Bob Megna, president of the Rockefeller Institute of Government and former New York State budget director, joins Policy Outsider host Alex Morse to discuss the behind-the-scenes of the New York State budget process. The conversation covers the budget development timeline, the players involved, and how the current economic landscape, including the ongoing recovery from the COVID-19 pandemic, may affect policies, programs, and funding priorities.
Guest:
Robert Megna, President, Rockefeller Institute of Government
Transcript was generated using AI software and may contain errors.
Alexander Morse 0:04
Welcome to Policy Outsider. I’m Alex Morse. Many of us handle our finances by making a budget, we prioritize what we want to spend money on and determine how to pay for those goods and services. The idea isn’t much different from how government operates. For example, New York State prioritizes policies and programs and allocates funds to pay for them. The major difference between you, me, and New York State, of course, is the size and scope of our budgets. But overall, the concept is largely the same. Those differences plus the tremendous reach a state budget has, however, do make government budgets much more complicated. And so for today’s episode, we have Bob Megna, the current president of the Rockefeller Institute and former New York State budget director to help break down how state budgets are made. Bob Megna has a wealth of experience drafting, negotiating, and issuing New York State budgets. And he’ll join us today to review the budget process, provide context on the evolution of the executive and legislative powers and budget making, and offer insight on how economic landscapes of the current day affect state priorities and decision-making. Coming up next.
Alexander Morse 1:44
Here with me today is someone who needs no introduction, but he’ll get one anyway, Bob Megna, current president of the Rockefeller Institute of Government and former New York State budget director. Bob, thanks for joining the podcast today.
Robert Megna 1:56
It’s great to be here.
Alexander Morse 1:57
So we’re currently in the middle of budget season in New York State, as Governor Kathy Hochul recently issued her first executive budget. And so we’re glad to have you on the show, as it’s a good opportunity to peer behind the fiscal curtain and gain a greater understanding of how the budget process has developed over time. What factors influenced budget making and negotiations? And what makes budget making unique in New York, especially in 2022, amid the ongoing pandemic? So, we’re going to start with a little bit of table setting. Why do we have an executive budget process?
Robert Megna 2:32
You know, it’s a fundamental question, I think, because the budget process in New York goes all the way back to the 1920s. Prior to that period, there was a significant period of legislative control of the budget process. And even more than that, almost committee-by-committee control of the appropriations process in the state. It was very disorganized. It was not functioning very well. And then I think the reform movement in the 20s, which was really a national movement. In New York, it took the form of creating an executive budget process. And the first actual executive budget, I believe, was 1928, with Governor Al Smith. And I think it really changed the dynamics of budgeting in New York. But it took the period from 1928 to the present day through various court cases and actual practice to get us to the point where now I think the rules of the game are pretty well understood by all the players—the legislature, the governor, the judiciary, and the public. So it’s an interesting process, which I think gives the executive a lot of power in the budget process but we can talk about that more. The other point I’d make, Alex to start, in your comments, you talked about the beginning of the budget process. The budget process in New York State is all year, we’re actually entering the phase where the governor delivers the actual executive budget and then it goes to the legislature and the legislature has to act on that executive budget. But the reality is that all through the year the budget is being monitored. The Budget Division of the State of New York is reporting quarterly on how the state is doing or how its meeting or not meeting its budget goals. And preparation for the next year’s budget begins almost as soon as the budget for the current year has passed. So it’s an ongoing annual process that involves almost every aspect of state government.
Alexander Morse 5:10
So it’s a year-long process and New York State’s budget needs to be passed by April 1, which is not how a lot of other states do it. Their fiscal calendar is different. Why is New York State different from a lot of other states in the country?
Robert Megna 5:25
Most states and even many local governments, New York City, for example, and local cities throughout New York State are on a July 1 fiscal year. And I think that largely has been the historical view. I think when they did the amendment, the amendment to do an April 1 budget, and again my history may be a little fuzzy on this one, that actually didn’t happen when they did the executive budget process. That happened later, legislatively, I believe, in the early 1940s, to move the fiscal date to April 1. And I think it was the state legislature and the governor at the time, who felt that it was better to get the process done earlier in the year. But it is pretty unique in New York State to have an April 1 as opposed to July 1 fiscal year.
