Balancing the State Budget – Halfway There, But Running Out of Gas?

Dec 20, 2011
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This month’s overhaul of New York’s tax code was an important step in closing the estimated $3.2 billion gap in New York State’s fiscal year 2012-13 budget. It provided $1.9 billion in additional annual revenues; $1.5 billion will help close the budget gap and $400 million will be dedicated to new commitments.  As Governor Andrew Cuomo stated, “We just did 50 percent of the budget,” meaning at least half of next year’s budget gap will be financed with new revenue. As the Governor prepares the Executive Budget due next month, he should avoid more new taxes as the way to close the rest of the budget gap. Instead the focus should be on containing spending growth and reducing reliance on gimmicks.

The case for avoiding more revenue measures is based on two considerations:

  1. Spending has grown throughout the recession; the tax base has not. As of this fiscal year, New York’s tax base is 7 percent smaller than it was four years ago. That is, if the State had left the 2008 tax system in place, state tax coffers now would be 7 percent or $4.1 billion less full. Despite this contraction the State continued to expand spending through fiscal year 2011. Even with this year’s reduction, total spending in fiscal year 2012, including federally-financed programs, is fully $15 billion, or 13 percent, higher than in fiscal year 2008. New York sustained this spending growth by enacting revenue enhancements and using temporary resources. While the soon-to-expire income tax surcharge generated the most debate, New York enacted another $6 billion in permanent revenue measures including the MTA’s new payroll tax, increased assessments on hospitals, expanded revenue from lottery sales, an increased cigarette tax rate, higher fees and fines, and the elimination of various corporate tax “loopholes.”
  2. Spending will go up next year, even if no additional revenues are authorized. The projected $3.2 billion budget gap is based on spending growth of 5 percent. The $1.5 billion in new income tax revenue guarantees spending growth of half that, or 2.5 percent. If the remainder of the fiscal year 2013 budget is balanced with cuts, state spending will still grow by that 2.5 percent. However, some portions of the budget will not be so lucky. The Governor has committed to increasing both Medicaid and school aid by 4 percent. Because these two areas combined are half of general fund spending, simple math suggests that all other areas of spending would have to be held nearly flat to keep the overall growth at 2.5 percent.

Instead of calling for more revenue to fill the budgetary gas tank, New Yorkers should be calling for more reforms that get us better mileage. With a more manageable budget gap for next year, and the latest increase in state resources, New York should adhere to the following actions next year:

 

Close the remaining budget gap with structural reform measures that slow down the fastest cost drivers - pensions, school aid and Medicaid.

  • The fastest growing area of the state budget has been required contributions to its pension funds. In the past decade state pension contributions and other fringe benefits have risen on average about 8 percent each year. The Governor has proposed a pension tier for new hires that increases the retirement age and vesting period and reduces pension spiking from overtime. This change would save $120 billion over 30 years. 
  • The set of school aid programs can be designed to run more efficiently.  New York spends hundreds of millions in school aid to wealthy districts that could finance high levels of spending without state assistance. The basic formulas by which school aid is distributed should be reopened to address better the great disparities in local districts’ wealth and capacities to fund their schools. With the local property tax cap in place, these formulas have even greater importance.
  • The State’s innovative approach to curbing growth in Medicaid spending has proven effective and should continue. The Medicaid Redesign Team’s oversight and deliberation must continue to be a priority next year if spending is to be contained. In addition, New York’s inequitable local financing scheme for Medicaid should be phased out. The State has taken on a growing portion of Medicaid financing but still requires poorer counties with greater Medicaid populations to shoulder an unfairly large share of the program costs.

 

Resist the temptation for more economic development spending. Grants totaling $785 million were awarded this month, and the Governor has indicated that he intends to propose an additional $200 million for another round of competition in the Executive Budget. The competition was helpful in sparking the creativity of regional participants and jumpstarting many fruitful partnerships, but it should not be continued. Instead, the State should ensure that the new and “old” money, some $6 billion, is used well. State leaders should focus on repurposing existing funding to preserve scarce resources for other priorities, and concentrate on tuning up the transparency and accountability on any public subsidies for private sector projects.

 

Reduce reliance on fiscal gimmicks. The Governor and Legislature plan to continue two gimmicks enacted in prior years: the deferral of $970 million in business tax credits and the amortization of a $782 million payment to the pension system. These gimmicks mask the State’s structural deficit and come with long-term costs: lost confidence in state promises to businesses, in regard to the former, and long-term interest costs in regard to the latter. Both should be ended while addressing the underlying cost drivers. The State should also take a hiatus from one-shot revenues. Every year the State uses “one-shot” resources to close a portion of its budget gap, including sweeps from dedicated revenue funds and mandatory contributions from public authorities. Even last year, when the State used a minimal amount of one-shots, they added up to over $800 million.

 

The $1.5 billion in new revenue put some more gas in the tank, but it will not get New York to the destination of a balanced budget next year. Instead of thinking about another stop to fuel up again, New York should begin making its gas guzzler more efficient. The Executive Budget should chart a path toward more sustainable spending and a more sensible division of State and local responsibilities.

 

By Tammy Gamerman

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