February 28, 2017

Dear Legislator:

I write to convey the Citizens Budget Commission’s recommendations for legislative action on the Governor’s Executive Budget for fiscal year 2018.

Proposals to Support:

Continued Spending Discipline: While certain financial maneuvers artificially lower the rate of spending growth from 3.2 percent to 1.9 percent, the Executive Budget does continue overall spending discipline.[1]  The two largest items in the state budget, Medicaid and school aid, will be close to their growth caps, increasing by 5.5 percent and 3.9 percent, respectively. Spending on agency operations will decrease compared to the current year, reflecting decreases in state employees.  Specifically, the Executive-controlled workforce will decrease slightly in fiscal year 2018 and will be down 10 percent since 2010.  With potentially significant federal budgetary changes on the horizon, continued fiscal restraint is of utmost importance.

Increased Retiree Health Insurance Premium-Sharing: While most employers—public and private—do not reimburse retirees for the cost of Medicare Part B premiums, New York State not only pays for the standard premium, but also the Income-Related Monthly Adjustment Amounts (IRMAA) levied on high-income retirees (for example, couples with incomes in excess of $170,000 per year). Under the Governor’s proposal, the State would cap the amount retirees are reimbursed at current levels and discontinue IRMAA reimbursements for those most able to afford the costs of health insurance. The proposal to create tiered premium contributions based on years of service would allow employees to pay a smaller share of premiums in retirement with each additional year of service. Retirees with 10 years of service would be responsible for a maximum of 50 percent of single coverage premiums, decreasing to a minimum of 10 percent with more than 30 years of service, the contribution rate enjoyed by current retirees. As per current practice, proportionally higher contribution rates for higher wage retirees and family plan enrollees would be applicable.[2] Retiree health care costs are growing at a rapid rate, and the proposed measures are reasonable and necessary steps to control these expenses.

STAR Modifications: STAR (School Tax Relief) is a poorly designed program that drives excessive benefits to wealthy taxpayers. While STAR should be repealed, freezing the benefit will stem the growth of this poorly targeted program and is a step in the right direction.

Rational Tuition Plan for CUNY and SUNY: In 2011 New York implemented the NYSUNY 2020 and NYCUNY 2020 programs for the State University of New York (SUNY) and City University of New York (CUNY). These five-year programs introduced a rational and predictable tuition plan and a commitment to maintain State financial support to public universities. SUNY and CUNY tuition rates are lower than other states’ public institutions; incremental tuition increases will not endanger New York’s ability to attract students.  The Executive Budget would re-authorize increases of up to $250 per year for five years.

Proposals to Modify:

Use of One-Time Financial Settlements: The State’s current year $1.8 billion in one-time financial settlements should be used to provide long-term benefits such as pay-as-you-go capital investments that replace borrowing, enhance reserves, or accelerate debt payments. Use for operating expenses is not appropriate. Accordingly, the proposal to dedicate $150 million to the state’s rainy day fund is laudable, while dedicating $200 million for health care capital grants may prove worthwhile if such funds are utilized to effectuate systematic reforms that lead to improved care with decreased state costs. Likewise, $270 million dedicated to the Department of Transportation capital plan may also prove beneficial if the investment displaces debt and improves functionality. However, $200 million for ongoing counterterrorism and emergency response spending, and $155 million for first-year costs of labor agreements should be funded from general state revenues. The allocation of $800 million for economic development should be rejected, along with other economic development spending as described later in this letter.  

School Aid Distribution: The Executive Budget increases school aid $961 million on a school year basis–raising total school aid 3.9 percent to $25.6 billion. Of this increase, $428 million, or 45 percent, is Foundation Aid. The existing Foundation Aid Formula does not properly calculate the local contribution, and has too many floors, ceilings, phase-ins, and add-ons that warp the final aid distribution, driving too much funding to wealthy districts.[3] The Executive Budget would radically change the way Foundation Aid is calculated, making minor adjustments to last year’s distribution and adding funding to all districts including those that are affluent and not in need of further state support, exacerbating existing inequities. The final adopted budget should direct Foundation Aid where it is needed most—among less wealthy districts.

