Table of Contents THE SOURCES OF RECURRING SAVINGS
Overview of the Sources of Savings
Social Welfare Savings
Public Education Savings
Debt Service Savings
Savings in Other Services
Tax Expenditure SavingsAN OPTIMISTIC VIEW OF THE FUTURE
First Things First
Competing Paths to Enhanced Competitiveness
Tax cuts
Improved infrastructure
Better services
This Final Report synthesizes the five reports prepared by the Budget 2000 Project Subcommittees. A working group composed of the Executive Committee of the Citizens Budget Commission and the co-chairs of the Budget 2000 Project Subcommittees oversaw development of the Final Report. This group was chaired by Lawrence B. Buttenwieser and included Deborah A. Buresh, Evan A. Davis, Paul Dickstein, Bud H. Gibbs, David R. Greenbaum, William H. Hayden, Lawrence S. Huntington, Eugene J. Keilin, William Keller, James A. Lebenthal, Richard A. Levine, James L. Lipscomb, Lionel I. Pincus, Hector P. Prud'homme, Richard Ravitch, Edward L. Sadowsky, Lee S. Saltzman, Frank P. Smeal, Lewis Bart Stone and Eileen S. Winterble.This report was written by Charles Brecher, Executive Vice-President and Director of Research. Michael Anderson completed the word processing and Dean M. Mead, Assistant Director of Research, prepared the report for publication.
INTRODUCTION
In May 1995 the Citizens Budget Commission convened a group of concerned and influential New Yorkers to consider the fiscal future of New York City and New York State-the Two New Yorks. They had two concerns.
First, the conferees were concerned that both municipal and State governments were saddled with "structural deficits."
Each year, projections of spending necessary to sustain operations exceeded projections of revenues available from existing taxes and intergovernmental aid. In the spring of 1995 the City was facing a fiscal year 1996 budget gap of about $2.7 billion and the State a gap of over $4.5 billion.
Moreover, the earlier responses to these structural deficits had been shortsighted and counterproductive. Politicians raised taxes, which increased revenues in the short-run but eroded economic growth over the long-term; cut services to citizens by eliminating jobs without enhancing productivity; or engaged in fiscal maneuvers which deferred expenditures and unjustly passed the cost of current government services to future generations of New Yorkers. Notable among the latter items were bond refundings that postponed repayment of debt and a variety of sometimes imaginative "one-shot" items that also served only to delay inevitable bills.
In brief, new policies were needed to deal with recurring fiscal problems. It would no longer suffice to impose repeatedly a choice among higher taxes, reduced services, and the inequity of passing costs of current services onto the next generation.
Second, the conferees were concerned that the economic competitiveness of New York State and City was in a long-run decline.
The competitive deterioration of New York is evident in a variety of statistics, but none are more compelling than those measuring economic opportunity. In 1950, New York was the nation's greatest concentration of employment. With 5.6 million private sector jobs, the state offered more employment opportunities than any other by a wide margin; second-place Pennsylvania had only 3.2 million private jobs. New York City also stood out as a center for work opportunities. With almost 3.1 million private jobs, the city was the country's greatest urban employment center; alone, it accounted for nearly 8 percent of the nation's total private sector payroll.
At mid-century New York was not only large but unusually rich. New York State led the nation on both a total and per capita basis. Its per capita income in 1950 was $1,834, fully 22 percent above the national average. In then-thriving New York City, per capita income exceeded the statewide average by 16 percent and the national average by 43 percent.
Today, decades of competitive decline have knocked New York from the top of the economic mountain. From 1950 to 1995, private sector job growth in New York State totaled 32 percent, compared to 150 percent for the nation as a whole. In New York City private jobs actually declined nearly 8 percent.
New York has also become poorer relative to the rest of the nation. Total personal income is now greater in California. On a per capita basis, income in New York State remains above the national average, $24,846 versus $20,809, but average income is now higher in New Jersey, Connecticut, and the District of Columbia. In New York City the relative decline has been particularly sharp; per capita income fell from 43 percent above the national average to 30 percent above.
Neither structural deficits nor economic decline can be overcome immediately, but the conferees in May 1995 agreed New Yorkers should seek to remedy the situation before the start of the next century. The outcome of the conference was an elaboration and refinement of a set of principles to guide the development of new fiscal policies for the Two New Yorks. There was widespread agreement on an ethical and economic framework recognizing that governmental activities are essential to the well-being of society and that in a federal system such as the United States', state and local governments have multiple functions to perform. The group acknowledged the futility of seeking a simple formula to determine the size of state and local governments, but agreed that public officials should strike a widely acceptable balance among three criteria-competitiveness, comparative advantage, and local values.
Competitiveness. Changes in the national and international economies are intensifying the competition for people, capital, and jobs. Important elements in the competitiveness of a jurisdiction are the regulatory restrictions on inhabitants and businesses and the "price," in the form of a tax burden, imposed for public services. Other things being equal (which, as noted below, they rarely are), residents and businesses will seek to locate in jurisdictions that impose less costly regulations and provide equivalent services at lower tax rates. Thus an important constraint on the scale of state and local governments is the tax burden, which cannot be excessive relative to competitive locations.
Comparative advantage. At the same time, competitiveness does not require that all governments charge the same price. Consumers will pay higher prices for better state and local services. Jurisdictions which design and implement a package of services that better satisfies certain people's desires will be able to tax more in order to pay for these services. For example, communities with highly effective school systems successfully sustain higher tax rates than communities with less effective schools.
The particular services in which a jurisdiction seeks to specialize and develop its comparative advantage vary. Governments that develop expertise in certain functions, whether education or policing, may capitalize on this advantage and provide more of such services. Areas with unique natural resources or especially rich cultural endowments may allocate more resources to promoting tourism, while those specializing in information-oriented industries may invest more in telecommunications infrastructure or educational services. In brief, there are sound economic reasons why jurisdictions do not offer identical packages of services, and why tax burdens may vary among jurisdictions.
Local values. Jurisdictions also differ in the characteristics, and thus values, of their population. While most areas, especially large urbanized states, embrace a heterogeneous population, individuals and families with similar traits and heritages tend to cluster together. This has led to areas, especially local jurisdictions, with residents who share distinctive values about the scale and mix of public services.
Examples of communities with distinctive values for public services can be found in geographically diverse areas. Coastal towns in California attract citizens who support environmental conservation; warm weather in Arizona and Florida attracts residents who favor services directed to senior citizens; the Progressive tradition of some Midwestern cities continues to attract citizens with inclinations to rely on government for promoting social causes.
The values of New Yorkers have played a strong role in shaping policies in the Two New Yorks. Citizens' awareness of their immigrant roots and the importance of facilitating social mobility has led to extensive government involvement in expanding educational opportunities, promoting liberal views of social justice and encouraging the development of cultural institutions. The values of New Yorkers may be changing, but they are an historical example of how values influence the scale and mix of governmental activity within the context of a federal system. In sum, the activities or policies of New York City and New York State governments may differ from their competitors due to distinct advantages and local values, but the tax burdens they impose are still constrained by the criterion of competitiveness.
These three criteria-and the premise that structural deficits, and the depressing choices they impose, must be eliminated in order for the Two New Yorks to enjoy a more promising millennium-were the basis for a two-year research project by the Citizens Budget Commission to develop recommendations to guide the fiscal policies of New York City and New York State as they enter the 21st Century. The project is called Budget 2000.
THE SOURCES OF RECURRING SAVINGS
If the Two New Yorks are to balance their budgets while providing a set of competitive public services, then their leaders must identify and implement measures that generate recurring savings. Ways must be found to lower the costs of governments while sustaining or improving the quality of their services. This was the task the Citizens Budget Commission set for itself.
