Thoughts on the FY 27 Budget – Part II

Paul Francis
6 hours ago
28 min read

Commentary # 32 by Paul Francis

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Introduction

It feels strange to post a Commentary on the FY 27 Budget the day before the State constitutional deadline for a completed Budget of midnight on March 31, but since the Hochul administration has a more relaxed philosophy about the importance of an on-time budget than her predecessor, negotiations are likely to continue well into the month of April.

As I have written about before, the New York State FY 27 Budget at least initially promised to be one of the least controversial budgets in recent years because it is an election year and the current bounty of tax revenue, as well as favorable decisions by the federal government that push off federal cuts for a few years, make it possible for the Governor to defer unpopular actions on structural issues for at least another year. Even so, a number of consequential issues have emerged since the Executive Budget, and even a relatively uncontroversial Budget includes issues that face strong opposition from affected stakeholders.

There are a number of good journalistic roundups of the major issues in the FY 27 Budget, and many of our readers also have access to excellent Budget summaries prepared by lobbyists or stakeholder groups. So I’m going to concentrate more on the dynamics of this Budget and a few issues that have been preoccupations of the Step Two Policy Project for some time.

Perhaps the most important dynamic in the FY 27 Budget is what it will say about the balance of power between New York City Mayor Zohran Mamdani and Gov. Kathy Hochul. From the time a few weeks before the Preliminary Budget, when the Mayor declared that the City faced a “budget crisis” of as much as $12 billion, the question of how the State would respond to the City’s budget mess inevitably became one of the biggest issues in the State budget negotiations.

After the financial bailout for New York City, the next most consequential aspect of the FY 27 Budget negotiations was not actually included in the One House Budgets or the Executive Budget, because the players involved want to keep the ball hidden for as long as possible to reduce public scrutiny. I am referring, of course, to the further reversal of Tier VI pension reforms.

The savings from the Tier VI pension reforms enacted in 2012 were advertised at the time as approximately $80 billion over 30 years, including $21 billion in savings for New York City, with the balance saved by the State and local governments outside of New York City. Tier VI was already weakened in 2022 and 2024, but the changes currently being discussed would essentially bring the pension program back to the standards of Tier IV, which was enacted in 1983.

It’s impossible to know the potential cost of further reversal of Tier VI reforms until a specific proposal is announced that could be scored. The Empire Center has estimated that the increased cost to State and local governments in the form of pension contributions initially could be approximately $1.5 billion annually if the surviving provisions of the Tier VI reforms are reversed.

One of the themes or dynamics suggested by this year’s Budget debate is the temptation to avoid detailed and timely fiscal analysis when a Budget action is considered in order to blunt opposition. State law requires that any legislative bill “which enacts or amends any provision of law relating to a retirement system or plan of the State of New York or any of its political subdivisions must contain a fiscal note stating the estimated annual cost to the affected employer and the source of the estimate.”[1] In practice, this means the actuaries for each affected pension system prepare these fiscal notes. However, when pension changes are made through the Budget, these analyses may not be available when decisions are made.

The perils of not having good Budget scoring at the time legislation is enacted are also suggested by Gov. Hochul’s push for changes in New York’s Climate Leadership and Community Protection Act (CLCPA) – another consequential issue not included in the Executive Budget.

The CLCPA was signed into law in July 2019 at a time when concerns over climate change were at a peak and the downstream consequences for consumer costs were barely considered. The chickens have come home to roost on the CLCPA and similar climate policies around the country, as the priority of addressing long-term climate change impacts gives way to more immediate concerns about affordability.

The Senate sponsor’s memo for the CLCPA (which was enacted outside the Budget) did not score the cost of the law, instead specifying that fiscal implications were “to be determined” by a study after the law was implemented. The Final Scoping Plan mandated by law did not come out until December 2022 and dryly noted as part of a 443-page report that: “In 2030, annual net direct costs relative to the Reference Case are around $11 billion per year” (which would equate to about $2,300 a year for a family of four), but notably did not provide a per-household or per-capita cost estimate for the average New York consumer.

By February 2026, NYSERDA was more direct in noting that:

“Absent changes, by 2031, the impact of CLCPA on the price of gasoline could reach or exceed $2.23/gallon on top of current prices at that time …. Upstate oil and natural gas households would see costs in excess of $4,000 a year and New York City natural gas households could anticipate annual gross costs of $2,300.”

