some of the surplus and giving it back to 2 million new Yorkers. Those $2 billion were set aside for a pandemic recovery initiatives. The goal of that is to work with the legislature and identify what are the most targeted investments that we need to make, but we set that aside for one time, pandemic recovery initiatives.
$1 billion goes to the new five-year capital plan. We have a five-year capital plan for highways and bridges across the state. It is $32.8 billion, and we put some hard dollar funding in there the governor mentioned in her speech this morning.
$1 billion for healthcare transformation. We're also setting aside a billion dollars in a reserve for transformation for the healthcare industry. Again, we're learning lessons every day in the healthcare side and we wanted to set that money aside, and also work with the legislature and identify the priorities.
A billion dollars goes for bonuses for healthcare and frontline workers. That number is actually larger, closer to two or $3 billion when we add in a federal support for those numbers. There is some match and some federal resources that we have identified as well. That will also go to bonuses for direct care, frontline healthcare workers who are still dealing with the pandemic, as we speak, across the state.
$350 million is for pandemic relief for businesses and some of the travel, some of the Broadway music industry, those kinds of parts of the sector that have been impacted most severely. They were starting to recover before Omicron and then as you have all seen a lot of these performance venues had to shut down again and those venues are critical for the economy. It's particularly in the downstate region.
So, while we're making, again, all of these investments at the same time, we're still making deposits to reserves and we still have a balanced plan.
The spending growth, we talked about this, this is where it's going. You see school aid is at 7.1. The number for Medicaid that is just the Medicaid cap number of 4.7 percent because we increased the global cap to 4.7. Actual spending in Medicaid, all in, is actually over 6 percent. So school aid is 7.1 percent as a result of the funding foundation aid and Medicaid is actually over 6 percent, which is not reflected here. And you could see overall we're at 3.1 and inflation is 3.2.
Financial plan overview. This is the base budget surplus. These are the revisions to the financial plan which show 6.4 billion increase in 23, followed by 5.3 in 24 followed by five. So these are the receipt forecasts that we're seeing this year, how it follows through to each one of those years. So this enables us to both make the investments while also making the deposits to the reserve funds. So then we talked about these, but we have the homeowner tax rebate credit, middle-class tax cut acceleration. There was a middle-class tax cut that was supposed to be phased in. We are accelerating that to 23 so that people can just get that faster.
On the small business tax relief, there's the healthcare frontline worker bonuses, which we discussed. There is a COLA, 5.4 percent for all the human services agencies. Higher education, new operating aid for both SUNY and CUNY. And mental hygiene and then there's other again, PayGo capital and other items. But as you can see the, the important line here as you start off with those surplus numbers on top, and we ended up with zeros on the bottom and that's fully funding all of the spending through the years and the gaps.
These are all your gaps. This is the history. We can take that first bar and go back as long as you want. There are always gaps. This is a roll-up of the three-year gaps. So after each - when we present every executive budget, we also present the gaps for the next three years. So those are the three colors that you're seeing there, right? So those are the following three-year gaps. So if you look at 2010, during the executive budget in 2010, there were out your gaps of $24.7 billion over the next three years and then those are the gaps from 2010, again, through 21, as you can see. In 22, after we got the federal money was 3.4 billion. And then from 23, 24, 25, 26 and 27, we have zero out year gaps.
Federal relief. We took the federal relief and it's a direct financial plan benefit for us that came in three forms. FEMA aid is just still coming in and we've spent all of the CRF again, that's the yellow here. And that had to be spent by December 31 of the current year. We received $12.75 billion, in 21 and we're using that over four years. Again, we have resources to make investments and we spread it out over four years to avoid a fiscal cliff and to make sure that what we're seeing on the revenue side holds up over that plan period, and we're doing it. But we're not sacrificing investments and I think you can see that in all of the spending that is in this budget.
The remainder of the 5.1 had to be spent by December 31st. And then we use 2023. We $2 billion reserve in 23 to 2.25 in 24, and then 3.6 in 25. And again, we go out in our financial plan to 26 and 27 to just show that even when those fall off, we still have a balanced plan.
