New York State’s FY 27 Enacted Budget

Commentary # 36 by Paul Francis

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Paul's Commentary #36 - New York State’s FY 27 Enacted Budget - 5.29.26.pdf

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Introduction

On May 27, eight weeks after the constitutional Budget deadline of April 1 and 20 days after Gov. Kathy Hochul announced that an agreement in principle on the Budget had been reached, the New York State legislature completed voting to enact the State’s FY 27 Budget. With the State awash in tax revenue and in the absence of politically urgent policy issues, such as bail reform a few years ago, the Governor’s intention when she began the Budget process was that this would be a classic election year budget, with many winners and very few losers.

At a distance, that is what the Enacted Budget looks like, with State Operating Funds spending increasing by roughly 8 %[1] according to the Citizens Budget Commission, including $1 billion in “energy rebates,” no broad-based tax increases on households or businesses, and few divisive policy initiatives. As of 10 a.m. Friday morning, the spending growth numbers for School Aid and Medicaid have not been released.

The loudest objections from legislators about the FY 27 Budget did not involve specific policy issues, but rather frustration about the Budget process itself: the inclusion of policy issues only tangentially related to fiscal matters, the opacity of the process even for legislative leaders – much less the rank-and-file, and a Budget so late that it leaves little time for consideration of the legislature’s priorities before it adjourns for the year, which according to the current schedule will be on June 4, 2026.

These are long-standing complaints about the Budget process, but they got louder this year. This is not an easy problem to solve since the Governor has substantial discretion to include policy issues in the Budget, and enacting a budget requires three-way agreement among the Governor, the Assembly, and the Senate. Nevertheless, the legislature may yet assert itself, and I would not be surprised to see some serious effort put into reforming the Budget process next year.

Even a relatively uncontroversial Budget includes challenging issues. The most important story of the FY 27 Budget was the State’s financial bailout of New York City. Another consequential action involved reversals of Tier 6 pension reforms adopted in 2012. The issue in this closed-door negotiation was how much of an increase in the annual pension contributions of the State and local governments Gov. Hochul was willing to allow. I say “Gov. Hochul was willing…” because the legislature has almost no self-imposed spending restraints at this point, particularly on this issue.

There were other controversial issues, such as limitations on local government cooperation with ICE, that required compromise between an increasingly progressive legislature and the programmatic beliefs and political instincts of a moderate Governor.

In terms of an issue that had a significant impact on a large group of people, I would nominate the fate of the roughly 450,000 New Yorkers with household incomes between 200%-250% of the federal poverty level who lost comprehensive and virtually free healthcare coverage this year under the Essential Plan because of impacts from the Trump administration’s “One Big Beautiful Bill Act” that was enacted last July. In the end, no relief was provided in the final Budget, suggesting that some fiscal limits do remain.

I have written about these and other Budget topics in other Commentaries over the last several months. My goal in this Commentary is not to provide a comprehensive review of the Budget, but rather to address a few of the major topics that have implications for the next several years of governing, or speak to larger issues in our politics today.

The New York City Bailout

In January, shortly after the release of the State Executive Budget but before the release of New York City’s Preliminary Budget, Mayor Zohran Mamdani made a dramatic announcement that he had discovered that the City faced a “budget crisis” of as much as $12 billion between the current fiscal year and the City’s FY 27 fiscal year. As a result of upward revenue adjustments of $4.2 billion and taking into account promised additional State assistance to close the gap, by the release of the Preliminary Budget, the City had reduced its estimated deficit to $5.4 billion.

Although the size of the City’s deficit was no surprise – New York City Comptroller Brad Lander in August 2025 had estimated the City’s deficit, including the current budget year and the next budget year, at $13 billion – the issue had been entirely ignored during Mayor Mamdani’s campaign. Nevertheless, from the time of the Mayor’s “budget crisis” announcement, it was clear that the biggest question in the State Budget would be how the State would respond to the City’s budget mess.

In order to enable Mayor Mamdani to meet his statutory requirement to issue his Executive Budget by May 12, 2026 (following a delay authorized by the City Council) without the inclusion of major spending cuts or the very unpopular property tax increase the Mayor had used as a placeholder in his Preliminary Budget, Gov. Hochul and Mayor Mamdani made a joint announcement on the morning of May 12, 2026 that outlined the terms of the State’s additional support for New York City.

