March 11, 1997

TO: Lawrence B. Buttenwieser, Chair

FROM: Cynthia B. Green, Vice President for State Studies
Andrew S. Rein, Research Associate

On January 14, 1997 Governor George E. Pataki presented the fiscal year 1998 Executive Budget. This memo reviews the proposed plan as updated by the Governor’s 30-day amendments. The first section provides an overview of the budget. The second section identifies important components of the proposal that should be included in the adopted budget and suggests changes to improve the plan.

This analysis is based on two recent Commission reports. A Baseline Budget for the State of New York estimates that the State has a $3.3 billion baseline gap to eliminate in fiscal year 1998. The Budget 2000 Project shows that aggressive reform of State government would save more than $8 billion annually, make deficits and reliance on fiscal gimmicks vestiges of the past, and provide significant additional resources to finance tax cuts, infrastructure investments and service improvements.

Overview

This overview includes a description of how the Governor proposes to close the $3.3 billion cash budget gap, a comparison of the fiscal year 1998 plan with the current year, and an identification of the fiscal consequences of adopting this budget.

Closing the $3.3 billion baseline gap

The Commission’s Baseline Budget estimated that under current law and policies, the State of New York faces a $3.3 billion general fund budget gap in fiscal year 1998 on a cash accounting basis. (See Table 1.) Under the Governor’s proposal, over one-third of the cash gap is closed with $1.3 billion of additional receipts and just under two-thirds is eliminated by reducing spending growth $2.1 billion.

Over $1 billion of the $1.3 billion increase in receipts comes from “rolling” personal income tax receipts collected in fiscal year 1997 into fiscal year 1998. (See Table 1.) In this manner, fully one-third of the Governor’s gap-closing actions draws upon non-recurring receipts.

The spending reductions are primarily in local assistance programs ($1.8 billion), with the largest reduction in Medicaid ($1 billion). In contrast, spending for State operations is virtually unchanged; the Executive Budget reduces baseline growth in this area $91 million or 1.7 percent.

Fiscal year 1998 versus fiscal year 1997

The Governor proposes a $33 billion general fund budget with a $24 million cash surplus. (See Table 2.) The recommendation would increase disbursements $111 million. To support this spending and permit tax cuts, the plan relies on $1.3 billion of one-shots, including the $1 billion of receipts rolled from this year.

Fiscal implications

Adoption of the Executive Budget would harm the State’s already precarious financial condition. Under Generally Accepted Accounting Principles (GAAP), the proposed combination of spending increases and one-shots would cause expenditures to exceed revenues by $799 million in fiscal year 1998. (See Table 3.) For the first time since 1986 the Executive Budget is not balanced under GAAP.

The estimated $2 billion accumulated deficit at the end of fiscal year 1997 would rise above $2.8 billion at the end of fiscal year 1998. Adjusting the State’s balance sheet for two transactions that have moved liabilities out of the general fund—the sale of $4.7 billion of Local Government Assistance Corporation bonds and refunding of the pension obligation—increases the anticipated accumulated deficit at the end of fiscal year 1998 to a record high of nearly $7.6 billion. (See Table 4.)

The Governor’s major initiatives for next year, the Star program of school tax relief and greater education aid and the cuts in estate and gift taxes, are multi-year programs that phase-in slowly. Together these new programs would cost the State $201 million next year, then increase to nearly $1.3 billion in fiscal year 1999 and almost $4 billion in fiscal year 2002. (See Table 5.) The multi-year tax cuts and spending programs would generate unacceptable deficits in the years ahead, including a $1.7 billion deficit in fiscal year 1999 and over a $2.4 billion deficit in fiscal year 2000. (See Table 6.)

Recommended Action On The Executive Budget

The Executive Budget is not balanced in accordance with GAAP and does not restructure State government in a significantly aggressive manner. The Budget 2000 Project demonstrates that reform of State government could save far more than is needed to balance next year’s budget.

