As 2012 begins and the New York State Legislature begins a new session, its first priority should be reform of the financing and benefits of pensions for state and local employees. Such reforms are urgently needed because (1) the relatively high cost of the current system places New York at a competitive disadvantage, and (2) these costs have been growing and are projected to continue growing, making a bad situation worse.

An important, yet obscure, element of municipal finance is a “rental payment” made by the public authority financing the water and sewer system to New York City’s treasury. What was once a declining overhead cost for the water system has become a rapidly growing expense that increased from a low of $102 million in 2003 to $234 million in the current fiscal year.

Try this multiple choice test.

According to the Comptroller’s Comprehensive Annual Financial Report the City of New York ended its 2010-11 fiscal year with:

• a. a $5 million surplus
• b. a $282 million deficit
• c. a $9.6 billion deficit
• d. all of the above

The answer is: d. all of the above.

To help states cope with recessions one mechanism that is often suggested is a rainy day fund. Although New York has a rainy day fund (in fact, it has two), the funds have not been used in the latest recession. This report explores the reasons why New York has not developed an effective rainy day fund and presents four guidelines for how the State can create a more useful rainy day fund.