I described the details of the State actions in an article for Vital City, so I won’t repeat that analysis here. Some of Mayor Mamdani’s allies have complained about the characterization of the Budget as a “bailout” of New York City, but the Mayor at the time was content in allowing the framing of the May 12 joint announcement to suggest just that. The joint announcement (released by the Mayor’s press office) read:

“Governor Hochul, in partnership with the state legislature, has secured an additional $4 billion in gap-closing support, bringing the total new state assistance to nearly $8 billion over two years.”

In actuality, of the $8 billion in total, about $3 billion represents additional State aid, and about $5 billion represents State authorizations for the City to take various actions, including the deferral of pension contributions, the imposition of a new pied-à-terre tax, and the ability to avoid making mandated expenditures.[2] In addition, tax revenue estimates over two years were increased by $4.2 billion, which considerably reduced the City’s budget deficit.

I suspect this year’s Budget may represent the high watermark of the congenial budget-making relationship between the Mayor and Governor. The Mayor’s Executive Budget, even taking into account the roughly $2.5 billion in additional recurring State assistance, $1.6 billion in annual deferred pension contributions, and the supposed $500 million in revenue from the pied-à-terre tax, is estimating out-year budget deficits ranging from $7 billion in FY 28 to $9 billion in FY 30. Mayor Mamdani was not elected to be an austerity mayor, but the money just isn’t there for him to advance most of his affordability agenda or even to absorb the organic growth of existing programs he endorsed during his campaign.

Something will have to give. Unless New York State authorizes New York City to increase personal income taxes and/or corporate taxes – or tax revenue continues to exceed expectations – it’s unlikely New York City can do more than tread water in the coming years, with incremental cutbacks in spending rather than the new ambitious programs Mayor Mamdani called for in his campaign.

If tax revenue growth slows, it will put more pressure on the City than the State, given the City’s weaker fiscal condition today. There is no telling when tax revenue growth will slow. You could have lost a lot of money betting against the stock market, the relatively strong economy, and attendant tax revenue growth in New York over the last several years. Many smart people are saying that the markets are not adequately pricing in the negative impacts within the next six months of events like the blocking of the Strait of Hormuz and even the “super El Niño” effect, both of which could seriously impair the economies in Asia and Europe, with knock-on effects on the US. Nevertheless, I tend to share the view of those who think that the AI revolution will continue to prop up the stock market for at least another few years. But nothing ever lasts forever, and eventually the fiscal winds will shift.

The Special Interest Battles

Gov. Hochul has narrowed her policy ambitions over the course of her five years as governor. She has come to recognize how difficult it is to convince the legislature to take hard votes and has adjusted her sights accordingly. After the failure of ambitious but politically difficult proposals, such as overriding the zoning authority of local governments to block housing developments or fundamentally redesigning the School Aid formula by ending the “save harmless” provision that protects districts with declining enrollment, the Governor now pursues a more incrementalist agenda.

Consistent with that incrementalist agenda, the Governor has been relatively successful in blocking or severely limiting ambitious programs championed by the legislature, such as the long-running effort to have the State fund the Housing Access Voucher Program at substantial levels to support local rental subsidy programs. She has also been relatively successful in blocking legislative initiatives that would hurt the general public while advancing a particular special interest, such as the long-running effort by the Trial Lawyers to expand the universe of individuals who can pursue wrongful death actions, which Gov. Hochul has vetoed for three years in a row. But convincing the legislature to approve any new proposals that would create “losers” among special interests is more difficult.

As a result, the Governor is only able to successfully wage very few big fights with special interests in any given budget cycle. Even when there is a compelling case for reform, these battles require her to use all her political capital to overcome entrenched interests and restore some financial rationality to the system. The Governor often needs help from another powerful special interest to prevail – such as 1199SEIU, in the case of the consolidation of the Fiscal Intermediary industry in home care two years ago, or Uber, in the case of this year’s litigation reforms affecting the cost of automobile insurance.