State and local government spending can be divided among five major categories:
Social welfare-This category includes income maintenance, medical care, and social services for the less fortunate. In New York these items comprise nearly one of every three dollars spent by the State, City and other localities.
Public education-Elementary and secondary education is provided by local school districts with financial aid from the State. In New York, this accounts for more than one-fifth of all State and local spending.
Debt service-When governments make large-scale capital investments, they typically finance the project by borrowing using long-term bonds. The repayment of these loans is called debt service, and in New York it accounts for about 7 percent of all State and local spending.
Other services-States and localities provide a wide range of services other than social welfare and basic education. No single service represents an unusually large amount, but together this diverse mix of services accounts for about four of every ten dollars spent by the State and localities in New York.
Tax expenditures-Governments tax as well as spend, and sometimes provisions of tax laws give special incentives through deductions or exemptions for favored types of behavior. These provisions, known as tax expenditures, promote activities such as housing, economic development, and social welfare in a manner parallel to direct government expenditures. While there is no aggregate budget for all State and local tax expenditures, the sums allocated in this way by the Two New Yorks are substantial.
The prospects for identifying significant new efficiencies in these areas are strong, because spending in New York far exceeds national averages. Measured relative to the size of its economy, New York's state and local expenditures exceed the national average by 55 percent for social welfare, by 44 percent for debt service, by 29 percent for other services, and by 18 percent for education.
Moreover, in many cases the reason for the higher spending is not better services; rather it is higher costs for the same unit of service. For example, the average annual cost of keeping a person in a state prison is 23 percent higher in New York than in the average state, and for local jails the rate in New York is double the national average-$29,300 versus $14,700. Similarly the annual operating cost per mile of highway in New York State is about three-and-a-half times the national average-$40,800 versus $12,000. And the annual cost per patient in public mental hospitals in New York State was 25 percent above the rest of the nation-$118,600 versus $95,900. Underlying these high costs is a pattern of excessive staffing and generous compensation for public services. Average salaries for public service employees in New York State are about 27 percent above the national average, and the relative number of public service workers also is about 25 percent greater in New York State than in the rest of the nation (63.5 workers per 1,000 population versus 51.0 nationally). These revealing statistics indicate that substantial savings can be achieved without diminishing the quality or scale of state and local services.
In order to identify the policies that would promote balanced budgets and a competitive public sector, the Citizens Budget Commission initiated a review of each of the major areas of expenditure, as well as a consideration of tax policy and service and infrastructure needs. The reviews were conducted by three committees of CBC trustees, which prepared the five reports that accompany this document. The scope of these reports extends beyond a search for savings and includes policies to enhance services, improve infrastructure and lower taxes, but their common first step is to identify the expenditure reductions and related measures necessary to yield sufficient resources for balancing budgets and achieving other high-priority goals.
The astonishing results of CBC's research are summarized in the table below. The overall savings are at least $8.0 billion annually for the City and $4.8 billion for the State, for a total of $12.8 billion. Moreover, if, as described below, the restructuring of service delivery is pursued aggressively and is successful, and if the federal government cooperates in social welfare reforms, then the total savings would rise to $19.7 billion.
TABLE 1 Sources of Savings for New York State and City (billions of dollars in fiscal year 1995) New York City New York State Total Social Welfare $3.6 $(0.6) - 4.5 $3.0 - 8.1 Programmatic Reforms - 3.0 3.0 State Assumption 3.6 (3.6)* 0.0 Federal Cooperation - 0 - 5.1 0 - 5.1 Public Education - $0.4 $0.4 Debt Service $0.3 $0.2 $0.5 Other Services $3.6 - 4.5 $4.8 - 5.7 $8.4 - 10.2 Tax Expenditures $0.5 - $0.5 ________________________________________________________________________ TOTAL $8.0 - 8.9 $4.8 - 10.8 12.8 - 19.7 *This is the added expense to the State of assuming current local government expenses. The amount is less than combined city and county expenses under current policies because the State would benefit from the savings associated with the programmatic reforms.
It should be noted that the dollar values in the table are expressed in terms of savings that would have been achieved if the recommended policies had been fully implemented in fiscal year 1995. Valuing savings in this retrospective way is fiscally conservative because it does not require making projections of future economic conditions, welfare caseloads, and other variables; instead, actual circumstances in 1995 are used as a basis for the calculations. No secondary impacts from the policy changes are assumed.
Social welfare programs account for between $3.0 billion and $8.1 billion in savings. At the core of these savings is a set of proposed programmatic reforms that would reduce expenditures over 30 percent without lowering cash benefits to the poor. This equals $3.0 billion in lower spending by the State.
Federal cooperation could yield even more. The Federal government finances nearly half the total cost of many social welfare programs. If the Federal savings made possible by State programmatic reforms were shared with New York, the gain could be as much as an additional $5.1 billion. The possibility of realizing these savings is enhanced by the inclination of federal officials to convert current funding levels into block grants and their willingness to consider proposals for waivers to rules in order to give greater flexibility in a state's use of already budgeted federal funds.
Finally, State assumption of local social welfare costs would save New York City and counties across the state large sums. While additional State spending would be required to offset the local fiscal relief, the state's broader tax base is a preferable source of financing.
The core programmatic savings derive from four strategies:
Streamline Administration. The current patchwork of separate county social service agencies generates excessive administrative costs and unequal treatment of clients. The State should assume full responsibility for administering public assistance, foster care, and Medicaid.
Statewide administration would also facilitate more extensive use of computer technology in program administration, which would be particularly beneficial in improving child-welfare services. Front-line workers in the foster care system, who make complicated and life-changing decisions each day, should be supported by computerized systems that promptly provide relevant data about the case's history, appointments and paperwork requirements, so that they can effectively interact with the court system. This would save lives as well as money.
More sophisticated information technology should also enhance child support collection efforts. The Child Support Enforcement System is a program that recovers child support payments from non-custodial parents on behalf of poor children. Public assistance families receive $50 dollars per month from recovered funds; the remainder reimburses the State for its aid payments. The program has been relatively unsuccessful in New York, where only 7 percent of AFDC payments are recovered compared to 12 percent nationally.
For Medicaid, centralized administration could greatly improve the State's ability to recover payments from the estates of long-term care recipients. The currently decentralized process provides little incentive for counties to pursue estates because they receive only 10 percent of the proceeds. In 1993, for example, the New York City Department of Social Services recovered less than one-half of one percent of nursing home payments; some state-administered programs recovered more than 3 percent.
Apply Managed Care Concepts to a Wide Range of Services. In the health care industry the concept of managed care has gained wide support as being cost-effective. While there have been occasional abuses which underscore the need for appropriate regulation and oversight, the basic strategy is sound.
The two key elements of managed care are "capitation" payments and reliance on competition to set payment rates. That is, providers receive a fixed sum per person enrolled and are responsible for caring for those assigned to them; however, the organizations are free to develop the most efficient mix of services and staffing. The amount they are paid for their services is set through a competitive bidding process, which drives down prices.
A number of states are applying managed care concepts to the provision of acute medical care services under Medicaid. Arizona has successfully applied the concepts since 1982, and more recently several other states have followed suit. New York State has applied for permission from the federal Department of Health and Human Services to use this approach extensively. This proposal should be implemented on a timely schedule.
Savings in medical care will derive from two pressures. First, the competitive pressures on managed care organizations will lead them to seek providers, especially hospitals, with the lowest unit costs. Second, capitation payments create financial incentives for managed care organizations to better manage the utilization of medical care, although oversight of managed care organizations is essential to guard against inadequate provision of care. New York's current high rate of inpatient and outpatient utilization should be reduced through elimination of unnecessary or ineffective services.