OPEB Fund: The Executive Budget creates a fund for Other Post Employment Benefits (OPEB).  However, the Executive does not deposit any revenues into the proposed fund.  The State should save for its OPEB liabilities. Dedicating one-time settlements to this purpose would provide long-term savings for the state’s taxpayers.     

Excelsior College Scholarships: The Executive Budget proposes to provide full tuition scholarships for full-time students enrolled in SUNY and CUNY degree granting institutions.  Eligibility would initially be limited to families with incomes of less than $100,000, increasing to $125,000 in 2020.  There is concern that the Governor’s cost estimate understates the number of additional students that may enroll at CUNY and SUNY schools due to this program, imposing increased costs in staffing and facilities on the institutions. If adopted, it is imperative to ensure the state provides SUNY and CUNY with adequate resources to accommodate any increased enrollment. In addition, the proposed requirement that private foundations affiliated with CUNY schools contribute 10% of their funds to this scholarship program should be eliminated; the foundations should be fully enabled to support additional initiatives selected by the colleges themselves.

Design-Build Authorization: The Executive Budget extends design-build authorization to all State agencies, authorities, and counties outside of New York City. Only a few State agencies and authorities currently have this authorization, which allows an entity to offer a combined design and construction request for proposals (RFP), as opposed to one RFP for design and a subsequent RFP for construction. Design-build is widely praised for saving time and money and has demonstrated positive results in New York State.[4] This proposal should also extend authorization to New York City, which has requested the authority in the last two legislative sessions.

Millionaires’ Tax Extension: The Executive Budget extends the Personal Income Tax (PIT) surcharge on taxpayers with incomes in excess of $1 million. Before extending the current rate, serious consideration should be given to the financial feasibility of imposing a top rate below 8.82 percent. Outside of New York City, only six states impose PIT rates higher than New York State.  When combined with the local PIT for residents of New York City, the New York rate is exceeded only by California. Also, given potential changes at the Federal level that may increase the impact of higher marginal tax rates, including repeal of the deduction of state and local taxes or imposition of additional limitations on deductions, the extension of the surcharge should include a requirement to revisit the tax if substantial federal changes are adopted.

Proposals to Reject:

New Economic Development Spending: Over the last six years economic development spending has expanded greatly, with few results.[5]  The Executive Budget would increase spending by Empire State Development (ESD) by $319 million, and increases non-ESD economic development capital spending by $334 million to $650 million in addition to creating a new Life Sciences Tax Credit. These proposals should be rejected and a moratorium on new economic development programs imposed until more transparency and results are achieved in the existing programs, through creation of a consolidated economic development budget and universal reporting requirements.

Film Tax Credit: The Executive Budget proposes to extend the Empire State Film Tax Credit for three years, until 2022.This credit is authorized through 2019; however, the State has allocated all authorized credits.  Despite various academic analyses that question the efficacy of film tax credits, it costs state taxpayers $420 million per year. Economic development subsidies, including the film tax credit, are meant to assist industries or individual businesses to establish themselves.  The film and television industry is firmly embedded in New York.  Many other states have repealed or substantially decreased their film tax credits, and it is time for New York to do the same.

Expansion of Executive Power: The Executive Budget includes three attempts to expand the Executive’s power. The Executive has proposed increasing the Division of the Budget’s (DOB) ability to transfer appropriation authority within the State Operations budget bill; this would allow the Governor to increase spending on projects after adoption of the budget without public or legislative input.  The Executive Budget also authorizes DOB to implement across-the-board reductions in Aid to Localities appropriations in response to revenue shortfalls.  This draconian tool would not appropriately target cuts and would undermine transparency. Lastly, the Executive Budget links enactment of unrelated Article VII language to appropriation authority for other programs. Proposals should be evaluated based on their relative merits, and not the merits of proposals that are interconnected solely due to parliamentary procedure.   

Thank you for considering CBC’s recommendations. As always, my staff and I are happy to answer questions or discuss these issues.

Sincerely,

Carol Kellermann
President, Citizens Budget Commission