What We’re Watching in New York State’s FY25 Budget

By Brian Backstrom, Courtney Burke, Tom Cetrino, Robert Megna, Laura Rabinow, Heather Trela

Each year between January and April, New York moves through the State’s budget process for the upcoming fiscal year. “Budget season” kicked off January 16th with the executive (or governor’s) budget proposal. This year, the Rockefeller Institute hosted the “Fiscally Focused” forum in February to review the executive’s proposal with New York State Budget Director Blake Washington, State Senate Finance Committee David Friedel, and Secretary to the State Assembly Ways and Means Committee Phillip Fields. Since then, as usual, the governor offered amendments to her original proposal and this month the assembly and senate offered their own “one-house” budget proposals. As we now enter the final negotiation period ahead of the April 1st deadline for the budget, we have a chance to compare the different budget proposals, what they have to offer, and consider the potential outcomes. Below the Institute’s research team highlights some key issues in different areas of the budget that intersect with our own research.

Revenue Consensus

by Robert Megna

An often-overlooked part of the annual budget process is the determination of receipts available to fund budget priorities. The budget’s revenue side includes tax revenues, miscellaneous receipts, fees, and other revenue sources. The consensus process—an iterative process to reconcile what the executive, assembly, and senate each believe the State’s revenue to be—follows the release of the executive budget and the fiscal reports of the senate and assembly. The process is governed by a vague statute that requires the parties to reach a consensus on receipts by March 10th each year. If the parties fail to reach a consensus by this date, the New York State Comptroller is expected to provide an estimate that the parties must accept.

This year a final consensus was reached by the required date at $1.35 billion. This amount fits within the range of revenue added in normal economic years. However, the revenue agreement is not the end of the story. And, as might be presumed, reaching an agreement on any additional revenue following this consensus makes achieving a final budget easier, as it increases the amount of funds available to appropriate across the budget. Concurrent with revenue consensus, more conversations about possible resources to support the budget are taking place at the staff level. These discussions include re-estimates of spending across the budget, often with a focus on state agency expenditure. Additionally, changes in revenue collections occur on an almost daily basis, especially in the March-April period, when income tax collections from wealthy New Yorkers become available, which can be positive or negative to the cash position of the state. This often results in informal changes in estimates of resources available that only becomes clear when the final budget is passed. Other factors that are discussed (and often lead to changes in estimated spending and revenue) include the timing and impact of changes to the law that have already occurred or the value of past changes to the law on actual revenue and expenditure. In fact, it is often the case that estimated changes made after consensus dwarf the changes agreed to during that process. As a result, we can expect that the final budget may have further significant changes in revenue estimates. These changes will almost surely increase expected revenue and will not be apparent until a final budget is passed and the Division of the Budget issues a financial statement.

Medicaid Funding

by Courtney Burke

Medicaid is one of the largest parts of the New York State budget. Governor Hochul’s budget proposal estimates total Medicaid spending for fiscal year (FY) 2025 will be $96.4 billion (page 68). The executive proposed slowing Medicaid growth through a number of programmatic changes. Among them is a proposed discontinuation of Wage Parity for Consumer Directed Personal Assistance Program (CDPAP) (meaning that the state would no longer be obligated to pay wages in the program equal to those outside the program) producing an estimated savings for the State of $200 million in FY 2025. In addition, the executive budget proposes that the State will “maximize the use of available resources while working with long term care stakeholders to identify at least $200 million in recurring State share savings across New York’s many long term care programs” (page 72). The executive’s budget also proposes a “$200 million unallocated State share reduction outside of community-based long term care services, that will be achieved through one or more savings proposals that are developed in consultation with stakeholders.”

When the senate and assembly released their one-house budget proposals in March they significantly altered the conversation about Medicaid by adding nearly $4 billion in new revenue from a “managed care organization (MCO)” tax. In doing so, the legislature countered the executive’s proposed Medicaid cuts and instead added new spending. Those spending additions for Medicaid include a 3 percent rate increase and supplementary hikes for hospitals, nursing homes, and assisted living facilities (proposed by both houses). The assembly’s proposal includes a further 7.5 percent for those categories of providers, while the senate adds 7 percent more for hospitals and 6.5 percent more for nursing homes, assisted living facilities, and hospice services.