The following actions would balance the budget, permit dramatic tax cuts, and provide additional sums for infrastructure investment and service improvements.

Balance the budget. The Executive Budget has a $799 million GAAP deficit; current spending is not supported with current resources. Balancing the budget would assure spending is supported with current resources. This should be accomplished with spending cuts that do not reduce services.

Significantly reduce reliance on one-shots and devote the fiscal year 1997 surplus to reducing outstanding debt. Instead of rolling more than $1 billion of this year’s receipts into fiscal year 1998, the adopted budget should use this year’s surplus to reduce outstanding debt, effectively lowering recurring expenditures.

Restructure State operations more aggressively. During the past two years, the State has eliminated over 18,000 positions, and the fiscal year 1998 budget proposes an additional reduction of 1,700. However, in most agencies State workers have not been subject to competitive pressures, and services have not been restructured.

Large savings would result from adopting the best practices from around the country. Many jurisdictions have lowered costs significantly by requiring government workers to compete with private and nonprofit firms for the right to provide services. Competition led to savings of 57 percent on custodial services in Phoenix and 26 percent on highway maintenance in Massachusetts. New York could follow this lead in the Departments of Transportation, Parks, Environmental Conservation, and General Services, where competitive contracts could be used for maintenance and management of equipment, land, facilities, highways, and roads.

Jurisdictions also have improved services and reduced costs in excess of 25 percent from reengineering service delivery through the introduction of new technology, work processes, work rules and compensation packages. Although the State has embarked on some reengineering, more opportunities exist. For example, improved and increased utilization of technology would benefit many agencies where disparate systems lead to inefficient, labor intensive reentry of data.

Implement greater savings in Medicaid-financed long-term care services. Over the past two years, significant attention has been directed to controlling Medicaid spending for acute medical care services, where spending per beneficiary was 58 percent above the national average. Equally important is reducing spending for long-term care, the single most expensive aspect of the program.

Although the Governor's budget begins the necessary attack on the high unit cost associated with long-term care, high spending also results from providing long-term care services to affluent families. This stems from New York's generous eligibility rules, particularly the limits on retention of assets. The adopted budget should tighten eligibility rules to target Medicaid benefits to the indigent and provide incentives for families with sufficient income to purchase private long-term care insurance.

Centralize the administration and financing of social welfare. The current administrative structure for public assistance, Medicaid, and foster care is a patchwork of 57 separate county social service agencies plus the City of New York that generates excessive administrative costs, reduces the quality of services, and results in unequal treatment of clients. The Governor's proposals for reforming social welfare call for even more local responsibility for these programs, exacerbating the existing problem. For example, the Article XVII Safety Net Program replaces the Home Relief program's State-established schedule of cash payments with locally determined non-cash benefits of vouchers for food, shelter and medical assistance.

The adopted budget should centralize the administration of social welfare to improve the quality of services and save money. Statewide administration of social welfare would facilitate more extensive use of computer technology in program administration. This would be particularly beneficial in improving child-welfare services, enhancing child support collection efforts, and increasing payments recovered from the estates of long-term care recipients.

Furthermore, the State should assume current local responsibility for financing social welfare services. New York relies extensively on its local governments to finance social welfare services, whereas this is almost entirely a state responsibility in most other places in the country. Financing social welfare services with local taxes creates a mismatch between available resources and required expenditures. Those areas with relatively large numbers of poor residents do not have the strongest tax bases. High local taxes in New York stem largely from these financing arrangements, placing the State at a competitive disadvantage. The best way to lower local taxes is to adopt a budget which begins State assumption of the local responsibility for financing and administrating public assistance and Medicaid.

Retain current public assistance cash benefits. The NY Works program, which replaces AFDC in the welfare reform legislation submitted with the budget, includes a five-year time limit for cash benefits and reduces the level of benefits during that period. The adopted budget should exclude these provisions.

The State’s current cash benefits are above the national average; however, they are needed by the poor to sustain minimally acceptable living standards. The value of cash benefits and food stamps in New York City already falls short of the federal poverty threshold, and it has been declining in inflation adjusted dollars for two decades.

