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Economics aside, a soaring deficit takes shape in Albany

ALBANY – The economy has been churning along. Wall Street has delivered a strong 2019. Personal income in New York State is growing and tax receipts are healthy. And not a day goes by without some big spending announcement – for this program or that community – by Gov. Andrew M. Cuomo.

Against that backdrop, New York State, according to Cuomo, is facing the greatest operating deficit in its budget since the Great Recession.

Come again?

The Democratic governor, enjoying the benefits of a good national economy, has ridden the fiscal waves for the past decade.

That wave is about to become gnarly for the governor and New York lawmakers.

More than three weeks beyond the statutory deadline, Cuomo’s office a week ago released a report detailing the financial condition of the 2019-2020 state budget at its midpoint as of Oct. 31.

The verbiage and numbers were alarming: The state budget faces a $6.1 billion deficit next year. That projection is up more than $2 billion from an estimate Cuomo’s budget office had made only six months earlier. The following years, the projection rises even higher.

“There can be no assurance that the state’s financial position will not change materially and adversely from current projections,’’ the midyear report warned.

If things get worse – say, the country enters a recession or Wall Street takes a major retreat – the financial plan floated possible steps: cuts to state agencies, delays in payments to local governments, such as schools, putting off construction projects and “extraordinary financing of operating expenses.’’

The main culprit

Much of the reason for the red ink is Medicaid, the insurance program for more than 6 million low-income New Yorkers. Medicaid services in the Empire State will cost the state, federal and local governments more than $74 billion this year.

But Medicaid has been facing a growing deficit, one that was not so quickly acknowledged in public by the governor. It wasn’t until the summer before a fiscal watchdog group, the Empire Center, found that the state last March, in the closing days of the state’s fiscal year, rolled over $1.7 billion in Medicaid payments to some 80,000 providers, like hospitals, into April – and, thus, the start of a new fiscal year.

Now, there is considerable mystery as the Medicaid deficit worsens. Last week, the administration revealed, on a chart contained in the massive midyear report, a $2.2 billion line item it called “Payment restructuring.’’ It explained that the $2.2 billion of the $4 billion Medicaid deficit would be closed by a “permanent adjustment to the timing of payments” owed to providers.

The remaining $1.8 billion in estimated Medicaid red ink will be addressed by what the report called “the savings plan.’’ That’s a fix that won’t be revealed by Cuomo until January when he presents his new budget plan for the fiscal year beginning April 1.

Old Albany standards

Fiscal watchdogs worry the state is papering over its fiscal woes and turning to old Albany standards, such as delaying payments owed to entities that provide services on behalf of the state.

“You try running your household expenses and then say, ‘I’m going to restructure my payments and that will make the problem go away,’ ’’ said E.J. McMahon, head of the Empire Center.

“If you think too hard about it it makes your head hurt,’’ he said of Cuomo’s plan to wipe out half the Medicaid deficit by restructuring the timing of payments to providers. “You just don’t make $2 billion vanish.’’

A variety of factors are causing the Medicaid problem. “The state would have known all those things, but it just didn’t adjust the budget the way it should have to find a way to curtail them or account for the rising costs,’’ said David Friedfel, director of state studies at the Citizens Budget Commission, another fiscal watchdog group. He had previous jobs on the Assembly’s fiscal staff and as a staff expert on Medicaid in the state’s budget division.

The governor of New York is given extraordinary power to adjust how state money goes out the door in any given fiscal year. In the 2019 budget, lawmakers handed him even more authority to do things like cut Medicaid spending after they approved the budget. “They just chose not to,’’ Friedfel said of the administration.

Watchdogs: gimmicks aplenty

Deferring payments is a gimmick, watchdogs say. “It’s not the right way to pay your bills. Paying December rent in January doesn’t save you any money. If the state continues to do that, the problem can and will snowball … and soon they’re going to be in real trouble,’’ Friedfel said.