The senate and assembly’s proposed MCO tax is modeled, for example, on one that was passed in California in 2023. The California tax is estimated to generate an additional $19.4 billion in federal revenue from April 1, 2023, through December 31, 2026. Provider taxes like these have been used for many years. By creating a state source for Medicaid revenue, the amount can be matched by the federal government. That federal match is then retained by the state thus generating extra revenue and often a large portion of the tax is repaid to the providers. They include taxes on hospitals, nursing homes, intermediate care facilities, managed care organizations, ambulance services, ambulatory surgical centers, physician services, and more.

By 2017, every state but Alaska had some type of provider tax or fee in place and 34 had three or more types of provider taxes. There are limits on how these taxes function. As outlined in a 2017 fact sheet from the Kaiser Commission: “states may not use provider tax revenues for the state share of Medicaid spending unless the tax meets three requirements: it must be broad-based, uniformly imposed, and cannot hold providers harmless from the burden of the tax.” At that time, federal regulations created a safe harbor from the hold harmless test for taxes where collections had to be 6.0 percent or less of net patient revenues. Since then, there has been a back-and-forth debate between states and the federal government about what is allowable as a federal match and if a phase-down of the provider tax should occur.

More recently, and of particular relevance to New York’s current budget negotiations, was the issuance of a letter from the Centers for Medicare and Medicaid Services (CMS), that several recent state provider tax arrangements, “appear to contain impermissible hold harmless arrangements.” As a result of the CMS letter, in fall 2023, Texas and Florida sued the federal government using an argument that CMS’s redefining of established terms would violate the Administrative Procedure Act because the agency would be enforcing a new statutory interpretation of a hold harmless agreement via guidance instead of going through proper notice and public comment rulemaking processes.

Given the lawsuit and the likely issuance of further guidance from CMS restricting such taxes there is a risk that if a new provider tax is imposed in New York, it could be subject to any judicial outcomes from the federal government. This could complicate New York’s current budget negotiations. The question for the executive and legislative branches during budget negotiations will be whether such a tax is likely to withstand federal scrutiny and for how long.

Education Aid

by Brian Backstrom

This year’s executive budget proposal included $35.3 billion in state K-12 education aid, an increase of $825 million or 2.4 percent over last year. The proposal noted that total statewide enrollment in public schools has decreased by approximately 10 percent over the past ten years, but “despite these enrollment declines, State aid has continued to increase each year.”

The bulk of the governor’s proposed increase—$507 million—is made up of a 2.1 percent increase in what is known as “foundation aid,” core formula-driven state funding that is designed to target resources based on local districts’ student enrollment, poverty rates, numbers of students with special needs, and similar factors. The governor’s proposal averaged the inflation rate over the past 10 years (after excluding the highest and lowest years to reduce the effect of anomalies), and applied this 2.4 percent rate to last year’s foundation aid allocation to generate this year’s proposed increase. Governor Hochul also proposed eliminating a provision referred to as “hold harmless,” which essentially guarantees that any local school district would not receive less foundation aid than in the previous year, regardless of the effect of any decrease in student enrollment.

Both houses of the state legislature rejected the governor’s position on “hold harmless,” and each restored that provision in their one-house budget responses. Both the senate and the assembly also rejected the governor’s proposal to use an averaged inflation factor to increase foundation aid, returning it to a one-year calculation, and are proposing setting a minimum annual increase in foundation aid of 3 percent. Seemingly acknowledging that the current foundation aid formula could be improved in some way, however, the senate and the assembly are each proposing a $1 million appropriation to fund a study that would recommend updates and changes to the formula.

Overall, the senate is proposing an increase in state school aid of $747 million over the executive budget proposal, for a total $1.6 billion increase from 2023-24, and the assembly is proposing an additional $1.1 billion above the governor’s proposal, a total increase of $1.9 billion over 2023-24.

