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Virus fueling fiscal crisis for state, LI governments, experts say

Gov. Andrew M. Cuomo during a news conference

Gov. Andrew M. Cuomo during a news conference at Glen Island Park in New Rochelle on Friday.  Cuomo told New Yorkers to expect the virus, and its impact on life and therefore tax revenues, to linger. Credit: Bloomberg / Angus Mordant

Newsday is opening this story to all readers so Long Islanders have access to important information about the coronavirus outbreak. All readers can learn the latest news at newsday.com/LiveUpdates.

ALBANY — Whenever the fear, pain and loss of the COVID-19 virus ends in New York, taxpayers will still have a hefty bill to pay.

“The loss of revenue right now to state government is incalculable; you just have no idea,” Gov. Andrew M. Cuomo said this week. On Friday, Cuomo told New Yorkers to expect the virus, and its impact on life and therefore tax revenues, to linger.

“I think this could be a six-, seven-, nine-month affair,” Cuomo said of the life of the virus.

The bleak fiscal picture is similar in Nassau and Suffolk counties where tanking sales tax revenue — a major source of funding for local governments — puts more pressure on property taxpayers, fiscal experts said. One major cost the state and local governments share — Medicaid health care — is also expected to rise as more poor New Yorkers get sick and others lose their jobs. Medicaid was already such a fiscal burden that Cuomo had directed a $2 billion cut in the coming budget due April 1 and postponed another $2 billion in payments before the virus hit.

Nassau County Executive Laura Curran and legislators earlier in the week agreed to transfer more than $500,000 to the Office of Emergency Management to buy more equipment to respond to COVID-19.

“The loss of sales tax revenue could be substantial for our county so the 2020 budget could take a major hit,” said Presiding Officer Richard Nicolello. “People are not going out, they are not having dinner out, they’re not going to the movies, shows or concerts — they’re not spending — so basically I believe you’ll see a substantial issue for this county and for the state. But obviously, at this point, that’s secondary.”

The county collects about $1 billion in sales tax revenue annually, Nicolello said. Nassau’s operating budget is about $3 billion.

Suffolk County legislative budget officials cautioned that coronavirus made it difficult to project the county’s future financial state because the $3-billion annual budget relies on sales tax revenue, according to the nonpartisan Budget Review Office.

Driving lower tax revenue: falling gas prices triggered by an unrelated international oil production war; people spending less on goods, public events, restaurants, movie theaters and shopping malls, the report stated. The potential financial ramifications of coronavirus come months after a state comptroller’s report found that Suffolk had the most fiscal stress of any other county in New York in 2018.

Lance Reinheimer, director of the Budget Review Office, noted that gas sales account for one of the top five largest sales tax revenue generators for the county, and with lower gas prices and people driving less, that revenue will be lower.

“You start thinking about how things cascade," said Reinheimer. "If the magnitude of this grows, people may hold off on purchasing houses,” which could hurt the towns that rely on mortgage tax revenues.

And as sales tax and other revenues plummet, government costs for combating the virus skyrocket as it spreads faster than the traditional flu. Health officials said the coronavirus will hospitalize about 20% of those who contract it — forcing an increase in state costs to expand hospital capacity — and kills about 3% more. 

David Friedfel, director of state studies at the independent Citizens Budget Commission, said many financial analysts project a future similar to a recession, when government officials expect a 3.7% drop off in revenue.

“The big rub is that the state expected to be up 6.7% in revenue, so that becomes a 10% change,” Friedfel said.

State and local governments had counted on a continued expanding economy to provide more robust revenues before the virus hit, he said. But then the Dow Industrial Averages dropped 25% in just days.

Historically, the state would lose $34 billion in revenues over three years. State reserves and rainy-day funds are about $3.4 billion, if the state makes its scheduled deposit in March, he said. Even if revenues are flat this year, he said the state will have a $5.6 billion hole in its budget because growth was anticipated.

“Local governments will be impacted by the decrease in sales tax, but many can rely on property taxes, which aren’t affected as much the economy,” Friedfel said. “However, it’s still an issue for the taxpayers.”

The number of coronavirus cases continues to swell even if the economic impact remains uncertain.

“We are still ascending,” Cuomo said of confirmed cases. “We are still on the upward trajectory of this disease. This is going to get much worse before it gets better.”

“The dramatic decline in business will only get worse,” said Melissa Fleischut, president and CEO of the state Restaurant Association. “There is a growing fear among owners about how they will survive this crisis without meaningful assistance.”

But Cuomo said the state will be in no position to help.

“The state is not going to be able to compensate businesses for lost revenue,” Cuomo. “It would bankrupt the state.”

The other side of the ledger is ugly, too, the governor said.

“Your expenses have also changed dramatically,” Cuomo said.

That includes the state’s labor and material costs for testing thousands of people for the virus; the purchase of protective masks and other gear; contracting with private labs to increase testing; the production and distribution of hand sanitizer at a state prison to make up for a shortage on the open market. Cuomo and the Legislature approved a $40 million emergency spending measure March 3, then were   told the state’s share of an $8 billion appropriation to fight the virus would bring the state $35 million.

But Cuomo said that was insufficient to contend with the costs even before the virus grew much faster.

 The virus is forcing a recalculation of the state budget. However, on Monday, Cuomo underscored to reporters that he plans to pass a full budget on time: “April 1 is the budget.  

“The budget is premised on a revenue projection … based on a reality 60 days ago that no longer exists,” Cuomo said. On Tuesday, Cuomo reached out to state Comptroller Thomas DiNapoli for his financial advice, which Cuomo in the past has often dismissed.

"The world financial market volatility will no doubt impact our economic growth forecast for the next year and revenue from the financial sector,” Cuomo wrote to his fellow Democrat. “The COVID-19 epidemic could impact virtually every sector of society with school closures, travel disruptions, empty restaurants and hotels and canceled business meetings.

“I see possible major impacts on next year's forecast,” Cuomo stated, asking for the analysis by Tuesday.

"State and local governments should proceed with caution as they examine how this will impact budgets across the spectrum, from changes in consumer spending to expenses for rapid response to care for New Yorkers," DiNapoli said Friday. "We’ll be providing further analysis next week on the governor and Legislature’s previously released revenue estimates."

Analysis is also underway outside state and local government, but the outlook is just as unclear.

“Coronavirus has led to increased spending by states and locals (governments)   for prevention and treatment measures which are likely to escalate, and it will reduce economic activity and government revenues,” said Eric Kim, senior director at Fitch Ratings that analyzes governments for investors. “A severe downturn could pressure state and local governments' resilience.”

Governments have already started to look for help.

“I don’t see any possible way of states being able to handle this without federal help,” Cuomo said. But he added: “Nobody can tell what the federal government is going to do in response.”

Government leaders said no one knows what the total losses to state and county governments will be. But so far:

-The stock market, which provides 20% of state tax revenue, is down nearly 20%.

-Broadway, a billion-dollar industry, has gone dark.

-Sales tax revenue is sliding with reduced tourism.

— The NBA and NHL have canceled games, and college basketball games during March Madness have been suspended.

-Revenue from mass transit is down 14% to over 18%.

-With expected layoffs will come higher unemployment insurance costs.

-Overtime costs for business and government will rise for workers who are covering for colleagues infected and are quarantined for 14 days.

-Tax revenue on gasoline and air travel have fallen with reduced travel, and retail trade is fizzling; restaurants and bars are seeing fewer patrons. Restaurants and bars will be further impacted after tristate area governors said Monday that bars and restaurants will be shutdown except for takeout.

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