The managed care concepts should not be limited to acute medical care. Experimental programs are demonstrating their effectiveness for long-term care as well. The high cost of nursing homes and home care in New York would be lowered through selective purchasing by managed care organizations. Similarly, the financial incentives of capitation rates create pressures to rationalize currently high utilization rates, especially for home care. Managed care organizations would have incentives to limit home care hours to appropriate amounts, a feature notably lacking in current organizational arrangements.
Capitation combined with managerial flexibility would also reduce foster care expenditures. Agencies obliged to engage in competitive bidding would be forced to lower their unusually high administrative and oversight costs. Greater flexibility in determining the specific needs of children should reduce utilization by lowering the average length of time children spend in foster care and speed their return to natural families or their adoption.
Redesign Counterproductive Practices. Some of the high spending in New York results from policy choices which, however well intentioned, turn out to be mistakes. The three most significant are the expansion of the kinship foster care program, support of long-term care for affluent individuals or individuals with families who could contribute to their care, and support of relatively high-cost institutional services for the mentally ill and developmentally disabled.
Kinship care-foster care provided by relatives of the foster child-has played an important role in driving up New York's foster care expenditures. The explosion in kinship care beginning in 1986 accounted for 72 percent of the total increase in foster care cases in subsequent years, and the large number of children in the paid care of relatives largely explains why New York has a much greater foster care caseload than the rest of the nation. To reduce New York's enormous kinship foster care caseload, new administrative practices should be initiated. Kinship placements should be used only when the responsible relatives agree to initiate proceedings to become permanent guardians of the child and complete those proceedings within two years. In addition, payments to relatives caring for foster care children should be set to equal public assistance allowances rather than the higher rates paid for care by unrelated adults.
Medicaid is the major source of public funding for long-term care. New York, more than most other states, has permitted Medicaid to fund middle-class and more affluent families as well as the indigent. A cheaper and more equitable approach is to require non-indigent clients and their families to pay their own way by planning ahead and purchasing private long-term care insurance.
This approach requires a double-edged strategy of tightening eligibility rules to limit access to Medicaid benefits and offering incentives to purchase private long-term care insurance. If Medicaid remains a widespread option for middle class residents, it will be impossible to create a viable market for private insurance. Several states, including New York, have been experimenting with subsidizing long-term care insurance. Public funding may offset part of the premium charges or supplement the private benefits by offering Medicaid-financed services after the private insurance benefits are exhausted.
A variety of measures could limit eligibility for Medicaid long-term care services. Most notably, New York's interpretation of the federal Medicaid abandonment legislation should be revised to resemble that of other states, where eligibility is limited to those who are truly abandoned by their spouses. In addition, New York's "spend-down" rate could be brought closer to national norms through lower income limits for patients, lower income limits for spouses, lower asset limits for spouses, and time limits on asset transfers for home care cases.
The implications of these approaches to curbing eligibility vary somewhat. None would, by themselves, lower the quality or volume of services that clients receive. Lower income limits would reduce the discretionary income, and hence the standard of living, for clients and spouses. Lower asset limits and a revised interpretation of the federal abandonment law would lower available income for spouses only if assets were income-producing. The greatest impact of asset limitations would be on the heirs of clients, whose inheritances would be reduced.
New York State's treatment of the mentally ill and developmentally disabled is distinguished by greater reliance on care provided by large institutions and by higher per diem costs at those institutions. Expenditures for each type of beneficiary are well above national norms: For Intermediate Care Facility (ICF) services to the developmentally disabled, New York's average annual expenditures are nearly $111,000 compared to about $62,000 for the rest of the nation. Equivalent figures are not available for Medicaid payments to psychiatric hospitals, but the general cost per admission to psychiatric hospitals in New York State is $30,000 versus about $17,000 nationally.
With respect to services for the developmentally disabled, the goals should be to reduce the number of individuals cared for in State institutions and, more importantly, to lower the average cost of care in facilities. The reason that New York has more patients in intermediate care facilities is not that a larger share of New Yorkers are developmentally disabled. Rather, the State overuses these facilities by permitting a larger share of families with developmentally disabled children to rely on Medicaid. If the income and asset rules for eligibility were modified to require greater contributions from parents, the caseload would not be twice the national average.
A more important approach to lowering Medicaid expenditures for the developmentally disabled is to lower the average per diem costs of intermediate care facilities. First, fewer clients should be served in large State facilities and more in community-based services. Second, the per diem costs of all types of residential facilities should be lowered by introducing competition.
Align Unusually Generous Benefits More Closely to National Norms. For some social welfare programs, the problem in New York is relatively generous benefits for recipients. The benefit reductions most justified are in foster care maintenance payments, Medicaid optional service benefits, and SSI congregate-care payments.
New York State's cash benefits under AFDC, Home Relief and SSI also exceed national norms, but these benefits are required to meet humane standards. Further reductions are not warranted.
A significant factor causing high foster care spending in New York is relatively generous maintenance payments to foster care families. New York should set maintenance payment levels at national averages adjusted for local cost of living differences.
New York provides an unusually broad range of optional benefits under Medicaid with costs well above national averages ($991 versus $511 per beneficiary in 1993). Some carefully planned changes in optional benefits could yield modest expenditure reductions. Cuts in optional services should be restricted to those that are not essential to effective treatment and are not likely to result in substitutions for more expensive treatments. For example, eliminating prescription drug coverage would make other services, such as physician office visits, highly ineffective and increases expenditures for other covered services. Eliminating coverage of the optometry option would yield increased spending on ophthalmologists. Two potential candidates for cuts are dental and transportation services (Medicaid pays for either subway, taxi, or private car service to medical providers), although further analysis should be initiated to determine the likely impacts of such restrictions.
Congregate carethat is, special group living arrangements with nonmedical supervision for the mentally and physically impairedtypically costs more than the basic federal and state cash benefits provide. All but ten states supplement the additional costs of congregate care. The state supplements range from $702 monthly in Maryland, where intensive supervision is provided to less than $2. New York's payments vary by the level of care provided, and range from about $266 to $483 monthly. Reducing congregate care payments to the national average, adjusted for cost-of-living differences, would reduce spending for these purposes about 25 percent. The implication of such a reduction is that congregate care providers in New York would have to provide services as efficiently as their counterparts in other states without reducing services.
The four strategies described above are at the core of the CBC's program for redesigning social welfare programs. If implemented fully in fiscal year 1995, they would have saved the State about $3 billion. However, two other sources of social welfare savings also are important.
First, streamlined State administration of social welfare programs should be accompanied by full State funding of the non-federal portion of these activities. While this represents an added expense for the State, there is an offsetting savings for the City and all other localities in the state. In fiscal year 1995, New York City spent about $3.6 billion of local tax funds on these social welfare programs, and this sum would be a savings for the City. Additional savings would be available to all counties across the state. The added spending for the State is an offsetting $3.6 billion. Because it would benefit from the programmatic reforms that reduce costs, the added State spending is less than the combined savings to the city and counties statewide.
The case for State assumption of current local social welfare costs rests on more than the important administrative efficiencies. Using the statewide tax base to finance these activities would permit areas like New York City and Erie County to compete more effectively for jobs because their local tax burden would not be disproportionately high because they house concentrations of less fortunate New Yorkers.
A second critical issue related to social welfare reforms is how the federal government will respond to the recommended changes. As noted, their cooperation is necessary for some measures. Equally important, federal taxpayers will save as much as state and local taxpayers, because these programs are funded approximately 50 percent by federal funds. Depending on the extent to which the federal government shares these savings with New Yorkers, the estimated State savings range from nothing to as much as $5.1 billion. Also as noted earlier, block grants and waiver proposals are mechanisms with successful precedents for realizing these savings.