Alexander Morse 6:33
Does that have any implications in how New York State budget impacts finances?
Robert Megna 6:39
Yes. And I think people are of two minds about whether it’s a good thing or a bad thing. I think, from purely a tax collection point of view, income tax collections are due on April 15. So the State of New York gets a significant portion of its income tax collections and pays out a significant portion of refunds after the April 1 date. It puts some pressure on the process because you want to make sure that you’re not passing a budget that in two weeks is going to be out of balance. We’ve had some situations where that’s happened, where the state passed the budget in early April or on April 1 and then tax collections didn’t meet expectations or exceeded expectations by a significant amount. In which case, both the legislature and the governor might feel that adjustments need to be made to reflect those changes. Often we don’t do that in New York. There is a process to have a supplemental budget in New York State, which really has not been utilized significantly in many years. And so I think we have learned how to budget and use cash and manage cash in such a way that the April 1 date doesn’t affect us as much. I think the other reason you often hear that April 1 is a bad date for the budget is I think the legislature often feels that it’s too compressed a time schedule for them to adequately address budget issues the way they would like. So the legislature comes into session in New York in January, the budget typically comes in the third Tuesday of that first month, except in the gubernatorial election year. And that then presents a situation where the executive budget comes out near the end of January. The legislature has to absorb everything that’s in that budget, bring it to the floor of their houses, and pass it before April 1. That’s a very compressed timeframe. And I think there have been discussions and efforts in the past to discuss moving the fiscal year to July 1 like in many other states, but they have not been successful. I do think that history tells us that while it is a compressed timeframe that there is enough time to manage all of the activity that has to happen to get a budget passed by April 1.
Alexander Morse 6:42
Now let’s get a sense of how big a budget is. You’re talking about this compressed timeline, the legislature only has several weeks to digest it all, to negotiate. How big is this New York State budget?
Robert Megna 10:03
Well, I think now, the governor just proposed a budget over $200 billion. A chunk of that is federal money that flows through. But the state aspects—state tax collections, state appropriation of just state collected revenue—is well over $100 billion now. So this is a very big document that contains information on spending across a wide variety of areas and programs, all the way from school aid K-12 education, which is always a significant part of the budget. I think the governor proposed this year, over $31 billion in state aid to school districts. A significant amount of the state budget goes to health care. The Medicaid program is close to a quarter of the state’s budget and then a myriad of other programs, including funding state agencies. A significant part of the state budget is local assistance, like K-12 education, but also a significant number of other programs that benefit and flow to localities. So it’s very big. But I think within the context of it being very big, no one goes back and looks at that $200 billion, usually, dollar by dollar. There’s a significant amount of that money that’s in the base budget that’s really not going to change from year to year. That is basically being programmed. If K-12 education ends up being $31 billion, it’s not going to be $5 billion next year, it might not be $31 billion, depending on conditions, but it’s not going to be five. So a significant amount of the dollars that are spent are in place. So what I’m trying to get at is that it’s on the margins every year, its where does money needs to be added? Where does money need to be subtracted? What are the priorities of the executive? And after the executive presents those priorities, how does the legislature feel they should be shifted around to meet what they want to accomplish? So I think, again, the budget’s huge, it’s very complex, but again, the decision-making in the budget on an annual basis is really around how do you want to change the direction of policy? And sometimes also, how does the economy and other events that are going on in the world change your ability to finance the things you want to finance? So it’s a combination of economic events and the economic world you’re living in and the policy priorities you have. But a big chunk of that budget just moves from year to year pretty much untouched.
Alexander Morse 13:23
So fundamentally, when there’s a program that needs to be funded, it has to be reappropriated every year. We don’t fund a program for necessarily 10 years.
Robert Megna 13:33
No, in fact, that’s how the appropriations process in New York works. There is an annual appropriation for a program. That program may change or the priorities around that program may change. So people may decide they want to continue to fund it. They want to fund it at a higher level, they want to fund it at a lower level, or they want to eliminate it. So all of those pieces go into the building of a budget. But yes, you have to, at least through the budget process, revisit those decisions on an annual basis.