In an op-ed released on March 20, 2026, titled “Climate Action and Affordability Can and Must Go Hand-In-Hand,” Gov. Hochul said: “While I am still committed to working toward our targets, with all the stress our residents are under, New Yorkers expect their elected officials to prioritize affordability.” She outlined the major changes she is seeking, but without an Article VII bill introduced in the Executive Budget or the 30-Day amendments, the details are being hashed out behind the closed doors of budget negotiations.

Gov. Hochul’s top priority in the FY 27 Budget appears to be litigation reforms designed to reduce the cost of auto insurance. She argues that these changes would save consumers approximately $2 billion annually, or about $200 per auto insurance policy. Neither the Assembly nor the Senate included this proposal in their One House Budgets, preserving their ability to leverage their acquiescence (if it is to come at all) for maximum benefit. This fight over auto-insurance-related litigation is a classic Albany battle between the interests of the State’s powerful trial lawyer lobby and the interests of affordability for the general public.

Having watched the system closely since I was New York State’s Director of the Budget in 2007, I would say that the essence of the New York State Budget is the competition between special interests and the general public’s interests. Special interests are not inherently bad – often far from it. It’s just that they focus on their individual interests without acknowledging the trade-offs involved in a world of limited resources. Special interests have enormous sway over individual legislators not only because of campaign contributions and endorsements, but because legislators generally view the business of managing trade-offs as someone else’s responsibility.

Back in the day of all-powerful legislative leaders like Sheldon Silver and Joe Bruno, they would assume more of the responsibility for enforcing the necessity of trade-offs. But I think it is fair to say that in today’s State legislature, with the constant threat of primaries from the Democratic Socialists of America (DSA) in the only party (the Democratic Party) that matters, there is a gravitational pull of the legislature’s position to the lowest common denominator of a particular special interest.

As a result, the Governor is the only player left to protect the general public’s interest. To Gov. Hochul’s considerable credit, she has used her veto power over the last several years to block any number of special interest bills passed by the Legislature that would damage the public interest, such as the so-called “Wrongful Death” bill that would significantly expand the universe of plaintiffs who could bring a wrongful death action, which in turn would dramatically increase medical malpractice costs.

When it comes to the Budget, however, Gov. Hochul has been less successful in overcoming the influence of special interests to the detriment of the public’s general interest. The revenue bounty Gov. Hochul has enjoyed since taking office in 2021, when the State increased personal income taxes on high earners and corporate income taxes, has enabled her to meet the spending demands of the State’s most powerful interests. In fairness, she has resisted more extreme proposals for increased spending and taxes that have been championed by the Progressive wings of the Senate and Assembly.

State Operating Funds spending between FY 23 (the first budget for which Gov. Hochul was directly responsible) and FY 26 rose by about 6.1% on average, well above the rate of spending increases under her predecessor. In addition to the fact of life that it is more difficult to control spending when tax revenue is plentiful, Gov. Hochul may have felt that she needed to spend her political capital on enacting programmatic policy changes in areas such as bail reform that she considered a greater political imperative.

Although there are important issues in this Budget, including Gov. Hochul’s push for changes to SEQRA — the State Environmental Quality Review Act — aimed at speeding up housing and infrastructure projects, they are far enough away from our area of focus and expertise that we will not address them here.

An important issue that is in our wheelhouse is also not addressed in either the Executive Budget or the One House budget resolutions. That is the issue of the loss of Essential Plan coverage for individuals with household income between 200% and 250% of the federal poverty level. As a result, sometime later this year, approximately 460,000 individuals will lose healthcare coverage. We have followed this issue closely and will describe below two different approaches to addressing the problem that deserve consideration.

The New York City Bailout

As alluded to above, ever since Mayor Mamdani announced on Jan. 28 that New York City was facing a “budget crisis” of a $12 billion deficit in the City’s Budget that must be enacted by June 30, 2026, it’s been clear that perhaps the biggest issue in the State’s budget would be whether – and how – the State would bail out the City from its fiscal problems. Mayor Mamdani insisted that he saw few opportunities to meaningfully close the budget gap through spending reductions. Instead, he called for New York State government to authorize the corporate tax and personal income tax increases he had campaigned on and to increase State funding to address a “structural imbalance” between the City and the State.

