Founded in 1932, the Citizens Budget Commission is a nonpartisan, nonprofit civic organization devoted to influencing constructive change in the finances and services of New York State and New York City government. This report was prepared under the auspices of the Commission’s State Finances Committee, which I chair. The other members of the Committee are Paul Atanasio, Jonathan Ballan, Bernard B. Beal, Deborah A. Buresh, Robert A. Culnane, Denis V. Curtin, Evan A. Davis, Stephen F. DeGroat, Charles E. Dorkey, III, Linda Fan, Dall W. Forsythe, Kenneth D. Gibbs, Daniel N. Heimowitz, H. Dale Hemmerdinger, Peter A. Hoffman, Paul M. Hopkins, William R. Howell, Lawrence S. Huntington, William Josephson, Philip R. Lochner, Jr., Laurence G. Preble, Irwin Schneiderman, Lewis Bart Stone, Thomas Jonah Tisch, Stephen H. Weiss, and Lawrence B. Buttenwieser, ex-officio.

Created in 1984, the Committee reviews and makes recommendations about the State of New York’s financial management. Our earlier work and reports have stressed the importance of balanced operating budgets, reducing the State’s accumulated deficit, and reforming the State’s debt issuance and capital planning processes. These 12 years of research and monitoring have made apparent that the State’s lack of a baseline budget impedes an informed debate about fiscal priorities. We prepared this report to fill that void.

This report was prepared by Andrew S. Rein, Research Associate, under the direction of Charles Brecher, Executive Vice President and Director of Research and Cynthia Green, Vice President for State Studies. Matthew Lesieur, Research Assistant, provided data entry assistance. Boyd, Barrese & Associates provided assistance in developing the methodologies for estimating receipts from the personal income tax and sales tax. The Commission gratefully acknowledges the assistance and cooperation of numerous State officials, especially staff of the New York State Division of the Budget, Office of the State Comptroller, Department of Taxation and Finance, Department of Social Services, Assembly Ways and Means Committee, Senate Finance Committee and Assembly Minority Ways and Means Committee. We also appreciate assistance provided by the State Education Department, Office of Mental Health, Office of Mental Retardation and Developmental Disabilities, Department of Correctional Services and the private, nonprofit State Communities Aid Association.

When debating policy choices for a new fiscal year, the necessary first step is to identify the impacts of continuing current policies. This is done with a baseline budget—a financial plan that estimates future receipts assuming no tax changes, and future spending assuming that current services continue. By identifying the size of any gap between receipts and disbursements, and by explaining the causes of the gap, a baseline budget focuses debate on fiscal policy choices.

Baseline budgets are required for the federal government and for the municipal government in New York City, but the State of New York does not publish a baseline budget. As a result, the information available on the size and causes of State budget gaps is limited, making it difficult to analyze financial proposals made by the governor and Legislature.

By presenting a baseline budget, the Citizens Budget Commission seeks to fill this void in the State’s budget process. The baseline budget is a tool which New Yorkers can use to analyze proposals made in the upcoming fiscal year 1998 budget debate. Interested citizens can compare the baseline financial plan to the executive budget and legislative initiatives, and use those differences as a guide to political leaders’ key decisions with respect to fiscal priorities. This process can enhance the accountability which is essential to a functioning democracy.

This State of New York fiscal year 1998 baseline budget shows that Governor George E. Pataki and the State Legislature face a gap of $3,335 million. Between fiscal years 1997 and 1998 disbursements are projected to grow 5.5 percent, while receipts decline 5.5 percent. As a result, estimated receipts of $31,760 million will be insufficient to cover projected disbursements of $35,095 million.

Although the state’s economy is expected to expand modestly, receipts will decline $1,833 million due to the loss of non-recurring or “one-shot” items used in the fiscal year 1997 budget and the impact of previously enacted tax cuts. Projected growth in disbursements of $1,837 million is due primarily to new spending for Medicaid ($529 million), education aid ($503 million), state operations and general state charges ($421 million), and debt service ($240 million).

When debating policy choices for a new fiscal year, the necessary first step is to identify the impacts of continuing current policies. If no changes are made to the revenue structure, how much money will be received? If the same level of service is provided, how much will it cost? Will revenues be sufficient to pay for current services, or will there be a budget gap? What will be the size of this gap?

These questions are answered by a baseline budget—a financial plan that estimates future receipts assuming no tax changes, and future disbursements assuming that current services continue. A baseline budget identifies the size of any gap between receipts and disbursements, and explains the causes of the gap. A baseline budget identifies the areas of spending that are growing rapidly, the underlying receipt growth, and the impacts of past budget-balancing strategies.