Indeed, the litigation reform affecting the cost of automobile insurance was one of the two big special interest battles in the FY 27 Budget. The other was the campaign by public employee unions to reverse the Tier 6 pension reforms adopted in 2012.

Gov. Hochul’s posture with respect to these two issues was very different. She was the primary driver of the litigation reforms affecting automobile insurance, which was the focus of a pitched lobbying and public relations battle. On one side were the Trial Lawyers, who sought to frame the battle as greedy insurance companies against the little guys who become injured in an automobile accident. On the other side, Uber spent close to $10 million through an affiliate called Citizens for Affordable Rates on advertising supporting Hochul's argument that the current system was rife with fraud and that it materially inflated the cost of automobile insurance. Gov. Hochul achieved nearly all of what she was seeking – potentially reducing automobile insurance rates by about $200 per vehicle per year.

It was a rare defeat for the Trial Lawyers. New York – especially downstate – is one of the most litigious places in the country, which raises costs for the general public. Medical malpractice costs in New York are the highest in the nation, and the Trial Lawyers have defeated every effort at reform. Policy initiatives designed to reduce malpractice costs, most notably the Medical Indemnity Fund (MIF), were only enacted because the law fully protected the Trial Lawyer bar by preserving the contingency fee structure. Another program protected by the Trial Lawyers that materially raises costs in New York is the so-called “Scaffold Law,” which imposes “strict liability” for most injuries on construction sites – as opposed to the comparative negligence standards in 49 other states. The construction industry and its consultants estimate that the Scaffold Law increases construction costs by 6-8%.

The Trial Lawyers benefit not only from the public’s perception that they protect the little guy from large corporate interests, but also from the public’s faith, shared by purchasers of lottery tickets, that they too might become one of the winners in this system.

In the case of the Tier 6 pension reforms, Gov. Hochul tried to have it both ways – offering public support for the dubious arguments of the public employee unions (especially the teachers’ union), while trying to avoid being tagged as imposing spending increases on local governments and school districts, which will bear the brunt of increased pension contributions resulting from Tier VI changes. In the end, the total increase in pension contributions has been estimated at $577 million annually, significantly below the $1.5 billion annual increase that fiscal experts had indicated would be required if the full ask of the public employee unions had been granted.

This was the third time that Gov. Hochul embraced reversals of parts of the 2012 Tier 6 reforms, which collectively increase pension contributions by approximately $1 billion annually. It may be too much to ask that Gov. Hochul and the legislature hold the line against the united front of public employee unions on reversing Tier 6 pension reforms in an election year. Depending on your level of fatalism, you could say that the final deal “could have been worse” or just say that it was “disappointing” that the Governor and the legislature would create such a large long-term liability in the absence of the compelling case for these changes, given all of the other needs in the State. It is worth noting that Mayor Mamdani also supported this deal even though it will add approximately $150 million a year to his already daunting structural deficit.

The governor’s success in overcoming the opposition of environmental activists and their allies was another special interest battle that she could not afford to lose – and she prevailed. My experience has been that smaller reforms advanced in the Executive Budget died on the vine because the legislature knows that if they just refuse to engage in the issue long enough, the Governor will not hold up the budget for these issues and eventually drop the proposals.

However, there are exceptions to that general rule. To my surprise, the legislature substantially accepted the governor’s proposed changes to the State’s Independent Dispute Resolution (IDR) law by excluding Medicaid and making other incremental changes. On another issue we have long supported, the Enacted Budget provides a permanent carveout from managed care for school-based health centers. Alas, other commonsense scope of practice changes involving the health professions – long-sought by the administration – were ignored by the legislature.

Reality Bites: the Saga of the Climate Leadership and Community Protection Act

This year, the need to make changes to New York’s 2019 Climate Leadership and Community Protection Act (CLCPA) became one of Gov. Hochul’s top priorities in the Budget. The CLCPA was enacted in 2019 and established aggressive emission reduction targets while deferring an implementation blueprint for achieving those targets to subsequent regulations. In February 2026, a New York Supreme Court judge forced the administration’s hand by ruling that the State was in violation of the unambiguous statutory requirement that regulations implementing the CLCPA be in place by 2024. Creating the regulatory mechanism to actually accomplish these emissions reductions – which is widely assumed to be a “cap and trade” structure – would result in significant consumer costs very soon.  