Public education should not be a major source of savings. For the Two New Yorks to compete effectively in the next century, their public schools must provide students with a high quality education. While statewide spending per pupil in New York is third-highest in the country and about 31 percent above the national average, and in New York City spending per pupil is 17 percent above the national average, this relatively high spending does not always yield an adequate education. This is especially true in New York City, where most students perform far below national norms on standardized tests. Within New York State, the City's schools account for more than seven of every ten students who test below norms for their grade.
For these reasons, the accompanying report on public education focuses on how to achieve greater returns from current investments in New York City public schools. While additional spending may eventually be warranted, an essential prerequisite is a more accountable school system.
Two strategies are recommended to improve school performance. One is to harness the innovative energy of competitive pressures, using four specific measures. First, the New York City Board of Education should launch an experiment to fund vouchers for selected low-income families with children in the worst-performing public schools. Second, the State should authorize new "charter schools" to enable innovative sponsors to serve publicly funded students in the City. Third, for-profit firms should be authorized to compete with civil servants for the provision of some instructional services within public schools. Fourth, parents should be given more choice in selecting schools within the public system.
Even when these initiatives are implemented successfully, over a million children in New York City will continue to rely on the public schools. Accordingly, the second strategy is to revamp the way in which these schools are governed and managed. At the highest level, the Board of Education should be more directly accountable to the City government that funds it and whose leaders must stand for election. At middle levels, redundant and dysfunctional structures, such as the community boards, should be eliminated. At the school level, principals should not be eligible for tenure, but should be given authority to function as line managers and held responsible for performance; similarly, teachers should not be protected by permanent certification, but should be required to demonstrate their continued competency by renewing their certification at regular intervals. Financial and other incentives should be used to reward both principals and teachers who do their jobs well. In addition, resources now earmarked for special and bilingual education programs should be allocated with greater flexibility, and the students served by these programs should be better integrated into regular classroom activities.
While the thrust with respect to public education should be achieving greater returns from current investments, there is one important potential source of savings. New York State provides significant financial aid to all school districts. Reductions should be made in the aid provided to wealthy school districts. Downstate suburban schools, for example, spend on average 76 percent more per pupil than the national average. While residents of those districts should continue to be free to make that choice, the amount of school aid supporting this high spending is excessive.
New York State aid for education is distributed to local school districts through nearly 50 different aid formulas and grant programs. While these mechanisms determine aid to a district based largely on its number of qualifying students, they are adjusted to account for differences in wealth and income in communities throughout the state. The purpose of these adjustments is to provide more aid per pupil to districts in poorer communities.
In some ways, this system accomplishes its redistributive goals: State aid per pupil in the poorest districts is more than five times greater than the figure for the wealthiest districts. Despite their relatively higher level of State aid, however, the poorest districts, on a per pupil basis, spend less than one-half the amount spent by the wealthiest school districts. Only Alaska has a wider disparity between its wealthiest and poorest districts.
A major reason for the large differences in spending between wealthier and poorer districts is that the current State aid mechanisms contain a minimum flat grant that goes to all districts, regardless of wealth. In 1988, the New York State Temporary State Commission on the Distribution of State Aid to Local School Districts (the Salerno Commission) recommended simplifying the system of State education aid, acknowledging the increased costs associated with at-risk students in funding formulas, and recognizing differences in costs among regions in the formulas. The 1993-94 State budget partly followed these recommendations: categorical grants and supplemental aid programs were folded into general operating aid, at-risk students were weighted more heavily in distribution formulas, and actual spending levels, which reflected regional differences in costs, were given a greater impact in allocating aid. However, these changes were accompanied by transition adjustments that maintained the flat grant, limited the increases that poorer districts could receive, and established hold-harmless provisions that prevented wealthier districts from losing aid. In subsequent years, the adjustments have amounted to a freeze of State aid; in most programs, the level of state aid to a school district remained the same as it was the previous year.
In the future, moves to implement fully the principles of the Salerno Commission will require that aggregate State education aid be reduced. This should be done by holding harmless the most needy districts, including New York City, and imposing aid cuts on wealthier districts. However, localities should maintain the discretion to invest their own resources to support their children's education; that is, they could sustain spending levels with additional local tax resources. If aid cuts of 20 percent were imposed on districts with above-average tax bases, then the annual savings would be about $400 million.
Debt Service Savings As noted earlier, debt service is the payment of principal and interest on bonds issued to finance large capital projects. Debt service can be lowered by scaling back capital investments, but this is not the best approach for the Two New Yorks. Instead, research summarized below points to a need for even greater capital investment. The preferable source of savings is to streamline the procedures for implementing capital projects. And the enlarged investments should be guided by an improved capital planning process that gives adequate attention to preventive maintenance.
Streamline project implementation. New York's governments and public authorities manage annual capital investment worth $10 billion. They often achieve good results, but outdated procedural requirements add to costs.
A frequently cited complaint is that capital investment is slowed greatly (and thus made more expensive) by sometimes convoluted and repetitive reviews and approvals and by numerous handoffs from stage to stage. A secondary effect of an inefficient process for project management is that contractors perceive government as difficult to deal with, and thus raise their bids above what they would offer for the same work with a more cooperative owner.
The results of such difficulties are substantial delays and inflated construction costs. Two reports of the Citizens Budget Commission in the late 1980s determined that City capital projects were beset by huge delays and cost overruns. A panel of distinguished business leaders found similar problems, reporting in 1989 that "on average, City construction projects require between 3 and 6½ years to achieve substantial completion from the date they first appear in the published commitment plan, even though almost two-thirds of the projects are less than $1 million in size and only 7 percent exceed $10 million...[B]etween 1 and 1½ years are consumed by multiple reviews and approvals needed from City oversight groups-some 25 to 30 just to the initiation of construction, plus additional reviews if state or federal funds are involved or a site must be acquired."
The most significant action taken by the City to improve accountability and efficiency in implementing capital projects was the establishment of the Design, Award and Construction Project Tracking System, which enhanced the City's knowledge of the status of its thousands of individual projects. With this information came a greater capacity to identify problems and to expedite completion. Additional actions have been taken by the current and recent mayors to centralize oversight and control over implementation and reduce waste.
Despite these improvements, there is still room to speed the City process. In addition, similar problems exist in the State and the public authorities, but without the same remedying actions taken by the City.
The most significant project implementation issue is the State's Wicks Law. It requires that the State, local governments and school districts divide all contracts of more than $50,000 into at least three separate sub-contracts-electrical wiring and lighting, plumbing and gas fitting, and heating, ventilation and air conditioning-plus a fourth to a general contractor for the remainder of the project.
The original intent of the law, first passed in 1912, was to curb corruption in the building industry by requiring local governments to act as their own general contractor over projects as a whole. It was believed costs of construction would be lower if public entities coordinated the many aspects of a construction project rather than hiring firms to do so. However, in practice, local officials have proved ineffective as general contractors and the practical impact of this requirement is to increase costs.
The New York City School Construction Authority (SCA) was created in 1988, in part for the purpose of circumventing the Wicks Law's negative effects. A study commissioned by the SCA five years later concluded that projects built under Wicks Law requirements cost more and take longer to finish than similar projects exempt from the requirements. The projects under Wicks cost 27 percent more per square foot on average than exempt projects. Wicks projects took nearly two years longer than non-Wicks projects to move from design work to final completion-54 months versus 32 months, respectively.