Alexander Morse 14:12
You also mentioned formulating a budget based on changing policy and how the executive or maybe the legislature wants to enact such policy. And you also talked earlier about critical court decisions and how that affected budget making in New York State. Can you expand a little bit on that?
Robert Megna 14:29
Well, just by using the words executive budget process should tell you something about how it works, The governor is in a pretty powerful position with respect to the budget. And she has a lot of say, almost total say, in how that gets presented. The legislature then, the way the budget process in New York works, have to act on her budget. They can’t just put it off to the side and say, “Oh, we’re going to rewrite it the way we want to do things.” The constitution is pretty clear that they have to act within some prescribed methods, which are pretty, in some ways, limiting and in other ways not. So they can strike items that the governor wants to do. They can eliminate appropriations that Governor Hochul this year would propose. They can add items of appropriation, so they can add separate items to spend on a different policy. But they really don’t have an enormous amount of room in between to go in and change her policies. So they can either get rid of it entirely because they don’t like it, or they can add something different. But they can’t add something different that just replaces what she was going to do. And that’s a process that has been fought out now since 1928. And it’s been fought out through the courts. Because often, what has happened is that the governor not only says I want to spend $31 billion on K-12 education, she says in that appropriation how she wants to spend that money. The legislature, I think, felt, “yes, it’s the governor’s role to put in the $31 billion number on K-12 education, but she couldn’t totally tell us with a lot of detail within that appropriation, how it was going to be spent.” What the courts have concluded over many years and many court cases but pretty consistently for the executive, is that, no, the governor has the authority to both say I want to spend $31 billion in that case and this is the way I think it should be spent. Now the legislature has the ability to strike that appropriation. But what they cannot do is then add another appropriation for $31 billion for K-12 education.
Alexander Morse 17:36
They can’t add their own policy agenda.
Robert Megna 17:39
Correct. A lot of people have interpreted this as limiting the legislative role. But there’s one significant power that they have to bring the governor to the table to negotiate on the executive budget, which is they can refuse to pass it. And for many years in New York, we did not meet the April 1 deadline with the budget because the legislature chose not to pass the budget as proposed by the governor because they objected to significant parts of how that money was being allocated and spent. So they differed with the policy prescriptions the governor had. Since no one likes to run the state without a budget or the resources to keep the state running, the governor then is either forced to find ways to keep the government running until a budget is passed or to sit down with the legislature and work out a framework that they can both agree to. And for many years in New York State that’s how the budget process was conducted. And then what would often happen to kind of stay within the confines, the governor after talking to the legislature would resubmit his or her budget. So that then the legislature could again act on the executive proposals but they had been altered in negotiation with the legislature. And that happens every year. It may happen after April 1. Often it happens before April 1, where budget items are negotiated between the legislature and the executive. Changes are made. The bills are put back through the process by the executive and the legislature votes those bills up or down. And they’ve had their ability to have an impact on the budget process. So, it’s a long-winded way of saying yes, the executive has a lot of power through a process. That power has been upheld by the courts over many, many years. But the idea that the legislature cannot influence or work with the executive on putting a budget together that includes their priorities, I think, is overstated. So the legislature also has a lot of power in the budget process.
Robert Megna 18:03
And so now focusing on fiscal year 2022-23, how does the current landscape affect budget making in New York? We have the ongoing Coronavirus pandemic, the federal aid that’s going to all states, so New York State actually has cash on hand, as opposed to what happened maybe in 2009 during the Great Recession, how do these different factors change or affect budget priorities?