Other Education Items

Several other education items contained within the governor’s, senate’s, and assembly’s budget proposal are worth a quick mention:

  • While the executive’s budget proposal extends authority for mayoral control over New York City schools for four years, both the senate and the assembly proposed that mayoral control be allowed to expire on June 30 as scheduled. Governor Hochul proposed a four-year extension of mayoral control after New York City Mayor Eric Adams first assumed office in 2021; the state legislature and governor eventually agreed to a two-year extension and an evaluation of mayoral control by the State Education Department (NYSED).
  • The executive’s budget included a proposal for public high schools to work with students to complete the federal FAFSA (Free Application for Federal Student Aid) form, making it a graduation requirement unless parents opt-out. The assembly’s one house bill rejected the governor’s proposal, and the senate’s modified the proposal to include provisions regarding data privacy and data sharing, and requiring the Higher Education Services Corporation to analyze and publish outcomes of this initiative.
  • As the foundation of building a statewide longitudinal education data system that would support more comprehensive analysis of the effectiveness of education programs and policies, the executive proposed authorizing the sharing of student data for educational purposes and consistent with all federal privacy laws among the New York State Education Department, the State University of New York, the City University of New York, and the state’s Higher Education Services Corporation. While the senate proposed adding a requirement for NYSED to develop and require the use of a data-privacy agreement by all parties, the assembly’s proposal maintained the prevention of interagency data sharing.
  • The executive also proposed expanding the state’s Tuition Assistance Program (TAP) to allow awards for an estimated 75,000 qualifying part-time students at a cost of $150 million. The assembly agreed with the expanded eligibility for part-time students, and proposed adding $118 million more to: raise family income eligibility threshold from $80,000 to $125,000, double the minimum award from $500 to $1,000, and, allow 5th-year awards. The senate’s proposal added $138 million to the executive’s budget proposal, concurring with the expansions proposed by both the executive and the assembly, as well as increasing the maximum award from $5,665 to $6,165 and eliminating the distinction of dependent and independent students when calculating award amounts.

Clean Water Infrastructure Funding

by Laura Rabinow

Since 2015 in New York State, clean water infrastructure funding has been a key component of annual budget negotiations and investments. This focus more immediately followed the discovery of drinking water contamination in Hoosick Falls, New York by PFAS (per- and polyfluoroalkyl substances) and in Flint, Michigan by lead. It also followed earlier reports by state agencies and officials of the long-standing need for funding. In 2008, a report by the state Department of Health stated that a “conservative cost estimate of repairing, replacing, and updating New York’s drinking water infrastructure is $38.7 billion over the next 20 years.” Consequently, since 2017, the state has invested roughly $5 billion in clean water infrastructure. And, since 2019, annual appropriations have stayed steady at $500 million.

This year, the executive’s budget proposal included $500 million for clean water infrastructure over two years—effectively cutting the appropriations by half from last year. In response, the assembly’s budget proposal maintained the $500 million funding level for clean water infrastructure from last year, and included a carve-out from those funds of $100 million for lead service line (LSL) replacement. Service lines are pipes that connect homes and buildings to municipal water systems and which can be a source of lead exposure when they corrode. The senate’s budget proposal likewise restored the $500 million in broader clean water infrastructure funding, but also included a new $100 million appropriation for a Safe Water Infrastructure Action Program. The proposed program would provide funding for the operation, maintenance, and repair “of any such existing drinking water system, storm water system or sanitary sewer system” as well as “new water infrastructure expansion, but only into already developed areas.” This appears to include the replacement of LSLs, though it is broader in scope, and effectively raises the total funding for clean water infrastructure to $600 million under the senate’s proposal.

Beginning last year, following multiple instances in New York of lead exposures from drinking water systems, budget negotiations included proposals related to replacing LSLs. As outlined in the Institute’s 2023 report, Leading on Lead, “an estimated 9.2 million lead service lines (LSLs) remain in use in communities across the United States, including nearly 500,000 in New York State.” While water infrastructure funding as a whole has increased over the last several years in the state, funding that is dedicated to LSL replacements has been low—$30 million in total, compared to the estimated $3.7 billion that would be needed to replace all LSLs in New York. In addition, the federal government has more recently proposed revisions to the Lead and Copper Rule that, if finalized, would require the replacement of those LSLs by 2037. As noted in our report, last year, state budget proposals included a $50 million carve-out for LSL replacement, but that was not included in the enacted budget. Officials, experts, and stakeholders at the Institute’s symposium on LSL replacement policy and practice last month (February 2024) highlighted that while there was already federal funding included in the Infrastructure Investment and Jobs Act for LSL replacements, of which New York expects nearly $115 million each year over five years, there remains a significant gap in the funds that will be needed.