The most important step remaining in streamlining implementation is to repeal the Wicks Law. Given the wide-ranging estimates of the waste generated by the Wicks Law-from a low of 8 percent to a high of over one-third-a conservative estimate of the reduction in cost of affected projects is 10 percent. Based on fiscal year 1995 figures, this represents about $720 million of savings in capital spending, divided almost equally between the State and the City. However, from an operating budget vantage, the relevant figure is debt service savings due to reduced borrowing for lower capital expenditures. Based on full implementation of the recommendations over a long period to impact all outstanding debt, the debt service savings would be 10 percent of debt service for capital purposes, or nearly $300 million for the City and over $200 million for the State in fiscal year 1995.
Sound planning with attention to preventive maintenance. The State and the City vary widely in their capital planning, with the City employing more sophisticated techniques that approach the standards recommended by the Commission. The major fault in the City's process is lack of sufficient attention to maintenance standards. Although information is being compiled, it is not given sufficient attention or relied upon in making the relevant budgetary decisions. The City should allocate more resources to maintenance and repair, yet current procedures do not yield these results.
A recent and glaring example of inadequate maintenance yielding vast capital needs is the City's public schools. The gap between the funding for maintenance and the need generated by the existing school buildings is significant. In fiscal year 1995, the Board spent $0.79 per square foot to maintain its facilities. By comparison, commercial building owners in lower Manhattan spend about $2.25 per square foot on maintenance, or over three times as much as the Board. While the maintenance needs of commercial buildings are different from those of school buildings, this large discrepancy indicates grossly insufficient maintenance by the Board. It is estimated that at the current pace of maintenance and repair, each year 47 schools move from needing minor repairs to requiring major renovation. In this way, inadequate spending for maintenance in one year increases capital needs in future years.
The maintenance problems of the Board of Education are a dramatic example, but by no means the only one. The City's schedules of the maintenance needs of its infrastructure, which were recently mandated by Charter reforms, reveal that maintenance underfunding is widespread. The Department of Transportation's maintenance funding for fiscal year 1996 equaled 80 percent of the estimated maintenance need. Capital asset maintenance for the Human Resources Administration was funded at three-quarters of need. However, most of the agencies were funded at much lower levels: Less than 10 percent of necessary maintenance of parks facilities was funded; an amount equal to just 9 percent of library maintenance needs was allocated; and no funds at all were provided for fire station maintenance.
Innovative measures beyond those required by the latest Charter reforms are necessary. Further study and experimentation with a variety of approaches is warranted. Among the possible measures are Charter mandates that a share of agency operating budgets be earmarked for maintenance, or bond covenants requiring adequate appropriations for maintenance of the projects financed by the bonds.
The State needs far more extensive actions to improve its capital planning. Despite recent revisions, its process fails to produce the relevant information on maintenance and capital needs and priorities. The governor should be required to produce more extensive planning documents, and the Legislature should give them more serious consideration. Eventually the essentials of each branch's responsibilities might be written into the State Constitution, but this should not be a prerequisite for reform. Political leadership, supported by statutory processes, could provide the State with a vastly improved capital planning process.
The long-run fiscal implications of a sound capital planning process are not easily quantified. However, it is reasonable to assume better planning will more effectively target available resources, and appropriate maintenance expenditures will prolong the life and improve the functioning of assets. Thus, any given level of capital spending will yield an improved infrastructure if there is sound planning.
Savings in Other Services While social welfare, public education and debt service comprise about 60 percent of State and local spending, the remaining 40 percent also can be a major source of savings. For most of these activities, the Two New Yorks offer very expensive services that are insufficient to meet public expectations. As a share of personal income, a measure that takes into account differences in living costs, New York's governments together spend one-third more than other states and localities to provide essentially the same package of services.
If services were one-third better in New York, then the cost disparities would not be ruinous. But higher quality services are not the explanation. Services are more expensive here because New York uses 25 percent more employees per capita to deliver public services, and pays them over one-quarter more on average (not including New York's even more expensive and more generous fringe benefits).
These facts provide more than just an opportunity to initiate change that will improve services and lower their costs-they establish the necessity of such changes. If New York is to be competitive, costs must come down. Toward these goals of effective services and lower costs, the CBC proposes a plan for restructuring government. It is designed to reduce government spending dramatically, while sustaining and increasing the effectiveness of public services.
The restructuring plan presented in the accompanying report encompasses three approaches. First, recognizing that resources are scarce, government should eliminate unnecessary and low-priority activities. Even in flush economic times, government should not engage in functions that do not contribute to the public good. Similarly, if there is a viable private market for an activity, then government should not be involved. Finally, setting priorities should identify some activities which, relative to other public services, do not merit scarce funds; these activities should be left to the private sector or cease in their present form.
Second, competitive forces should be introduced to the provision of many public services to stimulate innovation and efficiency. Too often, public services become wasteful because there is little motivation to do the job better and cheaper. Although government should be involved in ensuring that certain services are available to the public, it does not necessarily follow that government itself should provide those services. Competition is a constant reminder that the right to provide a service is temporary, held only as long as the service is provided effectively and efficiently.
Third, services that continue to be provided directly by government-the vast majority- should be reengineered to improve their productivity. The many sources of inefficiency-redundancy, outmoded technology, wasteful rules governing the processes and amount of work-can be eradicated or drastically curtailed through reengineering. In addition, altering the current system of employee compensation to reward good work and efficiency, and investing in preventive programs and research and development, will greatly aid in achieving better and less costly services.
Pursuing such government restructuring would require executive leadership to implement major changes in the way state and local governments deal with public employee unions. Core processes of government, including collective bargaining, would have to be reformed. Most importantly, the attitude of government officials would have to change, shifting their focus to the public they serve. Restructuring is not a one-shot effort, but a permanent change in the way government is run. The principles and practices elaborated here should be applied continuously, or government will backslide into high-cost ways.
While such restructuring is difficult, experience in a wide variety of communities demonstrates that it can be done and that it generates significant savings. Numerous examples are presented in the accompanying report on restructuring. A few of the more dramatic cases include a 57 percent savings in custodial services in Phoenix, a 61 percent savings in microfilm operations in Indianapolis, a 42 percent savings at a recycling center in Philadelphia, and a 26 percent savings in highway maintenance in Massachusetts. The concept also has been applied in one New York City agency, the Department of Probation, to achieve a 15 percent savings in the adult supervision budget.
Opportunities abound for applying these three strategies in New York City and New York State. Illustrations of the strategies presented for consideration and described more fully in the report include:
- Introducing competition into the process of refuse collection, street cleaning, and recycling services in New York City;
- Using competitive bidding for highway maintenance in the State Department of Transportation;
- Combining more competition with reduced subsidies in the funding of higher education in order to restructure the State and City university systems; and,
- Using cameras, electronic monitoring, and automated kiosks to reduce incarceration and probate costs for the City and State.
- Conforming City and State practices with respect to the purchase of employee health insurance to private sector norms by requiring employee cost-sharing for premiums.
- Reducing the need for overtime and night shift differentials by scheduling shifts more rationally.
The CBC's research provides examples of how the three recommended approaches work successfully elsewhere and illustrations of how the strategies might be applied in New York. Given the illustrative nature of the evidence, it is difficult to estimate the potential savings precisely. However, the evidence from other jurisdictions points to typical savings of about 35 percent; allowing for the significant implementation barriers and other unique features of the Two New Yorks, a more conservative estimate is under 30 percent. Applying these percentages to the relevant expenditure base in fiscal year 1995 yields estimated savings of $3.6 billion to $4.5 billion for New York City and $4.8 billion to $5.7 billion for New York State.