The problem is serious on any number of fronts. First, Medicaid is a huge cost. Together with what the state provides to local schools, the two programs account for 45% of the state’s operating budget.

Second, New York relies on revenues derived from Wall Street and quite heavily on taxes from wealthy residents. In past recessions, New York felt the fiscal squeeze worse, relatively, than other states.

The Cuomo administration did not comment on the blistering attacks from budget watchdogs about the fiscal picture.

But officials stressed that work is underway on a new state budget plan that will keep spending under a self-imposed 2% cap that, in turn, will help resolve the Medicaid problem. The Medicaid deficit, it would appear, will be addressed by aiming solutions at the big health insurance program; some groups and lawmakers want the solutions to be spread out across the full state budget.

Freeman Klopott, a spokesman for Cuomo’s budget division, said the governor in 2012 began focusing on ways to slow Medicaid spending. He blamed “increased utilization and medical inflation nationally” as the culprits for creating what he called a “structural imbalance” in Medicaid’s financing.

The Medicaid deficit drivers

There are many explanations offered for the Medicaid red ink. When the state began its version of the Obamacare health system, a huge surge of people applied for the coverage on the private marketplace, but many were placed into Medicaid because that was the program for which they qualified. That growth, Friedfel said, has flattened out the past year or so.

The state’s population is also aging, so Medicaid's long-term health costs are rising, as are payments to financially distressed hospitals.

Also a major driver: the state’s minimum wage program. Enacted with Cuomo’s push in 2016, the higher minimum wage is now affecting the state’s own financial house in ways that the state did not fully project. A line item on page 97 of the new midyear report shows the cost of Medicaid paying providers for the higher minimum wage requirements stood at $703 million last year, rising to $1.5 billion this year, $1.8 billion next year and $2.2 billion in two years.

When first enacted in 2016, the $15 minimum wage law raised concerns, for some, about Medicaid, which helps cover the salaries of people at entities contracted to provide Medicaid services. “They didn’t have the money to pay for it on their own,’’ State Sen. Liz Krueger, a Manhattan Democrat, said of the providers. “I’m quite sure the Legislature was saying it, and the governor continued to take the position that these agencies can absorb the (minimum wage) costs in their contracts with the state. But it just wasn’t going to be true.’’

A new session awaits

All of this comes as lawmakers prepare to return in January for a new session. A new budget, closing the deficit, is due by March 31. It comes also as lawmakers enter the 2020 re-election season, a time when more spending, not less, is generally the order of the day in Albany.

A tussle, the likes of which have not been since since Cuomo’s first year in office in 2011, now awaits.

Assemblyman Richard Gottfried, a Manhattan Democrat who chairs the Assembly health committee, said Medicaid spending is rising not because of some programmatic problem but, chiefly due to long-term care costs and, within that category, home care expenses.

Gottfried said some of the “crisis atmosphere is caused by the completely artificial Medicaid cap the governor had us enact 8 years ago. The cap has no relationship to anything like the demographics of the aging population.’’ He said long-term care costs need to increase by more than the cap’s 2% level.

Lawmakers will be pushing for tax hikes, not health cuts, in 2020. That is a certainty. “We need to think about revenue options,’’ Gottfried said.

Krueger, chair of the powerful Senate Finance Committee, which will consider Cuomo’s budget plans in 2020, said many questions have been raised about the Medicaid deficit numbers.

“He knew this was going to happen because (the state) has not been paying the full 12-month Medicaid bill in a 12-month period. He’s been kicking the can down the road,’’ she said.

Having more New Yorkers get enrolled in Medicaid, Krueger said, “is a good thing for the state because more people with health insurance means more people with preventive care, decreased health problems, decreased emergency room visits. It’s a win-win, but it is increasing Medicaid costs that we did not plan on."

Shaping up is a bitter battle by Democrats who control Albany over Medicaid, one of the party’s most protected programs.

New York State, watchdogs say, needs to do more than hope the national economy and stock market stays healthy. “We are now very vulnerable,’’ McMahon warned.

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