Cannabis Policy

by Heather Trela

Several cannabis-related proposals have been included this year in the executive and one-house budget proposals. Currently, New York has an adult-use cannabis potency tax in place for distributors that requires them to pay based on the amount of THC in the product. Those products with higher levels of THC have to pay more. There is general agreement in principle across the executive, assembly, and senate budget proposals to repeal the potency tax, though there are differences in the details of how they would do so. The executive budget called for the replacement of the potency tax with a flat 9% tax on wholesale cannabis sales. The assembly also called for a flat wholesale tax but proposed a lower rate of 7%. The senate, however, has proposed a multiyear and incremental approach for the wholesale tax to phase in its implementation more slowly; the tax rate would begin at 5% in 2024, increase to 7% in 2028, and finally arrive at the 9% tax proposed by the executive in 2031. In all three budgets, the state and local retail excises tax rates (9% and 4% respectively) would remain untouched. The senate budget also contains a provision to repeal the excise tax on medical cannabis.

The unabated proliferation of the illicit cannabis market in New York State continues to negatively impact the legal market. Both the executive and senate included provisions in their respective budget proposals for increased enforcement powers to address unlicensed dispensaries. The executive budget proposes an expansion of the powers granted to the Office of Cannabis Management to more quickly facilitate padlocking illegal dispensaries and empower local governments to padlock violating dispensaries through their own laws and resources. The Department of Taxation and Finance would also be granted additional staff resources to assist with enforcement expansion. The senate’s budget proposal would further extend the powers granted in the executive’s proposal by giving agencies more power to hold property owners of illicit dispensaries responsible, as well as expanding the hours that inspections can occur, empowering local governments to create their own laws to combat illegal dispensaries, and making it easier to secure closing order against dispensaries in local courts. The assembly proposal, however, included no language to expand enforcement powers; Assembly Speaker Carl Heastie indicated that this was an issue of policy and should be discussed outside of the state’s budget process.

Finally, the slow rollout of the legal adult-use cannabis program has been especially challenging for farmers who have invested in growing and cultivating cannabis crops without a developed market in which to sell it. Both one-house budget proposals have provisions to grant financial assistance to those who have been struggling. The assembly’s budget proposed $80 million for the creation of the Cannabis Rescue and Relief Fund that would focus on cultivators and processors that have experienced substantial financial hardship. The senate’s budget proposed $60 million for cannabis farmer loans, $40 million for cannabis farmer grants, and $28 million for cannabis farmer tax credits. The executive’s budget proposal did not contain any designated funds for cultivators.

Shared Services

by Tom Cetrino

The executive budget proposed continuing the Countywide Shared Services program—where the state incentivizes municipalities at various levels to explore potential cost-savings by combining or coordinating programs—as a voluntary program, but no state matching funds would be provided for projects implemented under the program after June 30, 2024. The governor’s proposal also would repeal the current requirement for the Department of State to submit a comprehensive review of the program by June 30, 2025. This would effectively end the state’s participation in the program.

The senate and assembly budget resolutions rejected the governor’s proposal to terminate the state matching funds. Both houses’ proposals also amended the law governing the program and its reappropriation to ensure that new shared services projects included in any Countywide Shared Services Plan submitted to the Department of State or Division of the Budget before December 31, 2024, remain eligible for state matching funds (subject to appropriations). The assembly accepted the proposed repeal of the reporting requirement but the senate rejected it and its proposal would still require a Department of State comprehensive report on the program.

ABOUT THE AUTHORS

Robert Megna is president of the Rockefeller Institute of Government
Courtney Burke is senior fellow for health policy at the Rockefeller Institute of Government
Brian Backstrom is director of education policy studies the Rockefeller Institute of Government
Laura Rabinow is deputy director of research at the Rockefeller Institute of Government
Heather Trela is director of operations and fellow at the Rockefeller Institute of Government
Tom Cetrino is visiting fellow at the Rockefeller Institute of Government