After the Mayor’s announcement of the $12 billion deficit, it was reported that Gov. Hochul thought the City was exaggerating its budget problem to create leverage for the Mayor’s priority of raising taxes on wealthy New Yorkers and large corporations. Indeed, by the time the Mayor presented New York City’s Preliminary Budget on February 17, City Hall had reduced the size of the City’s deficit to $5.4 billion, primarily as a result of upward revenue revisions but also aided by a last-minute addition of $1.5 billion in new State funding on top of the roughly $1 billion in budget relief funding for the City that had been included in the Governor’s initial Executive Budget.[2]

Even with this smaller deficit, the Mayor continued to insist that the problem could only be solved by the State. In a transparent effort to force the State’s hand, the Mayor threatened to increase New York City property taxes — the only tax the City can increase without State approval — by 9.5% unless the State authorized the alternative taxes he proposed and substantially increased State funding to the City. The New York Times reported last Friday that the Mayor has been “quietly backing away” from his property tax increase proposal in the face of a ferocious backlash from the City’s small property owners. What I always assumed was a transparent bluff may have hurt the Mayor with his constituencies that were not in on the act.

The details of the financial relief package for New York City – including both tax increases and increased funding for the City – are important but complicated. For those interested in the details, we have included a long description and summary tables in the Appendix.

At a high level, it appears that between the Executive Budget and its 30-Day amendments, the Governor has provided approximately $2.5 billion in additional funding for New York City. The Preliminary Budget’s estimated deficit of $5.4 billion took into account this roughly $2.5 billion of additional funding from the State. Therefore, what is most relevant to the ongoing State Budget negotiations and resolution of the City’s remaining deficit is additional resources proposed by the legislature that find their way into the Enacted Budget. The legislature has proposed roughly $5 billion in additional resources, consisting of additional taxes whose revenues flow directly to New York City and increased funding for the City that was included in the One House budget resolutions.

If all of the taxes directly benefiting New York City and the additional funding included in the One House budgets are adopted in the final State Budget, the State will have largely solved the Mayor’s immediate budget problems.

While leaving the details to the Appendix for those who are interested, a few aspects of the State’s response bear highlighting:

The tax platform on which Mayor Mamdani campaigned assumed that all of the proceeds from increased personal income taxes and corporate taxes authorized by the State would flow to New York City. By contrast, the Executive Budget proposes no new taxes, while the One House budget resolutions authorize approximately $3 billion in taxes that would flow to New York City. In addition, the Senate and Assembly resolutions proposed additional State taxes of $5.4 billion and $7.2 million, respectively, the proceeds of which would flow to the State. Except to the extent that increased State taxes support higher levels of budget relief funding for New York City, such taxes don’t benefit the City.
Gov. Hochul has insisted that she will not support any increases in personal income taxes, and she cannot afford to be seen as getting rolled on this position by the Mayor or the legislature. Fortunately for the City (and probably by design) the One House budget resolutions do not provide for direct increases in personal income taxes that would flow to the City, although approximately $700 million of the $3 billion in increased taxes authorized by the One House budget resolutions that would flow to the City would indirectly increase the effective tax rate for a group of wealthy individuals. It remains to be seen whether Gov. Hochul will view that indirect tax increase as crossing her red line.
I have consistently stated that I expect Gov. Hochul will agree with increasing corporate income taxes despite her initial opposition. If she does, the increase in New York City’s corporate income tax rate by the roughly 2 percentage points advanced by the Senate and the Assembly would generate $1.75 billion in new revenue for the City. I’m doubtful, however, that she will approve a comparable two-percentage-point increase in the State’s corporate income tax rate, which would raise approximately $2 billion for the State.
In terms of increased funding for the City, I believe that the final Budget will come close to adding approximately $2 billion (which would be in addition to the $2.5 billion of increased funding for the City already offered by the Governor through the Executive Budget and the 30-Day amendments). If this level of additional funding is included, the categories of additional funding will be interesting. It’s highly likely that New York City will be included in the Aid and Incentives for Municipalities (AIM) program for the first time since 2010. The Assembly (but not the Senate) provided $600 million of funding for New York City to comply with the State’s unfunded mandate of reducing school class-size – a liability that could grow to $1.8 billion in a few years. Demanding that the State provide the resources to fulfill its unfunded mandate should be an obvious request of the City, but the Mayor has been reluctant to focus on this “ask” because it is politically inconvenient to do so.

Perhaps I am being too optimistic about the prospects for Mayor Mamdani and New York City to receive this amount of additional resources in the final Budget. Recent reporting in the New York Times says Gov. Hochul believes that “city officials needed to be doing more to rein in spending.” The change in the City’s bond rating outlook from “stable” to “negative” by the major credit rating agencies was, in the words of the astute Errol Louis, “the political equivalent of what baseball players call a brushback pitch.” And, of course, all of the commentary in the mainstream media and budget watchdogs has argued that the Mayor needs to balance the City’s budget with spending reductions rather than tax increases – without offering much in the way of specifics about what spending to cut.