Tax Expenditure Savings The scope of the Commission's report on tax policy extends well beyond tax expenditures. As will be described below, the CBC has identified a comprehensive set of tax reductions and reforms that would place New York State and New York City in a much more favorable position with respect to competitive sites for businesses and residents. A major tax reduction program is necessary because the Two New Yorks now impose high tax burdens to support their expensive services.
One of the ways in which political leaders have responded to the adverse effects of high State and local tax burdens is to grant dispensations to individual firms. The largest example of this strategy is the real property tax exemptions granted to firms in New York City in order to encourage them to remain or expand within the city. In fiscal year 1993, the property taxes foregone due to these special arrangements totaled over $521 million, up from $180 million in 1987. Additional exemptions are given to State and local sales taxes imposed on purchases by the favored firms and to utility taxes to which they might have been subject.
The argument supporting these tax breaks is that they keep jobs and economic activity in the city which otherwise would be lost to New York. If this proves true, the exemptions "pay for themselves" by generating revenues from income and retail sales taxes which otherwise would have been lost due to the relocation.
But these benefits have not always been clearly evident. Critics make three basic points. First, it is not clear what the firms involved would actually have done without the tax breaks. Some may have moved as threatened, but others might have remained or at least kept some of their operations within the city. Second, the calculation of benefits typically ignores the adverse impact of the deal on firms not involved. Cutting the costs of one firm in the city gives it an unfair advantage over its local competitors in the same industry; some significant portion of its future activities in New York may have been transferred from a local competitor who would have been paying a full share of taxes. To the extent this occurs, the tax exemptions do not increase economic activity within the city. Third, the strategy has adverse consequences for businesses in other industries and for all residential taxpayers who continue to pay a full share of taxes. The foregone revenue is made up by these other taxpayers, whose burden grows. This makes the city less competitive for non-exempt parties.
Under the Two New Yorks' current burdensome tax system, and in the face of similar incentives offered by other states and counties, the use of discretionary tax breaks remains contentious; some see them as essential to retaining jobs, while others criticize them as giveaways. However, the general principle that a more competitive and economically neutral tax system would eliminate the need for virtually all such incentive programs is widely accepted, and it provides a basis for the more desirable long-run policy of eliminating them.
Discretionary tax breaks for businesses should no longer be necessary when overall tax burdens are lightened significantly. Past concessions should not be withdrawn, but in the future new tax breaks of this type should be avoided. Instead, the more effective consequence of other tax and spending reforms will be that the Two New Yorks become economically attractive, because they provide to all firms desired services at competitive tax rates.
If discretionary tax breaks had not been used in fiscal year 1995, then New York City would have collected approximately an additional $500 million in property taxes. The value of related tax expenditures under State sales and other taxes is not readily available, so the estimated City savings of $500 million in Table 1 probably understates the resources made available by this policy.
AN OPTIMISTIC VIEW OF THE FUTURE
The prospect of significant new resources for the Two New Yorks transforms deliberations about the future from gloomy discussions of inevitable service cuts designed to close yawning budget gaps into a much more optimistic dialogue. Prospects emerge to do more than break even; the City and State can begin to consider ways to become more competitive and to stimulate their economic future.
Yet, no matter how great the potential savings, resources will always be scarce. Decisions about how to use funds made available by changing the way the City and State perform their tasks ought to be guided by an informed and spirited public debate. The CBC does not have all the answers, but we do have a clear set of priorities. These recommendations for the use of newly generated savings are intended to initiate a serious, but essentially optimistic, set of public discussions about the wisest way for the Two New Yorks to redeploy resources now consumed by inefficient and ineffective practices.
First Things First A first fundamental guideline for thinking about the future is not to spend money which is not yet available. The savings valued above at $12.8 to $19.7 billion will not emerge automatically. Hard work by managers, sacrifice from workers, and cooperation by the federal government each are essential. The temptation to use funds that are not yet in hand should be avoided.
As savings are realized, the highest priority should be eliminating the structural deficit. The one-shot measures and fiscal gimmickry which are now relied upon to balance budgets should be abandoned. The next generation should not be saddled with the bill for services to current New Yorkers.
Removing structural deficits will not consume a major share of the available savings. Using the same technique of quantifying the fiscal impact of policies by assuming they were fully implemented in fiscal year 1995, closing the State and City structural gaps would require about $2.4 billion. For the City, this represents the approximately $1.4 billion in one-shot revenues used to balance its budget that year. For the State, it represents the average for fiscal years 1994 and 1995 of the actual deficit, the value of borrowings used to finance aid payments and of one-shots.
In addition to eliminating deficits, priority should be given to using revenues in ways necessary to achieve the recommended savings. Specifically, two sources of savings will require expenditures to support their implementation. First, much of the restructuring of service delivery will require the cooperation of labor and can best be achieved by a policy of "gain sharing" some portion of the savings generated by redesigning work rules and compensation practices. The accompanying report on restructuring recommends that 20 percent of savings from redesigning government operations be used in this way. This suggests about $1.1 billion to $1.5 billion should be reserved for enhancing employee compensation.
Streamlining the administration of social welfare programs also is essential to realizing the potential savings. This is tied to State administration of those programs, and State administration should be linked to State financing of the current local share of these programs. As noted earlier, State financing is a source of savings to the City, but the action is also a significant use of new funds for the State. If the full set of recommendations to curb social welfare costs had been implemented in fiscal year 1995, and if the State assumed the local share of these lowered costs, then the additional expenditures required by the State would have been about $3.6 billion. This added spending is already taken into account in the savings shown in the table.
To recapitulate, there are three priority claims on the savings generated from the CBC's recommendations-eliminating structural deficits, enhancing employee compensation through gain sharing, and State assumption of local social welfare costs. While the State costs associated with assumption of local social welfare responsibilities already is reflected in the earlier total savings estimate, the other two priority items would consume between $3.5 billion and $3.9 billion of the $12.8 billion to $19.7 billion potentially available. The remainder should be used to promote a mix of policies to promote the competitiveness of the Two New Yorks.
Competing Paths to Enhanced Competitiveness The declining competitiveness of the Two New Yorks can be reversed with public policy initiatives. Three types of measures would serve this goal-lowering taxes, improving physical infrastructure, and providing better public services.
Yet each of these measures requires significant resources. While full implementation of the CBC's recommendations for savings would provide at least $9.3 billion beyond the amount needed for first-priority actions, even this considerable sum cannot finance everything possible to make New York more competitive. The CBC now does not have a detailed prescription for how to deploy the resources its recommendations would make available, but our research highlights what is known and what remains to be learned about promoting economic competitiveness. Based on this information, as well as new research to be initiated in the coming year, political leaders should make informed choices about how best to use the savings these efforts can generate.
Tax cuts As a result of decades of incremental actions, which have been reversed only modestly in recent years, New York imposes the greatest state and local tax burden in the nation. New York's taxes equal $3,532 per capita, nearly 62 percent above the national average and well above the second-place state, Connecticut, at $3,059 per capita. Measured as a share of residents' personal income, New York's taxes also are the highest in the nation, nearly 15 percent compared to a national average of under 11 percent and a second-place figure of 13 percent for Hawaii.
There is no definitive study of the impact of New York's taxes on its economy, but there is a growing consensus that currently high levels of taxation have strong negative consequences. The likelihood of this is suggested by the wide gaps between taxes in parts of New York State, especially New York City, and competing locations. Research presented in the accompanying report on tax policy examines the impact of taxes on "representative firms" in 11 different industries. The effect of taxes on these firms' rate of return was calculated for locations in New York City, a suburb of New York City, upstate New York, and six other locations including neighboring and competing states.