By providing this information, a baseline budget focuses debate on fiscal policy changes. Using a baseline budget makes it possible to determine whether new policies are sufficient to balance the budget and reveals the allocation of resources among education, social welfare, and other areas.

The State of New York Lacks a Baseline Budget

Baseline budgets are required for the federal government and for the municipal government in New York City, but the State of New York does not publish a baseline budget. As a result, the information available on the size and causes of State budget gaps is limited, making it difficult to analyze proposed approaches to gap-closing, including those in the governor’s executive budget.

The one forward-looking publication, the Executive Budget Financial Projections, estimates the impact of the executive budget on two subsequent years ¹. Since the executive budget is never enacted in full and the projections are not updated after budget adoption, this document provides limited insight into the long-run effects of enacted policy changes.

In each of the past two years, the State Comptroller issued a report that revised the Executive Budget Financial Projections to reflect actions taken by the Legislature and the Governor in adopting that year’s budget.² Although this report provided the first public estimate of future budget gaps based on enacted policy, it did not include all the elements of a baseline budget. It took as its starting point the estimates in the Executive Budget Financial Projections without independently analyzing the causes of change in receipts and disbursements. Moreover, it did not provide estimates of all categories of receipts and disbursements. While useful, it is not a complete baseline budget.

Filling the Void

This report seeks to fill that void by presenting a fiscal year 1998 baseline budget for the State of New York. Using a format similar to that used by the New York State Division of the Budget and the Office of the State Comptroller, the baseline budget identifies the size of the budget gap which must be closed and the major factors that cause changes in receipts and disbursements. Two appendices detail the assumptions and methods used to prepare the estimates of receipts and disbursements, respectively. [Appendices are available in the printed report. Click here for details].

The baseline budget includes estimates of each major general fund receipts and disbursements category, assuming the continuation of current laws, policies, and service levels. The analytic effort focused on large items.

Receipts are estimated using two methods. Fully 72 percent of receipts, the personal income tax and the sales tax, are estimated based on projections of economic activity. The remaining smaller categories of receipts are estimated by adjusting projections published by the State.

Disbursements are estimated using four methods. Items comprising two-thirds of the total, including Medicaid, income maintenance, education aid and state operations, are based on specific projections of workload, unit costs of services, and incremental spending associated with collective bargaining agreements. Other estimates of disbursements are based on figures from governmental sources, the assumption that spending will stay constant, or past trends and inflation.

Forecast Uncertainties

There inevitably are uncertainties in any forecast. Regarding receipts, economic changes are difficult to predict. Recently, personal income tax withholding and estimated payments have been greater than the economic data available for forecasting would indicate. This suggests a stronger economy and higher personal income tax receipts than our projections assume. Such developments would have a significant impact on the financial plan, because this tax represents over 50 percent of total receipts Alternatively, an unforeseen economic slowdown, particularly in financial services, would yield lower receipts than forecast.

Similarly, uncertainties surround projected disbursements. The estimates do not reflect the impact of the new federal welfare program, the “Personal Responsibility and Work Opportunity Reconciliation Act of 1996.” Absent an enacted plan for how New York State will conform to the law, it is impossible to specify future fiscal impacts.³ Also, should inflation prove greater or less than is forecast, baseline spending would change. Finally, the State’s latest Mid-Year Update reported additional risks that could affect fiscal year 1998.⁴ These include three court cases, one of which could require the State to refund $600 million in taxes.

In fiscal year 1998, the State New York faces a general fund budget gap of $3,335 million. (See Table 1.) Baseline disbursements are estimated to grow 5.5 percent, while baseline receipts decline 5.5 percent. As a result, estimated receipts of $31,760 million will be insufficient to cover projected disbursements of $35,095 million.

Although the economy is expected to expand slowly, receipts will decline $1,833 million due to the loss of “one-shots” used in the fiscal year 1997 budget and the incremental impacts of previously enacted tax cuts. Projected disbursements increase $1,837 million due to significant growth in spending for Medicaid, education aid, state operations, and debt service.