Nevertheless, I still think it likely that the State budget will provide sufficient funding to mollify the Mayor and relieve New York City of the need to make significant spending reductions in existing programs and services. The Mayor is already under fire for pulling back on his campaign commitment to expand the CityFHEPS rental subsidy program. He would be hard-pressed – politically and programmatically – to make deep cuts in existing programs.

There are many reasons why maintaining good City-State relations is important to both Mayor Mamdani and Gov. Hochul. From the Mayor’s standpoint, most of his agenda requires the approval and support of the State. Even with Democratic supermajorities in both legislative houses, Gov. Hochul holds the most cards in Albany.

As to Gov. Hochul, she needs a strong turnout in New York City in her November re-election, which the Mayor can help ensure. Moreover, she needs the Mayor as a moderating influence over Progressives in the legislature, who, on a range of issues, would push the State further to the left than the Governor wants to go.

While the path to the State’s bailout of New York City this year seems relatively clear to me, the unanswered question is what will happen during the remaining three fiscal years of Mayor Mamdani’s first term. The State’s finances will become more difficult as federal budget cuts that were deferred until after the midterm elections start to take effect. The underlying drivers of increased costs in New York City are unlikely to get better and may well get worse.

It almost goes without saying that, with the exception of childcare, Mayor Mamdani’s first City budget will leave most of his affordability agenda on pause. The $7 billion-plus in additional resources that I believe New York City will receive through the FY 27 New York State Budget would have been sufficient to fund large parts of his affordability agenda, but instead are required just to maintain existing programs.

Notwithstanding the Mayor continuing to argue that the City’s budget problems were unforeseeable and masked by the Adams administration, the City’s current deficit was both predictable and predicted. It was magical thinking at best or sleight of hand at worst to campaign on the implicit assumption that New York City did not face an existing budget deficit and that all new resources could be deployed for bold new programs.

Reversal of Tier VI Reforms

New York State's public employee pension system is a defined-benefit system in which retirement benefits, once granted, cannot be reduced under the New York State Constitution. The system is organized into six "tiers" based on hiring date, with benefit structures, contribution requirements, and retirement eligibility varying by tier. The major pension funds include the New York State and Local Retirement System (covering the Employees' Retirement System and Police and Fire Retirement System), the New York State Teachers’ Retirement System, and five New York City pension funds.

Changes in public employee pension plans are notorious for getting state and local governments into fiscal peril because changes are inexpensive in the short run but very costly in the long run. That’s a bad combination for a political system that is much more focused on the next election than long-term fiscal stability.

Prior to 2009, the most recent across-the-board change in public employee pension plans was the establishment of Tier IV in 1983. Between 2000 and 2010, the adoption of pension sweeteners in State law resulted in annual public employer[3] pension contributions statewide rising from roughly $1 billion to over $10 billion. In response, Governor Paterson secured Tier V in 2009, which largely restored the original Tier IV structure before the sweeteners. The structure included a 3% employee contribution for the first 10 years of employment and increased the age at which retirees could draw their full pension benefits from Tier IV’s age 55 to age 62.

Tier VI pension reforms, enacted in 2012, are not usually included in the litany of Gov. Andrew Cuomo’s accomplishments, but from a fiscal standpoint, they rank near the top. Tier VI raised the full-benefits retirement age to 63 for several categories of employees, introduced employee contributions of 3-6% of salary (based on income) for the entire length of employment, lengthened the final average salary (FAS) calculation from three to five years, reduced the pension multiplier percentage (e.g., 1.75% for the first 20 years), extended vesting from five to ten years, and capped pensionable overtime. The Cuomo administration estimated 30-year savings of $80 billion statewide, including $21 billion in New York City, as estimated by the Bloomberg administration, which strongly supported the changes.

The legislature began rolling back Tier VI in the FY 23 Budget, reducing vesting from ten to five years of service, which the bill’s fiscal notes estimated increased annual contributions by $61 million. In the FY 2025 budget, it changed the FAS calculation from the five past years to the three highest years, increasing statewide annual costs by an estimated $377 million and the present value of pension liabilities by $4.3 billion.