Robert Megna 20:58
James Carville famously said, “It’s the economy stupid.” And it is always the economy. Because how well the economic condition of the state is dictates how much tax revenue you’re collecting. It also dictates what kind of social services and other things need to be provided for, the citizens of the state, so that it has an affect. The economy has affects both on the revenue side of the budget and how much you’re collecting, but it also has an affect on the spending side of the budget in that in difficult time periods, you’re spending on social service-related activities typically increases by a significant amount as you try to aid New Yorkers that may be part of a disrupted economy. And so you have both sides of the equation working against you in difficult times and working for you in positive economic times. So when economic conditions are very good, tax revenues often exceed what you expect to bring in. And the folks within the economy are doing better. People are employed, their requirements and needs for state services tend to be a little bit less than those time periods. Again, depending on the service. Some services people tend to demand more when the economy is doing well because they expect that their extra tax money that’s coming in should be going towards services that they want. So I think the economy has an incredible impact on that. But to get to your question about today and the COVID response, every situation the state faces, every economic situation, every cycle is different. This one is different, dramatically different, in a way we’ve never seen before. Because initially with the economy closed down, expectations were that receipts would drop dramatically. Unemployment was increasing significantly. And many New Yorkers were ill or even dying. And so there were significant expenditures that had to be made on healthcare and health-related issues. And in protecting the health of New Yorkers, a very unusual situation, what happened, I think, to many was kind of a surprise. While the economy shut down in many ways, it also continued to operate better than people anticipated. People working from home, people figuring out different arrangements to get the work done they needed to get done. As you mentioned before Alex, significant federal aid coming. The combination of the economy gradually doing better than people expected with the federal aid, I think led to a recovery from the COVID induced downturn that was much faster and stronger than people anticipated. So we had a terrible year when COVID first hit but that’s been more or less ameliorated dramatically by how the economy recovered after that. And so we’re sitting in a situation that’s very unique because usually after a significant fiscal calamity like the beginning of COVID, when tax receipts and other things went down, it typically takes two years, four years, five years for the economy to recover to the point where you’re in a much better position. That didn’t happen in this situation. In this situation, the economy recovered very quickly. Federal aid was a significant stimulus. And so state policymakers found themselves doing much better than they expected much sooner than they expected. So back when COVID first hit, the budget was very conservative, based on the clients and revenue they were experiencing.
And as the economy recovered, and recovered more quickly, the usual anticipation that it would take three years or four years or five years to get back to where you were did not materialize. And we were back to where we were very quickly. And in some cases, even above that in terms of how much tax revenue we were collecting combined with federal aid. So we found ourselves, I think, in a situation that was very unique. Now the governor, she’s put out a budget, which in many ways is the first of its kind. In my experience, which goes back 40 plus years in New York, we have a budget that’s not only balanced but significantly in surplus and expected to be both in balance with surpluses for the next three to five years. I do not believe there has been an executive budget proposed in the past 30 to 40 years that contained no out-year gap. And when we talk about out-year gap, out-year gap reflects the fact of what you expect to take in in revenue versus what you expect to spend. Typically, we expected, just because of the way budgets were done, that expenditures would exceed revenues and there would be a gap that would have to be filled in the out years after the budget had been implemented. That situation has been reversed. It is a completely unique situation where we have no out-year gaps for the foreseeable future. Very different. You mentioned the financial decline. That was a much different situation. The significant declines that we were experiencing and expected to at least take a while to recover back to prior levels that happened as expected. So there were out-year gaps, there were significant constraints on spending that extended for multiple years because of how severe the downturn was on New York State finances. That has certainly not been the case coming out of COVID.
Alexander Morse 28:33
So that’s encouraging that there are no anticipated out-year gaps in that New York State will be able to fund its priorities over the next few years. My question is, how do we anticipate that or how do we prognosticate that without federal COVID response in the out years?
Robert Megna 28:50
Your question I think leads immediately to not all revenue that you take in is permanent or is going to continue to grow. So much of the federal aid that we’ve received will not continue into the future. Now, there’s still a backlog of spending that money and getting that money out the door according to the rules that the feds have for spending it. So we still have a backlog of those resources that need to go out. But that’s one-time money, you’ll often hear the terminology of one-time or one-shot money in the budget vocabulary. And that refers to resources that you have that are not recurring. So when you’re doing your budget planning, you have to recognize that those nonrecurring sources are going away and budget accordingly. I believe Governor Hochul in her budget has done that. But the combination of what still remains from that federal money that needs to get spent in combination with the tax receipts situation, which is much better than anticipated, by billions of dollars, means that there is at least a cushion over the next three to five years, which tells the governor and tells the Budget Division that at least over that time period the state will remain balanced. Again, it’s not what I do every day anymore but I know that the budget director and the governor factored those one-shot pieces against the recurring revenue base to come up with a plan that they felt secure the state’s finances over that full five year period, recognizing that the one-shot revenue would be going away.