The fiscal projections are rooted in the assumptions that national economic growth will continue at a moderate pace, and that New York’s growth will be slower than the rest of the country’s. (See Table 2.) Nationally, the gross domestic product is expected to grow 4.5 percent in 1996 and 4.6 percent in 1997. Personal income growth will slow from 5.4 percent in 1996 to 5.0 percent in 1997. Wage growth also will slow from 5.8 percent in 1996 to 4.9 percent in 1997. Non-agricultural employment in 1997 will grow 1.4 percent, less than the preceding year’s 2.0 percent. Inflation, as measured by the consumer price index (CPI), will drop from 3.0 percent in 1996 to 2.9 percent in 1997.

Continuing the recent pattern, New York State’s growth is expected to be slower than the nation’s. Personal income growth will decline from 4.7 percent in 1996 to 4.0 percent in 1997. Similarly, wage growth will drop from 5.3 percent in 1996 to 3.7 percent in 1997. Non-agricultural employment in 1997 will grow 0.8 percent, less than the preceding year’s 1.1 percent. This sluggish growth coincides with continued low inflation—2.9 percent in 1996 and 2.6 percent in 1997.

Total general fund receipts are expected to decline 5.5 percent, or $1,833 million, from $33,593 million in fiscal year 1997 to $31,761 million in fiscal year 1998. This aggregate decline is comprised of changes that range from a 48.3 percent decline in other transfers from other funds to 3.5 percent growth in the sales tax.

Prior year policy choices are the primary cause of this drop in receipts. Fiscal year 1997 includes $965 million in non-recurring receipts which will not be available next year. (See Table 3.) Most of these are discussed below in the sections on miscellaneous receipts and transfers from other funds; the balance are described in Appendix A [Appendices are available in the printed report. Click here for details]. The incremental impact of tax cuts enacted since 1994 will reduce receipts $2,114 million.⁵ Adjusting the change in receipts for non-recurring items and tax cuts reveals an underlying growth of 3.8 percent, reflecting the economic expansion outlined in the previous section.

Personal Income Tax

Personal income tax receipts are expected to decline 7.3 percent, or $1,261 million. A 4.0 percent increase in personal income from calendar year 1996 to calendar year 1997 generates a 4.4 percent underlying growth in personal income tax receipts.

This growth is offset by the loss of $1,894 million due to tax cuts enacted since 1994. The largest portion of these is the third phase of the 1995 tax cut, which reduces receipts $1,747 million. Other cuts enacted in 1994 and 1996 result in another $147 million reduction.

Sales Tax

Sales tax receipts are expected to grow 3.5 percent, or $183 million. Since consumption of New York State taxable items is estimated to increase slightly faster than personal income, which grows 3.8 percent from fiscal year 1997 to fiscal year 1998, the expected underlying growth in the sales tax is 3.9 percent. This growth is offset by the loss of $5 million due to tax cuts enacted in 1996.

Other (non-sales) User Taxes and Fees

Receipts from other user taxes and fees are projected to be flat. Slight growth in motor vehicle fees is offset by declines in cigarette and alcohol taxes, resulting from the long-run downward trend in cigarette and alcohol consumption.

Business Taxes

Business tax receipts are estimated to decline 0.7 percent, or $35 million. Underlying growth of 3.6 percent is derived primarily from the strength in the financial services sector and growth in energy consumption. This growth is offset by the loss of $194 million due to tax cuts. Fully $173 million of this is attributable to cuts enacted in 1994, including the phase-out of the business tax surcharge.

Other Taxes

Receipts from other taxes are projected to decline 1.8 percent, or $18 million. Increased real estate sales and estate values (which partially reflect strong stock market performance) generate an underlying growth of 3.8 percent. This growth is offset by the loss of $21 million due to the repeal in 1996 of the real property gains tax.

Miscellaneous Receipts

Miscellaneous receipts are expected to drop 28.5 percent, or $601 million. Growth in fee and interest income as well as other factors generate underlying growth of 2.6 percent.

However, this growth is from a base which is $640 million lower than the reported fiscal year 1997 receipts, due to non-recurring items used in fiscal year 1997. These one-shots include a transfer to the general fund of $481 million from the Medical Malpractice Insurance Association, $98 million from the Workers Compensation Fund, $35 million from other fund transfers, $7 million from accelerating collection of receipts, and $19 million in miscellaneous sales and assessments.⁶

Transfers from Other Funds—LGAC

One-quarter of the sales tax receipts is deposited into a debt service fund to pay Local Government Assistance Corporation (LGAC) debt service. This transfer represents the funds remaining after satisfying that debt service requirement. Although the underlying growth of sales tax receipts is 3.9 percent, the 2.2 percent growth of this transfer is due to an increase in the required LGAC debt service.