The New York Post, as was the case with bail reform, has been scathing in its criticism of Gov. Hochul (as well as of former Gov. Cuomo) for rising energy costs in New York State – attributing nearly all the blame to the CLCPA. In an election year in which affordability is expected to be the most important issue, it became a political imperative for Gov. Hochul to make statutory changes in the Budget that would defer the day of reckoning about the cost trade-offs involved in implementing the CLCPA.

In short, over the protests of many legislators and environmental activists, the CLCPA requirement to reduce emissions from the baseline year of 1990 by 40% by 2030 was changed to a requirement to reach a 60% reduction by 2040 (by which time Gov. Hochul will be long gone). The statutory requirement to issue implementing regulations was pushed back to 2028 (presumably after the 2028 elections). And the Budget makes a significant change in the metric for measuring methane, making the emissions reduction target easier to meet.

There are lessons from the CLCPA controversy that extend beyond the specifics of this law. From the time I first encountered the tension between ratepayer costs and climate change goals in 2007, environmental advocates and their legislative supporters have sought to hide the ball about the trade-offs involved. When the CLCPA was signed into law in July 2019, concerns over climate change were at a peak, and the downstream consequences for consumer costs were barely considered. As a result, the environmental community never really built a broad base of public support for its policies.

In a sense, the environmental activists were hoist on their own petard of telling only one side of the story. After the Executive Budget was introduced, Gov. Hochul directed the New York Energy Research and Development Authority (NYSERDA) to produce a study that presented the worst-case scenario of the “cap and trade” program that would be required by implementing regulations. Environmentalists howled in protest that NYSERDA’s estimates of increased costs – an additional $2.23 per gallon and $4,000 annually in heating costs – were exaggerated and misleading, but the NYSERDA punchline dropped into a vacuum of understanding and carried the day.

Budget Actions Involving the Health Portfolio

In contrast to prior years, when the administration muscled through important but controversial changes, such as the carveout of the pharmaceutical drug benefit from Medicaid managed care, and the consolidation of Fiscal Intermediaries in the Consumer Directed Personal Assistance Program, FY 27 was a relatively quiet Budget year for the health portfolio.

The State’s Medicaid program saw its financial position improved by more than $3 billion in FY 27 compared to the Executive Budget assumptions, as a result of decisions by the federal government made after the release of the Executive Budget. The Enacted Budget found other ways to spend most of that windfall in Medicaid, including supporting $1.5 billion in rate increases and other operating support for hospitals, nursing homes, federally qualified health centers, and assisted living programs.

It is the calm before the storm for the healthcare sector in New York and for the Medicaid budget. Decisions by the federal government gave the State a temporary reprieve from the need to spend approximately $3 billion a year more on lawfully present immigrants made ineligible for federal subsidies by the One Big Beautiful Bill Act (a.k.a. HR 1), but the State will need to absorb that responsibility within 2-3 years – or perhaps sooner if the next Budget reconciliation bill incorporates further Medicaid cuts. In addition, work requirements and more frequent recertification requirements for many Medicaid enrollees will take effect at the beginning of 2027.

I believe the impact of these eligibility changes will be less than many are predicting, but there is no doubt that they will result in a significant increase in uncompensated care, putting further pressure on the already strained healthcare delivery system. The economics of hospitals, meanwhile, are at risk from technological disruption and policy changes intended to reduce the overall cost of healthcare, from changes to the 340B prescription drug program to limitations on reimbursement based on the “site of service.” And in the absence of meaningful changes in benefits or eligibility or the development of some more efficient model of care, the inexorable growth of New York’s aging population will continue to drive the unsustainable cost of New York’s home and personal care system.

The 2011 Medicaid Redesign Team (MRT) initiatives and the 2020 MRT II recommendations (in which I was heavily involved) were far from perfect, but they helped to set an agenda for bending the cost curve in Medicaid, which I believe would have been steeper in the absence of these efforts. Gov. Hochul would doubtless want to rebrand any MRT-like initiative, perhaps building on the Future of Healthcare Commission. But in my opinion, she would be wise to convene the equivalent of an MRT III after her reelection in November.