For the FY 2027 budget, it is been reported that public employee unions, led by NYSUT, the UFT, DC 37, and CSEA, are pushing further changes, principally restoring the right to retire at age 55 with 30 years of service without penalty — the old Tier IV standard — and reducing employee contribution rates to the flat 3% that applied under Tier IV (with contributions ceasing after 10 years). The Citizens Budget Commission has estimated in the past that rolling back all of the Tier VI reforms – which the unions’ ask would essentially do – would further increase annual pension contributions by approximately $1.5 billion.

The unions argue that these changes are necessary for recruitment and retention. However, given that approximately 800,000 employees hired after the reforms were adopted in 2012 are enrolled in Tier VI, these changes would create what economists call a “free rider” problem in that they would immediately award significant benefits to existing public employees for whom the risk of attrition over this issue is probably low.

I try not to be a “budget scold” who criticizes most new State spending programs. I’m acutely aware of the need for most of these programs and embrace the values that a strong safety net represents. But dramatically increasing the cost of the State’s pension plans is not one of these critical needs – and when the State (and local governments, including New York City) spend massive amounts on things that are not essential, they become unable to afford programs that do more good for more people.

Targeted compensation changes, such as increasing starting salaries in areas where recruitment is most difficult and providing retention bonuses in areas where high attrition is a major problem, would be a more effective and less costly solution to this perceived problem. In an economy in which staying with the same employer for an entire career is much more the exception than the rule, a structural reform that would benefit public employees would be to allow more of them to choose to participate in a defined contribution plan of the type common in the private sector instead of a defined-benefit plan. Although Tier VI somewhat expanded this option, the defined contribution option is unavailable to unionized employees. This adamant opposition by public employee unions to giving their members this option represents paternalistic protection that is anachronistic.

When it comes to the reversal or weakening of the Tier VI reforms, Gov. Hochul has forfeited much of her leverage on the issue by appearing at the public employee unions’ rally and expressing support for Tier VI changes, with the only question being the extent of the changes. It is an election year, and despite her substantial lead in the polls and massive fundraising advantage, Gov. Hochul has never been one to leave much to chance when it comes to her electoral prospects. Reversal of the Tier VI reforms is a defining issue for public employee unions, and Gov. Hochul is not going to risk running for reelection without their support.

What is unfortunate about the Governor sacrificing her leverage on this issue is that the reversal of the Tier VI reforms should be one of the few issues that are important enough to the Legislature that it would give the Governor the ability to leverage her acquiescence to Tier VI reform to gain victories on some of the other issues on behalf of the general public interest over narrow special interests. Many of these issues are Budget perennials that the governor’s office repeatedly loses in its efforts for reform. In the Health sector alone, I’m thinking of issues like commonsense scope of practice and workforce flexibility reforms that have been included in the Executive Budget to no avail for the last several years.

Essential Plan Changes

The Step Two Policy Project has written extensively about changes to the State’s Essential Plan as a result of the enactment of the One Big Beautiful Bill Act (“HR 1”) in July 2025. As we anticipated, the federal government approved the State’s request to restore the Essential Plan to its original statutory authority as a Basic Health Program under Section 1331 of the ACA and to use the reserves in the Essential Plan Trust Fund to[4] pay costs for the roughly 730,000 lawfully present, non-citizens currently covered by the Essential Plan who are no longer eligible for federal subsidies because of their immigration status.

This decision by the federal government will save the State approximately $2 billion in FY 27 and $3 billion per year until the Trust Fund reserves are exhausted in 2-3 years by relieving the State of the responsibility to cover the Aliessa population under State-only Medicaid. The other implication of the State’s action is the loss of Essential Plan coverage for approximately 460,000 individuals (approximately 90% of whom are citizens and 10% of whom are lawfully present immigrants) with household incomes in the 200%-250% of FPL range currently covered by the Essential Plan, but who will now be ineligible to participate in a Basic Health Program plan because of the Program’s income limit of 200% FPL.

Only about 78,000 individuals in the 200%-250% income cohort purchased individual insurance policies using ACA premium tax credits before this group became eligible for the Essential Plan, so losing eligibility for the Essential Plan is likely to render most of them uninsured. With respect to this population, the Executive Budget Briefing Book says only that: “The State is committed to working with CMS, affected parties, and stakeholders to determine strategies which will provide affordable coverage for all New Yorkers.” Neither the Senate nor the Assembly offered any proposals to assist individuals in the 200%-250% of FPL cohort who are losing Essential Plan coverage.

