Citizens Budget Commission
March 6, 1998
Dear Assemblyman/Senator:
I am writing to convey the Citizens Budget Commission’s (CBC) recommendations for legislative action on the fiscal year 1998-99 Executive Budget. These recommendations are elaborated in the attached memo prepared by the CBC’s staff.
Our advice is rooted in the CBC’s fundamental commitment to fiscal prudence. We use this term to denote behavior that promotes two core values—balanced budgets and fiscal stability. Balanced budgets are important to ensure that citizens pay for the services they consume. Fiscal stability requires actions that reduce future risks, finance recurring spending with recurring revenues, and do not burden future taxpayers with unaffordable bills.
From this perspective, the CBC endorses several of the Governor’s proposals; however, we also urge you to make several changes to the Executive Budget.
The CBC endorses the Governor’s proposals to:
1. Convert a bonded program to pay-as-you-go. The Governor proposes to use $425 million of the fiscal year 1998 cash surplus to convert the Community Enhancement Facilities Assistance Program from a bonded program to pay-as-you-go. This is fiscally prudent because it would lower future debt service costs. However, this program would be improved by specifying the projects to be funded in the State’s capital plan.
2. Change the Wicks Law. The Governor proposes to increase the cost threshold for projects required by the Wicks Law to have multiple contractors. This is a step in the right direction because the Wicks Law needlessly drives up construction costs. Ultimately, the Wicks Law should be repealed.
3. Enhance the Tax Stabilization Reserve Fund (TSRF). The Executive Budget proposes to enhance the TSRF by depositing $68 million of the fiscal year 1998 cash surplus and increasing the annual deposit cap and the total size cap. This is prudent because during times of economic prosperity it is important to put money aside in the event it is needed during an economic downturn. Other changes, not proposed by the Governor but recommended by the CBC, would further enhance the TSRF, so that it could be a rainy day fund. Withdrawals should be permitted only during an economic downturn. The State also should consider allowing prospective use of TSRF balances in the budget, rather than limiting use to mid-year transfers. The State also should consider requiring deposits during strong economic periods.
4. Use Executive Budget receipts estimates as the basis for the adopted budget. The estimates of receipts in the Executive Budget are prudent and based on reasonable economic assumptions; therefore, they should be the basis for the adopted budget. Receipts estimates should not be increased unless additional data indicate better economic performance.
5. Sustain and accelerate tax cuts that promote economic competitiveness. The CBC’s Budget 2000 Project evaluated New York’s State and local tax system and concluded that cuts in the personal income, business income, real estate transaction, utility gross receipts and the estate and gift taxes would be most beneficial to improving New York’s competitiveness. The Executive Budget continues and accelerates several such measures enacted in prior years.
6. Pursue elementary and secondary education reforms. Three of the Governor’s educational initiatives follow policy prescriptions previously recommended by the CBC.
Ÿ Allow year-round education.
Ÿ Reform special education funding.
Ÿ Allow the creation of charter schools.
7. Pursue STAR’s goal of enhanced State financing of elementary and secondary education. The STAR program’s shift of $2.7 billion in education funding from the local tax base to the State is desirable because the State’s broader tax base makes it possible to overcome existing disparities in school funding. STAR will reduce local taxes while concurrently increasing State education aid to school districts to fund their revenue loss.
In the 1994-95 school year, the wealthiest 10 percent of the school districts spent 77 percent more per pupil than the poorest 10 percent. As currently structured, STAR will not reduce these disparities. It generally will increase the share of State aid distributed to wealthy districts and decrease the share distributed to poorer ones.
The CBC recommends changes to the Executive Budget
Two features of the Governor’s budget conflict with the CBC’s commitment to fiscal prudence. First, almost $1.3 billion of the projected $1.8 billion fiscal year 1998 cash surplus, a non-recurring receipt, would be used to support recurring and growing spending and tax cuts. Second, this budget would result in large out-year budget gaps—$2.7 billion in fiscal year 2000 and $5.1 billion in fiscal year 2001.
For these reasons, the CBC recommends the Executive Budget be changed to:
1. Use the entire surplus in a fiscally prudent manner. The Executive Budget proposes to use $1.3 billion of the fiscal year 1998 cash surplus to support the State’s baseline operations and new spending or tax-cut programs. Instead, that $1.3 billion should be used in fiscally prudent ways. These include the following:
Ÿ Pay-off outstanding debt. This would reduce recurring debt service expenses and out-year budget gaps. It would be especially appropriate to pay off the $6 billion of debt that was issued to support operations rather than capital projects.
Ÿ Fund one-time commitments that provide multi-year benefits. It would be prudent to fund non-recurring initiatives that reduce future operating expenses. This could include spending—some of which is already in the budget—to upgrade computer systems to address the "year 2000 problem."
Ÿ Reduce the accumulated deficit and other long-term liabilities. The proposed budget would increase the State’s general fund accumulated deficit to $2.1 billion. For example, the State could pay the almost $1.2 billion it owes school districts from prior years.
2. Balance the budget by returning spending control to a top priority. The Executive Budget proposes a 5.4 percent real (inflation adjusted) increase in State funds spending—a stark contrast from the 4.6 percent real decrease in the Governor’s first two years. The fiscal year 1999 budget should be balanced with recurring spending reductions, rather than relying primarily on $1.3 billion from the fiscal year 1998 cash surplus.
3. Reduce reliance on appropriation-backed debt. The proposed capital program increases the State’s reliance on appropriation-backed debt, which is more costly than general obligation debt and does not require voter approval. No general obligation debt issue is proposed for the ballot, thus missing the opportunity to reduce reliance on appropriation-backed debt.
4. Reconsider the cut in the sales tax. The economic development benefits from eliminating the State’s sales tax on clothing are limited. Other tax cuts, such as those identified above, would do more to make the state competitive and attract jobs.
Prudent management of the public’s resources is just as important in good economic times as in bad. Given the current strength of the economy, this is an ideal time for the Legislature and the Governor to join forces and demonstrate the commitment to fiscal prudence that would give all New Yorkers reason to commend bold leadership.
Sincerely,
Lawrence B. Buttenwieser
Chair