Manufacturing firms in New York City suffer rates of return 6 to 13 percentage points lower than firms in upstate New York as a result of taxes; the firms in upstate New York have rates of return comparable to neighboring states and Florida, but California and Texas have tax systems that permit significantly higher rates of return. Among service firms, New York City imposes taxes that lower rates of return to between 3 and over 18 percentage points below other locations. Upstate New York compares favorably with New York City and is competitive with New Jersey and Massachusetts, but Connecticut, Florida, Texas and California all provide greater profitability.
It is important to recognize that studies such as the one summarized above consider only taxes imposed directly on businesses. But taxes can raise businesses' costs in other, important ways. Utility taxes raise the cost of energy. New York State's exceptionally high gross receipts tax on utilities and New York City's high taxation of real property owned by utilities help explain why the cost of electricity statewide, and especially in New York City, is higher than in most other urban areas. For example, electricity costs in Atlanta are just 59 percent of that in New York City, and the figure is 61 percent in Houston, 67 percent in Chicago, and 73 percent in Pittsburgh. In neighboring Jersey City, electricity costs are only 74 percent of those in New York City.
Personal income taxes may be paid directly by workers, not corporations, but such taxes can indirectly oblige firms to pay higher wages. The relatively high burden represented by personal income taxes in New York is evident in several comparative measures. At $963, per capita state and local income taxes are higher in New York than every other state except Massachusetts and are fully 162 percent above the national average. As a share of residents' income, personal income taxes levied by the State government are 4.0 percent compared to the national average of 2.4 percent.
New York's competitive disadvantage with respect to taxes on households also is reflected in a survey conducted annually by the government of the District of Columbia. It compares the major state and local taxes on households at four income levels ($25,000, $50,000, $75,000 and $100,000 annually) in the largest city in each of the 50 states. In 1994 (the latest year studied) the burden in New York City was ninth highest at the lowest income level, but at the other income levels New York City ranked second behind only Bridgeport, Connecticut. The taxes studied consumed 15.6 percent of the income of a family earning $100,000; this was a full percentage point above third-place Portland, Maine, and 60 percent above the median for all cities studied. For upper income families the burden in other large cities was well below New York's; for example, taxes in Boston were 75 percent of those in New York and the figure in Philadelphia was 74 percent, Los Angeles 72 percent and Chicago 70 percent.
The accompanying report on tax policy does more than document New York's disadvantages; it also presents a comprehensive program of tax reform. The package includes five basic types of tax reductions:
The State and City personal income taxes should be lowered significantly to make them more competitive with other domestic locations. Specifically, the State income tax rates should be lowered to the levels identified as multiyear goals in 1995 legislation. The City's personal income tax rate should be lowered to 1 percent.
Business income taxes imposed by the State should be lowered to more competitive levels, and New York City's unique business income taxes should be eliminated. Separate State tax laws relate to utilities, banks, insurance companies, and general corporations. In each case, New York's effective rates are higher than those of competing states. Most of the difference is attributable to New York's unusually high utility gross receipts tax. The relevant tax laws should be revised to bring the effective rate in New York State to a level comparable to these competitors' average.
If the State's business income taxes were lowered to competitive levels, firms in New York City would still suffer a disadvantage because of unique municipal taxes. These include corporate income taxes on banks and on general corporations, an unincorporated business income tax, and the commercial rent tax. To make New York City fully competitive with the rest of New York as well as other jurisdictions, these municipal taxes should be eliminated.
The State's and City's heavy taxation of real estate transactions should be lowered to levels competitive with other jurisdictions. Placing an extra tax burden on real estate activities in the Two New Yorks discourages real estate development; this places the area at a competitive disadvantage because it slows or thwarts adjustments in land and space use which accommodate economic change and growth. In order to align its tax policies with those prevailing in most of the rest of the nation, the unique City taxes on mortgages and transfer of real property should be eliminated, the State's mortgage tax should be set at a rate equal to the average in competitive states, and the State's real estate transfer tax should be lowered.
The State's heavy taxation of inheritances and gifts should be lowered to conform to national norms. The State's relevant tax laws should be amended to make exemptions and other provisions consistent with the federal tax code and thereby comparable with the tax practices of most states with which New York competes for residents.
The City of New York's real property tax should be revised to treat all types of property the same. To avoid hardships from this revision, low- and middle-income homeowners should be given transitional exemptions for a part of their liability in excess of a portion of their income.
In the aggregate, the City's property tax is not too high; the effective rate of $26.67 per $1,000 of market value is close to the rate of $25.33 in the rest of the state. However, the City's law imposes excessive burdens on business property and inadequate burdens on small residential property. The law should be changed so that the effective rate is the same for all classes of property. The new system should be phased-in over several years, but the goal should be a real property tax that does not discourage business activity.
Even if phased-in over a reasonable period, the new system could impose hardship on some families. Because the Commission recognizes the important role of homeownership in promoting neighborhood stability, the tax system change should be accompanied by a transitional provision for "circuit breaker" refunds to low- and middle-income households. Under these provisions, which are used in other states, when a household's property tax liability reaches a designated percentage of their annual income, then some or all of the excess tax liability is forgiven.
These recommendations add up to significant, some might even say radical, change in the financing of the Two New Yorks. State personal income taxes would be cut 20 percent, business income taxes 29 percent, and inheritance and gift taxes 40 percent. City personal income taxes would be cut 78 percent, City business income and real estate transaction taxes eliminated, and its real property tax altered in a way that would raise the bills of some currently under-taxed owners while cutting the bills of most others substantially.
As the research presented in the report demonstrates, these changes would enhance New York's competitiveness. Tax burdens for the "representative businesses" in New York City and for those in other parts of the state would be nearly equalized, and all parts of the state would compete favorably with neighboring Connecticut, New Jersey and Massachusetts. For the more distant competing states, the tax advantage would be narrowed notably.
Of course, the cost of such dramatic tax cuts is substantial. If fully implemented in fiscal year 1995, the recommendations would have required offsetting savings of $5.4 billion for the State and $6.3 billion for the City. The total of nearly $11.7 billion would be unaffordable if only the previously described lower range of savings were realized; if greater savings are achieved, the tax cuts might be fully implemented or might be mixed with other measures promoting competitiveness.
It should be noted that a significant portion of the recommended tax reduction package has already been enacted. In 1995 the State adopted a three-year, phased-in income tax reduction, and in 1996 the State eliminated its real property gains tax. The fiscal year 1995 value of these tax cuts is about $3.4 billion. While adoption of these measures is consistent with a part of the CBC's entire package of recommendations, it would be preferable to conform more closely to the Commission's full set of priorities and long-run strategy. The State tax cuts have, to date, been financed primarily with non-recurring revenues and the more fundamental restructuring of services and social welfare reform are still pending. The adopted tax cuts and desirable additional tax reductions should be matched with implementation of expenditure savings to ensure structurally balanced budgets as well as finance other priority concerns.
Improved infrastructure One important function of state and local governments is to create and maintain the physical infrastructure necessary to make an area a desirable place to live and work. In this sense, adequate public investment is essential to making New York State and New York City competitive as a location for businesses and residents. Without an adequate infrastructure for water supply, transportation and public safety, an area cannot attract and retain people and jobs. Yet these systems cannot be created exclusively or even primarily with private funds; they require government to design and finance them.
Similarly, substantial public investments are necessary to permit vital public services to be delivered efficiently. Areas compete on the basis of the quality of services they deliver, and modern facilities and information technology can improve service delivery as well as reduce its cost. Accordingly, state and local governments must build facilities such as firehouses and schools and invest in computers and telecommunications systems in order to make their services competitive.