The Community Services Society, in March of this year, published an excellent report by Elisabeth R. Benjamin and Mia Wagner that included an analysis of various options for providing coverage to this stranded 200%-250% of FPL cohort, as well as other lawfully present immigrants affected by HR 1.

A central assumption of the CSS report is that a significant portion of the cost of covering these populations can be offset by reducing the reimbursement rate to providers in the Essential Plan from the current rate of 220% of the Medicaid rate to an amount as low as 125% of the Medicaid rate.

By way of background, the Essential Plan initially paid a reimbursement rate of 100% of Medicaid for individuals who would be eligible for Medicaid, but for their immigration status, and 150% Medicaid for individuals with incomes above 138% of FPL. Beginning about five years ago, the State began to increase the reimbursement rate in what could be described as an opportunistic strategy: higher reimbursement rates reduced surpluses that, at the time, were essentially stranded in the Basic Health Program Trust Fund and paying the higher reimbursement rates was both fair (because it more closely approximated provider costs) and advanced the State’s goal of stabilizing the State’s provider system.

If reimbursement rates were reduced to 150% of Medicaid, the full annual cost to the State in 2027 of covering the 200%-250% of FPL cohort would be approximately $2.4 billion. The CSS report proposes, as an alternative, a $50 monthly premium for this group. They assume that only 25% of the currently eligible population would participate, which would reduce the 2027 full-year cost to the State to approximately $562 million.

A different approach put forth by Michael Kinnucan of the Fiscal Policy Institute (FPI) seeks to take advantage of the availability of ACA premium tax credits for the 90% of individuals in the 200%-250% cohort who are eligible for those subsidies. As shown in the following table from Kinnucan’s report, FPI proposes having the State cover the full cost of the member contribution for the benchmark Silver individual insurance plan (approximately $882 million) to take advantage of nearly $3 billion in federal subsidies that would be drawn down assuming full member participation.

The roughly 460,000 individuals in the 200%-250% of FPL cohort could lose coverage as early as July 2026 based on the State’s timelines. At a time when affordability is the cry in the land – and with healthcare expense often cited as second only to housing as a burden – it would be somewhat surprising if, as appears quite possible, the State does not find even a partial solution for this population in the FY 27 Budget.

Conclusion

I have been reading the classic Dickens novel A Tale of Two Cities. Most people are familiar with the metaphor, famously used by politicians ranging from Mario Cuomo in his 1984 convention speech to Bill de Blasio in his 2013 mayoral campaign, to contrast the lives of the rich and the poor. But there is also a secondary theme in the novel, which is the contrast between the complacency of London's established order and the revolutionary fervor building in France as longtime grievances remain unaddressed.

I don’t want to push the metaphor too far. The discontent in New York City can hardly compare to life in pre-revolutionary France, and the City’s grievances have much more to do with federal policies and the modern economy than they do with policy from Albany.

But there is a sense in which both the State’s and the City’s FY 27 budgets are likely to be relatively complacent, despite the high hopes of Mayor Mamdani’s restive base. It appears likely that the State budget will largely bail out New York City from its current budget problems without requiring the City to fundamentally change its cost structure. Mayor Mamdani has chosen to pragmatically accept half a loaf and presumably play the long game. He will continue to exaggerate the significance of largely symbolic victories on small parts of his affordability agenda while reversing positions or pausing actions on major planks of the platform on which he ran.

In a similar vein, Gov. Hochul is accepting the reality that the Climate Action Plan announced under her watch in December 2022 (albeit in response to the 2019 CCLPA enacted under Gov. Cuomo) is prohibitively expensive to implement. Reflecting her pragmatic nature and learned incrementalism in governing, she is walking back on the aspirational, fiscally impractical climate change goals. Her top Budget priority appears to be putting in place commonsense litigation reforms that will reduce auto insurance costs. The auto insurance affordability package is a worthy effort, and if it succeeds in saving every car owner $200, that will not be nothing. But it is hardly a legacy initiative.

Another, more consequential sign of complacency is the inevitable reversal of public employee pension reforms at a cost of many tens of billions of dollars over 30 years, when there is no compelling reason to do so other than election-year support from public employee unions.

The days of wine and roses have indeed returned to New York State government, but one senses that more challenging times are not that far away over the horizon.