Other Transfers from Other Funds

There is no underlying growth in these transfers. The $131 million decline is due to the loss of non-recurring receipts. About $24 million of these represent one-time transfers from the Infrastructure Trust Fund and the Revenue Accumulation Fund. ⁷ The balance are discretionary transfers determined by current policy rather than economic conditions.

The Fiscal Year 1997 Surplus

The most recent estimate indicates the State will have a cash surplus of $335 million in fiscal year 1997.⁸ Historically, the State has used any cash surplus in one fiscal year as a resource in the following fiscal year. This practice supports recurring spending with non-recurring receipts. More prudent financial management would use a cash surplus to reduce the current year’s reliance on one-shots or to reduce outstanding debt and liabilities. Therefore, the fiscal year 1998 baseline budget does not include any receipts attributable to a fiscal year 1997 cash surplus.

Total general fund disbursements are expected to grow 5.5 percent. This aggregate amount obscures the wide variation in spending changes among the State’s services. While spending in a number of areas, including income maintenance and revenue sharing, is expected to decline or stay constant, substantial spending increases are expected in others, including growth of 9.1 percent in Medicaid and 32.6 percent in pension fund contributions. (See Table 4.)

Spending changes are estimated based on multiple factors. Workloads may increase, such as when public school enrollment grows. The unit cost of providing a service may grow, such as when the payment rates for a specific Medicaid service are increased. Other spending is less directly related to the provision of a specific service and is instead determined by broader policy decisions. Examples include revenue sharing, which is akin to a general block grant for localities, and debt service, which primarily pays for capital projects built in prior years. Table 4 provides a summary of the major factors that determine each spending item. Explanations of the estimating methods are presented in Appendix B [Appendices are available in the printed report. Click here for details].

Grants to local governments, which comprise 69.6 percent of total disbursements, are projected to increase 5.1 percent. (Refer to Table 4.) Spending changes range from a 0.3 percent decline in income maintenance to a 12.7 percent increase in education aid for the physically handicapped.

Income maintenance

Income maintenance spending is expected to decline slightly, from $1,985 million in fiscal year 1997 to $1,980 million in fiscal year 1998. This spending includes funds for Aid to Families with Dependent Children (AFDC), Home Relief (HR), Supplemental Security Income (SSI), and other programs including Emergency Assistance and employment programs. The overall decline is the result of a 5.7 percent drop in spending for AFDC and HR, a 6.8 percent increase for SSI, and a 9.1 percent increase for the other programs.

Spending for AFDC, HR and SSI is determined by workload (the number of recipients) and benefits per recipient. The AFDC and HR spending decline is the result of a 6.9 percent drop in the number of recipients, attributable to economic expansion and administrative actions including enlargement of workfare and fraud detection. Benefits per recipient are estimated to increase 1.4 percent, based on past trends.

For SSI, growth is projected as the number of recipients increases at its historical rate. Between fiscal year 1997 and fiscal year 1998, the number of SSI recipients is projected to increase 7.4 percent, and benefits per recipient to decrease 0.5 percent. The other programs, which represent 15 percent of income maintenance spending, are projected to grow at their historical rate.

Medicaid

Spending for Medicaid is projected to increase 9.1 percent or $529 million from $5,825 million to $6,354 million. This reverses experience in the current year; Medicaid spending is estimated to decline $170 million from fiscal year 1996 to fiscal year 1997, 9 primarily due to temporary cost control measures such as freezing the “trend” factor (which increases provider payments for inflation) and other one-year programs. As these measures expire, spending per Medicaid-eligible person will resume its past growth trajectory.

For fiscal year 1998, average spending for each eligible person is projected to increase 8.5 percent. The number of Medicaid eligibles is expected to grow only 0.2 percent. For two-thirds of the Medicaid population, eligibility is tied to participation in income maintenance programs. The aforementioned decline in income maintenance recipients causes a 2.5 percent decline in the related Medicaid eligible persons. Offsetting this decline, the rest of the eligible population is expected to increase 6.2 percent.

About 90 percent of the spending increase is attributable to two groups. Over 50 percent of the increase is for services to individuals who are Medicaid-eligible in conjunction with SSI. For this population, the number of eligibles will increase 7.4 percent and spending per eligible will increase 5.2 percent. Another 40 percent of the spending increase is attributable to services for others, mostly aged and disabled individuals, who do not receive SSI payments but whose medical bills qualify them for Medicaid.¹⁰ For this group, the number of eligible persons will increase 6.2 percent and spending per eligible person will increase 2.3 percent.