Alexander Morse 30:59
Okay, and so now that Governor Hochul and Budget Director Robert Mujica have made that plan, administratively what happens next in New York State?
Robert Megna 31:10
So we’re in the middle of the process we started talking about before. I think in a few days, the Budget Division will release their 30-day amendments, the governor has an opportunity to amend the budget she puts out within 30 days of submitting it to the legislature. Typically, in at least the past 20 or so 30 years, those 30-day amendments tend to be rather technical. Often appropriations include language that isn’t exactly right or doesn’t exactly do what the governor wanted to do or a tax bill might not reflect what the policy was intending to accomplish. So they make amendments to those bills to reflect changes that they need to make to be consistent with the governor’s policy prescriptions. Again, those tend to be more technical, not always. And at that point, the legislature then begins to dissect the executive budget, to hold hearings on the executive budget process, to question state commissioners, like the tax commissioner or the EnCon commissioner and all of the state commissioners about how the budget affects the programs they deal with. And the legislature over that process starts to hear from constituencies around the state about how the budget impacts them. So during the budget hearings, you will also see the School Board Association and labor unions and others come to the process either through the hearings process or directly to the legislature to make suggestions about how the budget could be made better or to criticize certain parts of the budget that they believe are not going to pursue effective policies. So this is a process that, again, happens over a very compressed timeframe from the beginning of February to that April 1 date. So that’s the situation we’re in right now, where the constituencies are coming to the legislature and telling them about the issues they have with the budget as it was proposed by the executive. Over the past 15 years or so, the legislature has put a process in place, where they then pass a budget in each house, which reflects their priorities. These are not really budgets because, as we talked about before, the legislature before they can do anything separately have to act on the executive budget. But the legislature needs a way to express its priorities as opposed to the governor’s priorities. The way they do that is by passing these resolutions, which are essentially a markup of the executive budget that shows where their priorities are different than the governor’s priorities. They have no real force of law and they really are a way for the legislature to show, again, where its interests differ from the governor’s interests on the budget. Once they put those documents out, and by the way, the Senate and the Assembly resolutions often are different and can be significantly different because the priorities of the two houses may be different. There’s no attempt to reconcile those because these are really resolutions about how their priorities are different than the governor’s budget. After that process takes place. The three parties, the legislative parties and the governor sit down and negotiate to the extent they can a final budget process, which in the past several years has been a process where the governor will then, after some back and forth about different priorities, resubmit a budget, which the legislature can then act on constitutionally by acting on what is still an executive budget in that very traditional sense. So that process has worked, again, significantly over the past 10 years, where I think we’ve either passed a budget by April 1 or no later than April 2 or 3. I think we had a COVID budget that was a little late, which was understandable. So again, I think that’s been the process. So now we’re in the part of the process where the legislature looks for deficiencies in the executive budget and negotiates with the governor about things they would like to see in the budget that were not there. And they either come to agreement or if they don’t come to an agreement, again, the legislature can choose to reject the executive budget that was proposed by the governor by not passing it. And then ultimately, they need to get together and figure out how they can align their priorities and pass a budget.
Alexander Morse 37:15
The New York State budget is an intricate process that really affects the lives of everyday people. You, me, everyone that’s listening, our audience. So Bob, thank you for joining us today and give us a little bit of a rundown on how the budget is developed, negotiated, and passed in New York State.
Robert Megna 37:36
Thanks, Alex. It was a pleasure.
Alexander Morse 37:48
Thanks again to Bob Megna for joining the podcast to help peer behind the fiscal curtain and discuss how the New York State budget is made and how it affects our everyday lives. If you liked this episode, please rate, subscribe, and share. It will help others find the podcast and help us deliver the latest in public policy research. All of our episodes are available for free wherever you stream your podcasts. Special thanks to the Rockefeller Institute staff, Joel Tirado, Heather Trela, and Laura Schultz, for their contributions to this episode. Thanks for listening. I’m Alex Morse. Until next time.
Alexander Morse 38:49
Policy Outsider is presented by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The Institute conducts cutting edge nonpartisan public policy research and analysis to inform lasting solutions to the challenges facing New York State and the nation. Learn more at rockinst.org or by following RockefellerInst on social media. Have a question, comment, or idea? Email us at communications@rock.suny.edu.
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