Appendix: Budget Proposals Benefiting New York City

The measure of a State bailout of New York City requires a differentiation between (i) additional resources the State is providing New York City to help plug the City’s budget deficit, and (ii) general funding increases driven by current law, which presumably are already in the City’s base budget numbers. There is some subjectivity in making this differentiation, as well as whether revenue from proposed taxes would actually materialize, which at least partially accounts for differences in estimates of the amount of resources the State is making available to the City.

If the proposals included in the Senate and the Assembly in their One House budget resolutions that directly benefit New York City are adopted, then by my count, the additional resources that provide budget relief to the City would total between $7.2 billion and $7.5 billion. This amount is composed of approximately $2.5 billion between the initial Executive Budget ($1.0 billion) and the 30-Day amendments ($1.5 billion), $3.0 billion in new City taxes proposed by the Senate and the Assembly the revenues from which are likely to materialize, and between approximately $1.6 billion and $1.9 billion from additional spending by the Senate and the Assembly in their “One House” budget resolutions that service the legislature’s counterproposal to the Executive Budget.

At the risk of confusing readers with a blizzard of numbers, the total resource estimate is relevant to judging the size of the State’s bailout, while only the $4.6 billion-$4.9 billion included by the Senate and the Assembly in their One House budgets is relevant to solving the remaining City budget deficit of $5.4 billion. My specific count may underestimate the amount of budget relief for the City, particularly in the form of increased School Aid, although my count also includes at least $300 million of proposed tax revenue that may not materialize. It’s worth noting that the Mayor’s office – in pushing back against bond rating agencies downgrading their outlook for New York City’s credit rating – pointed to “$5 billion in additional funding to the City proposed in both the Senate and Assembly budgets.”

A bigger question than the amount of the bailout package is the extent to which new City and State taxes will be included in the final package. While the Executive Budget included no tax increases, both the Senate and the Assembly One House budgets include several proposals that would significantly increase tax revenue that flows directly to New York City, as well as to the State.

Neither House adopted Mayor Mamdani’s campaign proposal to increase New York City income taxes by 2 percentage points on filers with $1 million in income, which the Mayor now estimates would raise $3 billion annually. Instead, the Senate and the Assembly, through different proposals, would directly raise State income taxes on high earners. The State personal income tax proposals from the Senate and Assembly would raise $1.1 billion and $2.9 billion, respectively.

Since these State tax revenues would accrue to the State, not the City, they would only help address the City’s budget problems to the extent that the final Budget provided additional funding for New York City. The issue of whether these increased taxes flow to the City or the State may be academic, however, because Gov. Hochul is unlikely to allow these direct personal income tax rate increases to be included in the final Budget. Gov. Hochul has said repeatedly that she is opposed to increases in personal income tax rates, and she simply cannot afford to be rolled on this issue by the Mayor or the legislature.

An interesting and consequential question is how the Governor will view a technical provision proposed by both the Senate and the Assembly to reduce the value of the tax credit received by taxpayers who utilize the pass-through entity tax (PTET) provision. Taxpayers who take advantage of the PTET tax credit include hedge fund partners, law firm partners, real estate investors, and private equity principals — in other words, some of the highest earners in New York City.

Both the Senate and the Assembly would reduce the New York City PTET tax credit from 100% to 75% and the State PTET tax credit from 100% to 90%. The net effect is that it would increase the effective tax rate of taxpayers who pay the PTET by a little more than 1.0 percentage point, generating $700 million in tax revenue to New York City and $1.8 billion in tax revenue to the State. It remains to be seen whether Hochul will view this indirect increase in personal income tax liability as equivalent to a direct increase in personal income tax rates, which is the red line that she is unlikely to cross.

The largest single revenue-raising item that would flow directly to New York City in the One House budgets is an increase in the New York City corporate tax rate of approximately 1.8%. When combined with a 0.4% increase in the City’s Unincorporated Business Tax rate, these corporate tax increases would raise approximately $1.75 billion for New York City. The New York City corporate tax of 8.85% is on top of the State corporate income tax of 7.25%, which is why it was always disingenuous for Mayor Mamdani to imply that a 4.25% increase in the corporate income tax rate would merely be bringing New York in line with New Jersey.

Despite her initial opposition, I have long believed that the Governor will support increases in corporate tax increases, at least for New York City. The City needs additional resources, and there is not a strong enough constituency opposing corporate tax increases.