The most significant development in the Health portfolio was the decision by the State to not address the impact of the loss of comprehensive, nearly free healthcare coverage under the Essential Plan for roughly 460,000 individuals with household incomes in the range of 200%-250%, as a result of changes necessitated by HR 1. If history is a guide, only about 75,000 of those individuals will obtain coverage using ACA tax subsidies. In addition, Congress failed to extend enhanced premium tax credits under the ACA, which roughly doubled premiums for approximately 180,000 New Yorkers who purchase individual health insurance through the New York State of Health. Fully replacing the federal funding the State used to receive to cover these individuals under the Essential Plan would have cost in the neighborhood of $2 billion to $3 billion, although partial solutions would have cost less.

Beyond the fiscal cost, the administration may have believed it would send the wrong message to Washington by backfilling these federal cuts – particularly when so many others are in the pipeline.

Conclusion

Transparency was a loser in this Budget. Several of the most controversial proposals were not introduced with the Executive Budget, nor were their specifics otherwise made public. These include the pied-à-terre tax, the reversal of Tier 6 pension reforms, and changes to the CLCPA. A columnist for City and State opined that Gov. Hochul’s success on these issues was “further evidence that her budget tactic of delaying and inserting controversial policy matters late is a winning strategy for her.” If that is the mentality, this pattern is likely to continue.

Despite Gov. Hochul’s pledge of transparency since taking office, the Budget process is now less transparent than ever. This extends even to timely reporting of basic details about the Budget. As the Citizens Budget Commission noted in its statement on the Enacted Budget:

“Unfortunately, New Yorkers still do not know the full impact of this budget— including spending growth, future gaps, and the structural gap—because the State again failed to publish basic financial plan tables with the budget agreement. New Yorkers should not have to wait up to a month to learn how their $268 billion is being spent.” 

This strategy of limited transparency may seem tactically smart because it makes it more difficult for the opposition to organize, or critics to find fault, in the case of Budget numbers, but there is a price to be paid in terms of a loss of public confidence in the system, as well as a lack of constructive input that outsiders might provide if they knew more about what was being proposed.

At a time when Congress faces nearly total gridlock, enabling the Trump administration to move the country backward in so many ways, perhaps we should celebrate the incremental progress being made by the State and New York City government in the FY 27 Budget.  

We should also celebrate multiyear progress in important areas, especially expanded childcare, which may well become Gov. Hochul’s greatest legacy. But the policies enacted in both the City and the State FY 27 Budgets still seem woefully mismatched to the scale of people’s problems.

I could make an argument that two decisions announced by Gov. Hochul in recent months outside of the Budget could have greater implications for life in New York than almost anything in this Budget. The first of these two decisions was the withdrawal of the Governor’s State of the State proposal to pilot the introduction of driverless taxis in upstate New York cities. The robotaxi industry, led by Waymo, is mounting an intensive lobbying campaign to authorize commercial driverless taxi operations – while simultaneously pushing for a federal law that would preempt local control. This is a sleeper issue – watch this space.

The second decision involves the Governor’s statement that she intended to opt in to Pres. Trump’s Federal Tax Credit Scholarship Program. Beginning in 2027, the program will allow taxpayers in states in which the Governor has chosen to opt in to receive a federal tax credit of up to $1,700 for donations to private and religious schools and other private education programs.

Even a stopped clock is right twice a day, and I believe the Trump administration’s policy will benefit education in New York State. I fully expect the teachers’ unions and many progressives to oppose this governmental support for private education (even though it is 100% federal money), which could make it difficult for Gov. Hochul to opt in. She will deserve a lot of credit if she resists this pressure and makes this tax credit program available to New Yorkers.

Endnotes

[1] The administration obscures as many politically inconvenient facts as possible in the Enacted Budget press release, so this actual number will not be known until the Enacted Budget Report is issued in 4-6 weeks.

[2] Authorization to defer compliance with the State's unfunded mandate to reduce class sizes – worth approximately $500 million in savings – was not included in the Enacted Budget but reportedly will be passed in a separate bill before the legislature adjourns.