$12.75 billion was the amount in revenue shortfall that we received from the American Rescue Plan. We've calculated revenue loss for the period of 9.9 billion. We're waiting for the federal government to approve that calculation and methodology. In the event that that's not approved, we will find other places to spend that money. But the aid can be used to support pandemic response efforts, lost state revenue, which was our main issue at the time, aid households, small businesses, industries, essential workers and communities disproportionately impacted by the pandemic, water and sewer, and broadband, all of the things that we are doing in this budget. So we are funding in every single one of those areas. And this money is in hand, but it's not guaranteed yet until the feds approve our calculation.
So, the fiscal crisis and reserves. Since 2000, state finances have been badly damaged three times by sudden events. We've had 9/11, we've had the great recession, we've had COVID. And none of these events were predictable and what we know for sure, right, is they will happen again. Something will happen, it has, and every time there's been shocks to the system and every time from a budgetary perspective, from the state's perspective, our ability to respond is directly related to, you know, what funding that we have. Each time the state has found itself unprepared, inadequate reserves, and the outcome was that we had to cut or go back on promises or commitments that were made and they've been deferred. The best real-world example was in 2008, there was a state commitment to fund foundation aid for school aid. We had no money set aside during that time, we hit a recession, and that commitment lasted just two years. And then starting in FY 10, the state had the recession and then we had to not only freeze foundation, but we had to make reductions in school aid. We did not come back to that level of school-aid spending, or we can not fully fund foundation aid again until 2022. So, it took from 2008 to 2022 before we recovered. The point here is that, if we're going to make these investments, make them with allocating reserves so that in the event that you have some of these shocks to the system, we won't have a repeat performance in the same crisis. The state will be prepared.
Reserves are the best defense for peak performance. At Governor Hochul’s direction in the mid-year budget, we started the plan to put reserves aside by 15 percent. And this budget fulfills that commitment with a reserves deposit of close to $5 billion. In the current year and each year until we hit 15 percent of state operations spending. And again, there are no gaps in the out year when we're doing that. Experts across from the government, financial officers associations and the budget policy priorities all recommend for any size of government having 15 percent in reserve in order to avoid cuts, right, at a time of an economic downturn. The federal government doesn't have to keep money in reserve, because there's an economic downturn they print money. We can't, and the state is we're forced - the executive budget must be presented as a balanced budget each year. So we cannot deficit spend. So either we make reductions - you have two options, raise taxes, or make reductions in spending when there's a downturn.
This is a hypothetical recession scenario. So just an order of magnitude, we took the previous recessions and did a simulation of what would happen in New York State and their range in the past three recessions, the range of revenue loss is between 36 to 50 billion over the three-year period.
So the size of the losses just illustrate the challenge, right, of setting aside significant reserves to weather a downturn. So even with the level of 15 percent of reserves, right, you can pay for about half of these scenario revenue losses. Now, perhaps they won't be that dramatic next time and perhaps there will be other funds available, but this insulates us from that and those are real-world, we've seen it before.
So, these are the deposits to the principle reserves that we've been talking about. In the current year, $5 billion in the reserves as a deposit. And again, that is and then we do spend another $5 billion in surplus. So the $5 billion in surplus is on top of the $5 billion that we're putting away in the plan deposits.
So, this allows us to do both, make the investments also planning for the future. And we’ll also remember this money is not in the bank. We do not have all of the funds for these deposits today. We have the funds for the deposit in 22 today. We believe in 23, that deposit also is in our plan and the 24 and 25 deposits are assuming that we have no more shocks, which we talked about happen periodically and no one knows when they are and that the revenues continue at the current, not the current rate of growth, but continue without reversing. So by 2025, we get to the 15 percent.
What are the risks to the plan? We have sudden catastrophic events that we've seen, again, 9/11, great recession. COVID-19, you name it, Superstorm Sandy. Right? And then there are other trends that we are watching that could erode the state's wealth over time. We have slow population growth, which the governor has talked about previously, tax migration, so people who are moving to other parts of the country, and then we have a telework, which is a new trend that was accelerated as a result of COVID. Depending on where they go, right, our ability, both the states and New York’s ability, right, to tax individuals who are working for New York companies, but are located in other parts of the state for a long periods of time, you know, may be challenged.
Short memories and optimism is just, you know, we forget sometimes some of the down cycles and what we had to do. And over optimism, if that's a word, but people being too optimistic about what is going to happen in the future and you spend to that point, and again, you end up going backwards, right? And I think it's more important to have certainty.
Overall, this budget invests smartly. We prepare for the future. We're mitigating risks that we're seeing, and we're building reserves at a level that has not been seen before. Thank you.