The Senate and the Assembly also proposed raising State corporate income tax by 2.0% and 1.75%, respectively, which should generate close to $2 billion in new tax revenue. In contrast to Mayor Mamdani’s campaign proposal, which unrealistically assumed that all proceeds of increased State corporate taxes would flow to New York City, the tax proceeds from the Senate and Assembly proposals would accrue to the State. Whether the Governor will increase taxes that fall on parts of New York outside of New York City remains to be seen, but in any event, this will not affect the amount of funding provided to New York City for budget relief.

The One House budgets include other miscellaneous new taxes that would flow directly to New York City, including an increase in the “mansion tax” on home sales in excess of $5 million in the five boroughs and a repeal of the sales tax exemption on gold bullion sales above $1,000. The legislature estimates this tax would produce $321 million for New York City, while repeal of the exemption on gold bullion sales would produce approximately $300 million in revenue for the City and an additional $600 million for the State. I suspect that most of the revenue from a repeal of the sales tax exemption on gold bullion sales would be unlikely to materialize because it would be easy to structure around, so it will be interesting to see how the Division of the Budget scores the proposal if it is adopted.

In addition to these revenue increases, the Senate and Assembly One House budgets include a range of proposals that, in aggregate, would send more money to New York City – by $2.0 billion and $1.5 billion, respectively. The largest funding increases are in areas in which a legitimate equity case could be made to increase funding to the City.

The Executive Budget’s increases in School Aid essentially follow current law and thus don’t provide budget relief to New York City. However, both the Senate and the Assembly increased statewide Foundation Aid (the major component in total School Aid) over the amount in the Executive Budget – by $675 million in the case of the Assembly and by $906 million in the case of the Senate. Given that New York City receives approximately 39% of Foundation Aid, we estimate that the One House budget resolutions, if adopted, would direct approximately $263 million-$353 million dollars to the City, which could be used for general budget relief.

Another significant funding increase in the One House budget resolutions is $300 million-plus annually for Aid and Incentives for Municipalities (AIM) funding. New York City was dropped from the AIM program in 2010, at a time when the City was in a stronger fiscal position than the State, as a result of the City’s strong economic recovery and the cumulative effect of the State’s assumption of a larger share of Medicaid costs every year. The reversal of fiscal fortunes between the City and the State since 2010 suggests that it no longer makes sense to exclude New York City from this general aid to municipality program.

The Assembly also wisely addressed an obvious inequity toward New York City by including $600 million to partially pay for the unfunded small-class-size mandate. Logically, requiring the State to pay for this small-class-size mandate, which applies only to New York City and could grow to as much as $1.8 billion annually when the mandate is fully phased in, should always have been at the top of the City’s list of demands when it complains of a lack of equitable treatment from the State.

There are two tables below; both were generated by Claude Sonnet 4.6 based on imported One House bills. I believe these are reliable presentations of the underlying data. The first table summarizes the One House tax proposals and whether the revenues would accrue to New York City or the State.

Proposed Tax Increases in Senate and Assembly One House Budgets

Revenue by Recipient (New York City vs. New York State)

Notes: Revenue estimates are annualized except where noted. State revenue items would benefit NYC only to the extent of increased State funding for the City. Gold bullion sales tax revenue is classified as phantom revenue because transactions can easily be restructured to occur in jurisdictions without such a sales tax. Personal income tax increases are identified as unlikely to survive budget negotiations based on Gov. Hochul’s stated opposition to direct PIT rate increases.

The second table indicates the increased funding proposals for New York City from the Senate and Assembly One House budgets:

Proposed Increases in State Operating Funding for New York City

Senate and Assembly One House Budget Proposals Incremental to FY 2027 Executive Budget

Notes: Amounts shown are annualized estimates except where noted. Multi-year totals are shown at their annual equivalent where possible. School Aid increases reflect 39% of the total amount proposed statewide in excess of the Executive Budget. The Senate and Assembly proposals overlap on some items (AIM, low-income family assistance, housing vouchers) but diverge on others: the Senate includes shelter reimbursement, TANF, and foster care aid not in the Assembly proposal, while the Assembly includes class-size mandate funding not in the Senate proposal.

Endnotes

[1] Legislative (LEG) Chapter 32, Article 3, Section 50.

[2] The New York City Comptroller, Mark Levine, estimates that the two-year gap between FY 26 and FY 27 could be as much as $3.6 billion higher than the Mayor estimates, but for purposes of this analysis, we will assume the Mayor is essentially trying to solve for a $5.4 billion deficit.

[3] NYSLRS Participating Employers: State agencies, counties, cities, towns, villages, miscellaneous employers, and schools.

[4] Technically known as the Basic Health Program Trust Fund.