Enacted last year, federal welfare reform significantly changes public assistance by limiting to five years the duration of federal cash benefits. This often is cited as the reason for limiting all cash benefits in New York State to five years. However, even though federal participation ceases after this period, the State can continue to provide benefits with its own funds. The current Home Relief program is an example of a public assistance program that does not include federal participation. In addition, it is not clear how time limits affect the long-term employment prospects of public assistance recipients, but they are likely to cause significant harm, particularly to children.

Do not implement a new education aid and tax relief program that disproportionately benefits wealthy districts. The Governor’s proposed STAR program includes a phased-in $1.7 billion annual increase in education aid and a $1.8 billion program to reduce school taxes. Both parts of the program are objectionable.

The education aid component does not address the inequity in spending per pupil between wealthy and poor districts. Over half of the new funding will reimburse costs or will be calculated on a per-pupil basis, thereby going to wealthy and poor districts alike. Thus, aid to wealthy districts, which subsidizes their ability to spend much more per pupil than poor districts, will continue to grow.

The adopted budget for fiscal year 1998 should promote equitable education funding by reducing aid to wealthy districts. The Budget 2000 Project estimates that a 20 percent reduction in aid to districts outside New York City with above average tax bases would save $400 million.

STAR addresses the problem of high local taxes by reducing local school taxes on homeowners (and coop owners in New York City) and substituting increased State aid for school districts’ loss of funds. The program “caps” local spending at current levels, but permits adjustments for inflation, enrollment growth and expansion of the property tax rolls, and additional spending growth authorized by a two-thirds vote of the district’s residents.

Although this initiative attempts to combat the serious problem of high local taxes, it is poorly targeted and will not achieve its goal. Wealthy, high spending districts that can easily keep spending within the cap likely will benefit from this program; their residents’ taxes probably will decline. In contrast, poorer districts with relatively low spending per pupil may have a need to override the spending cap; their taxes may rise. Like direct aid, tax relief should not disproportionately benefit wealthy districts.

Five important elements proposed by the Governor mirror reforms recommended in the CBC’s Budget 2000 Project and would make taxes more competitive and impose some spending restraint. These should be included in the adopted budget.

Cuts in estate and gift taxes. The Executive Budget would reduce estate and gift taxes and eliminate a key reason wealthy elderly New Yorkers move out of state. The plan to reduce estate tax liability to the maximum federal credit allowable and significantly increase the maximum unified credit for gifts would make New York's treatment of gifts and inheritances comparable to the practices of most other states with which New York competes for residents.

State operations restructuring. The Executive Budget proposes agency consolidation and reorganization of human services, which includes creating two new agencies, the Department of Temporary Disability Assistance and the Department of Children and Family Services. These are constructive first steps in reforming the State's service delivery structure.

Medicaid cost containment. The Executive Budget proposes to contain Medicaid, a program whose expenditures per beneficiary are twice the national average. At the heart of the problem is the State’s rate setting system, which protects providers from competition and sustains extremely high unit costs. The Governor’s pending federal waiver request, which would allow New York to place nearly all Medicaid recipients in managed care plans, is an important step in reducing high expenditures that the Secretary of Health and Human Services should approve.

Other steps are equally important. This budget would introduce competitive forces into the pricing of long-term care services, which are now 168 percent above the national average.

Special education reform. The current education aid formula and regulations have driven up costs by providing financial incentives for districts to place children with varying degrees of specialized needs in costly special education initially and in highly restrictive environments within the special education curriculum thereafter. The Executive Budget proposes reforms that would foster greater integration of general and special education and remove incentives for counterproductive and expensive placements.

Exemptions from the Wicks Law. The Wicks Law needlessly drives up the cost of construction and should be repealed. The Executive Budget calls for exempting City University of New York and local government small-scale construction projects from the Wicks Law, a step in the right direction.