A review of New York's performance in this critical function reveals severe shortcomings. While the evidence on the competitive status of State and City physical facilities is far from comprehensive, the available data show areas where the Two New Yorks trail other parts of the country.
How competitive is New York's infrastructure? Regrettably, neither the data nor even the measurement concepts are available to answer the question systematically. Ideally, measures would be available to evaluate how New York City and other areas of New York State compare to metropolitan areas in other parts of the United States and other parts of the world. New York City, in particular, is a "world city" competing for international finance and other service activities with places like London, Tokyo and Singapore. But there is no source of information with which to compare rigorously the transportation, water, waste disposal, parks, schools or other infrastructure systems of these cities.
Nevertheless, one recent review of New York's infrastructure pointed to serious shortcomings. The Regional Plan Association's third effort this century to produce a master plan for the New York region estimated that satisfying the capital needs of the metropolitan region would require additional investment of $75 billion above current levels over the next 25 years. The RPA's report placed particular emphasis on the need to improve regional mobility, and recommended building a rail network to connect commuter rail and subway systems and area airports, taking steps to reduce highway congestion, and easing freight movement.
The limited available data show that, in some respects, New York's infrastructure is in worse condition than the rest of the country's. For instance, U.S. Environmental Protection Agency estimates of wastewater treatment project needs show a total of $25.7 billion of investment necessary in New York, an amount equal to 6 percent of annual personal income. By contrast, the average for the other 49 states, the District of Columbia and U.S. territories is 2 percent of personal income.
For highway transportation, New York is mediocre, at best. An analysis of the percentage of principal highway miles in fair, mediocre or poor condition found 12,291 or nearly half of New York's 25,394 miles receiving such a rating. While this is an alarming statistic, it should be noted that New York ranked tenth among the 50 states and Washington, DC, substantially below the national average of 59 percent of highway miles in fair to poor condition. New York's roads tend to be considerably more congested, with 43 percent or 1,672 of its 3,904 miles of major urban roads rated congested. This ranks New York as the sixth most congested state, fully 41 percent higher than the national average of 30 percent.
The condition of New York's bridges is more bleak. Of the 17,308 bridges in New York, 9,500 were found to be structurally deficient and another 1,450 considered functionally obsolete. Together, 63 percent of New York's bridges were rated deficient, fully double the less than 32 percent average for the rest of the country, ranking New York worst among the 50 states.
New York's two major airports-Kennedy and LaGuardia-rank among the most congested airports in the country, and are declining in significance relative to other airports. Both airports ranked among the seven most severely congested airports (defined as airports with significant numbers of delayed flights) in 1992, and it is projected they will continue to be ranked as such in 2002 even if new runways are added. In addition, the share of total enplanements nationwide occurring at Kennedy and LaGuardia is expected to decline. Ranked eighth and eighteenth in 1993, they are expected to fall to thirteenth and twenty-second by 2010.
Finally, while comparative data on public schools are not available, the condition of New York City's facilities suggest it must be doing poorly. The combination of aging school buildings and extended periods of capital and operating budget underfunding have created systemic decay of school infrastructure that cannot be fixed by a short-term infusion of additional capital resources. In 1993, when the New York City Board of Education completed its most recent comprehensive facility needs assessment, 85 percent of the buildings surveyed needed substantial capital work. According to that assessment, 42.5 percent of the buildings required either replacement or complete modernization. Another 42.5 percent of the buildings had one or two inadequate structures/systems; but, at the present pace of deterioration, 47 schools a year are moving from this list to the one requiring more extensive work.
The CBC does not have a detailed or comprehensive capital investment program, analogous to its comprehensive tax reduction program. But it is clear that some of the new resources potentially available to State and City government should be allocated to new capital projects. Additional needs assessment and planning should be instituted at both levels of government, and the CBC also plans to initiate comparative research on infrastructure needs. The historic underemphasis on long-term capital planning by the Two New Yorks should be corrected, and the new knowledge should be used to identify worthy projects and weigh their benefits against those of tax cuts and service enhancements.
Better services A third way states and cities promote their attractiveness is by providing better services than their competitors. In New York, the major competitive failure in service delivery is the poor performance of New York City's public schools.
However, as the earlier summary of the accompanying report on the public schools indicated, the major cause of this poor performance is not inadequate funding. Spending per pupil already is above the national average. Resources should be better used through the combination of structural reforms identified earlier. Nonetheless, even after such reforms are implemented, it may prove necessary and desirable to increase spending per pupil at New York City public schools. The disadvantaged character of the student population, including high rates of poverty and large numbers of recent immigrants for whom English is a second language, may require enriched investment. Spending should not be increased without structural changes, but a reformed system might make a strong case for added funding.
For functions other than education, there are no comprehensive, comparative data indicating whether New York does particularly well, or particularly badly, in delivering services. As revenues are freed by the restructuring measures recommended by the CBC, there will undoubtedly be claims by advocates for more spending on a variety of activities from expanded hours for museums and libraries to more conveniently located firehouses and more frequent collection of refuse and recyclables. All such claims have some merit, but a meaningful guide to selecting among the options would be comparative indicators of New York's performance relative to other states and cities. Such information is not now available, but it ought to become a focus for future budgeting decisions.
Finally, the wisdom of added investments in prevention activities and in research and development for new approaches to service delivery should be stressed. The accompanying reports on social welfare expenditures and on restructuring each make the point that funds should be allocated for these purposes. Programs to prevent fires, for example, can both save lives and save money in firefighting; similarly, programs to prevent child abuse both save lives and reduce the need for later remedial measures. A sound case can be made for greater expenditures on a variety of preventive services, and they will also compete for new resources.
There will be budget battles in the future, but they hold the promise of having a far more positive character than those of recent years. If political leaders are willing to make a serious effort, then the means are available to free literally billions of dollars for State and local government. The CBC's recommendations regarding social welfare reforms, restructuring of public services, targeted reductions in school aid, streamlining of capital project implementation and elimination of unnecessary tax breaks are a path to at least $12.8 billion in recurring savings.
It will require hard work and some time to implement these measures, and money should not be spent before it is in hand. As the savings materialize, three goals should be given first priority: Eliminating the one-shot measures and other fiscal practices that conceal structural deficits and shift costs to future taxpayers; Sharing savings with State and municipal workers who contribute to more effective service delivery by changing the way they work and the way they are paid; Transferring the cost of social welfare programs from local governments to the State, which also should administer these programs more efficiently. Together, these first-order activities will require about $3.5 billion of the at least $12.8 billion which will become available (since the cost of transferring social welfare programs already is reflected in the $12.8 billion).
Future budget debates should focus on how best to use the additional savings to promote the competitiveness of the Two New Yorks. Legitimate claims can be made for dramatic tax cuts, major new infrastructure investments, and additional spending for basic services.
Perhaps New Yorkers will be able to afford it all. Under an optimistic, but not impossible, set of assumptions, fully $15.8 billion in savings might be available to pursue new initiatives beyond the core, high-priority recommendations. This could finance the comprehensive tax cut package described in the accompanying report, fund major new capital projects, and leave additional sums for well-justified service improvements.
Also possible is a future in which achievable savings provide for high-priority activities, but are not sufficient to fund fully the comprehensive tax cuts, all desirable capital improvements, and service enhancements. Such a future is still far better than the current circumstance of endless service cuts to close recurring budget gaps, because it provides for progress toward greater competitiveness. Further discussion and-equally important-additional analysis is needed to guide the choices that are available to the Two New Yorks. This set of reports from the Budget 2000 Project should be viewed as only a first step toward a brighter millennium, but it provides the basis for more optimistic and productive policy debates. The CBC looks forward to joining a wide range of New Yorkers in this new challenge.