Education aid

Local aid for education is expected to grow 4.4 percent, or $503 million. Most of the increase ($451 million) is for elementary and secondary education. Support for public schools is projected to increase 4.3 percent, or $361 million.¹¹ This is the result of a 1.1 percent (31,000) increase in the number of students enrolled, a 2.6 percent inflationary increase in aid per student, and the disbursement of $93 million which was deferred from fiscal year 1997 in order to help balance that year’s budget. Aid for physically handicapped students and other education aid are estimated to grow $90 million, based on 2.6 percent inflation, an historical real growth rate of 9.8 percent for aid to the physically handicapped and an historical constant dollar decline of 1.6 percent for other education aid.

A relatively small part of the education aid increase, $52 million, is attributable to 2.8 percent growth in aid for higher education. This increase is caused by inflation of 2.6 percent, an historical annual real growth rate of 0.8 percent for scholarships and tuition assistance and an historical constant dollar decline of 0.2 percent for municipal (CUNY) and community (SUNY and CUNY) colleges.

State Operations and General State Charges

Spending for the operations of State government, categorized as state operations and general state charges in the financial plans, is projected to increase 5.2 percent, or $421 million. This comprises 23 percent of the total baseline spending growth.

The State’s operations encompass multiple services, spending for which is determined by many different workload changes and discrete unit costs. Few new State programs have been initiated in recent years. Therefore, a constant service level is assumed for each agency, with one exception. During the past decade, spending for corrections has risen rapidly.¹² In keeping with this pattern, a 1.8 percent expansion in the population under custody of the Department of Correctional Services (DOCS) is included in the spending estimates.

Personal services spending growth is 4.2 percent, or $176 million. Most of this ($155 million) reflects honoring collective bargaining agreements with the State’s employee unions.¹³ The balance ($21 million) is due to the increase in the prison population.

Spending for nonpersonal services grows 3.0 percent, or $48 million. Assumed inflationary increases account for $43 million, and the rise in the prison population comprises the balance.

The pension contribution is projected to increase 32.6 percent, or $81 million. Although the robust investment performance of the pension funds and previous conservative salary estimates combine to reduce the necessary pension contribution by $124 million, there are two major counteracting forces reflecting prior choices. In fiscal year 1996, the State deferred $110 million of its pension contribution to fiscal year 1998. With interest, this adds $126 million to the fiscal year 1998 contribution. Another $31 million is due to the State’s decision to delay until fiscal year 1998 the initial payment for the fiscal year 1997 early retirement program. The rest of the increase, $48 million, is primarily the result of new entrants into the pension system and an improvement in benefits for some employees.

Spending for other fringe benefits is expected to rise 5.9 percent, based on past trends and inflation. Between fiscal years 1985 and 1994 real growth was higher than the 3.2 percent used in the estimate (see Table 4), but health insurance and workers compensation costs have slowed since 1994 and this trend is assumed to continue in fiscal year 1998.

Transfers to Other Funds

Growth in transfers to other funds of $240 million reflects larger transfers for long-term debt service. Debt service in fiscal year 1998 is estimated at $1,836 million, 15.1 percent more than in fiscal year 1997. Most of this outlay services borrowings for capital projects. However, less than one-third of the increase, $76 million, is attributable to capital investments.

Most of the projected increase, $164 million, will finance one-time borrowing used to reduce operating expenses in fiscal year 1997. In order to eliminate a long-standing two-year lag in its pension contributions, in 1986 the State borrowed an amount equal to the lag from its pension funds and has been paying it back on a 17-year schedule. In fiscal year 1997, in order to avoid paying the scheduled $135 million pension payment with current receipts, the State converted this obligation to publicly held long-term debt. In fiscal year 1998, the associated debt service will be $164 million.¹⁴

In fiscal year 1998 New York’s Governor and Legislature will confront a budget gap of $3,335 million. Various proposals will be presented during the budget negotiations beginning in January 1997. If the baseline budget is used as a framework for evaluating these proposals, the difficult policy choices will become clearer. It will be possible for all concerned to know whether proposals will be sufficient to close the gap, and how they will affect diverse programs and constituencies.

By presenting a baseline budget, the Citizens Budget Commission seeks to fill a void in the State’s budget process. Because public information and accountability are essential to a functioning democracy, the Commission believes its baseline budget will prove to be a valuable tool for all New Yorkers.

1. New York State Division of the Budget, Executive Budget Financial Projections 1997/98 - 1998/99, January 1996. Back to Document