Dear Legislator:

I write to convey the Citizens Budget Commission’s (CBC’s) recommendations for legislative action on the Governor’s Executive Budget for Fiscal Year 2019. Overall, CBC’s primary concern is that the Executive Budget does not go far enough to contain spending and is too reliant on new revenues, some of which may be speculative. CBC’s recommendations reflect those concerns.

Proposals to Reject

New Economic Development Spending: Over the last seven years economic development spending has expanded greatly, with few documented results.¹ New York State spent $4.0 billion in fiscal year 2016.² The Executive Budget increases Empire State Development (ESD) capital spending by $338 million to $1.9 billion and non-ESD economic development capital spending $234 million to $633 million. While much of the increase in spending is the result of previously authorized appropriations, much of this funding has yet to be committed to individual projects. There are also new programs proposed, including a new Life Sciences Laboratory ($600 million) and a High Tech Innovation and Economic Development Infrastructure Program ($300 million). These proposals should be rejected and a moratorium on new economic development projects imposed until more transparency and documentation of results are achieved for the existing programs. Necessary reforms include the creation of a consolidated economic development budget, universal reporting requirements, improved program design, and administrative reforms.³

Expansion of Executive Power: The Executive Budget proposes three expansions of the Executive branch’s budget powers. First, the Division of the Budget’s (DOB’s) authorization to craft a plan if federal Medicaid funding or all other federal aid declines by at least $850 million is extended for two more fiscal years. Second, DOB’s ability to transfer appropriation authority within the State Operations budget will increase, allowing the Governor to increase spending on projects after adoption of the budget without public or legislative input. Finally, DOB could institute uniform cuts up to 3 percent across the State General Fund and special revenue funds aid to localities if tax revenues are forecast to be $500 million less than Executive Budget projections. Cuts would not be targeted and transparency undermined. If the administration already anticipates the need to make significant midyear spending corrections a less risky budget should be adopted.

Business Tax Credit Deferral: The Executive Budget proposes a three-year deferral of business tax credits for taxpayers claiming more than $2 million in aggregate credits. This would increase revenues in the next four fiscal years, while exacerbating budget deficits thereafter. If the credits are unnecessary, they should be repealed; otherwise, the credits should be paid as scheduled.

Metropolitan Transportation Authority (MTA) Transportation Improvement Districts: The Executive Budget proposes to create special transportation improvement districts to raise revenue for transit improvements. The proposal would allow the MTA to siphon some of New York City’s property tax revenues without the City’s approval. Furthermore, these districts would exist in perpetuity, revenues would not be segregated to repay project costs, and property owners could be taxed for past MTA projects.  Additionally, the eligible project size of $100 million is too low, and the geographic district size proposed is too large.⁴ If the MTA wishes to consider tax increment financing as a capital financing tool, it can work within the existing statutory framework as it has in the past.

Shift in MTA Capital Funding Responsibility:  The Executive Budget inappropriately asserts that responsibility for MTA subway and bus capital improvements should rest solely with the City of New York, contrary to longstanding practice and understanding, and would require a seven-fold increase in City capital contributions to the MTA.

Health Insurance Windfall Tax: The Executive Budget proposes to increase taxes on for-profit health insurance companies to capture the “windfall” savings created by a decreased federal corporate tax rate. There is no legitimate justification for targeting this specific industry when other sectors will receive the same tax benefits. Increasing taxes on health insurance companies will ultimately increase consumer insurance costs. 

Proposals to Modify

Use of One-Time Financial Settlements: The State’s $702 million in one-time financial settlements are best used to enhance reserves or provide long-term benefits such as pay-as-you-go capital investments that replace borrowing, paying down debt, or making payments to the retiree benefits trust.  Using $383 million for annual State operating expenses and $194 million for the State’s portion of ongoing expenses related to the MTA Subway Action Plan is ill-advised. In contrast, dedicating $125 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.

School Aid: School aid growth exceeds the cap, increasing $769 million on a school year basis and growing 3.0 percent to $26.4 billion. Of this increase, $338 million, or 44 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 distort the final aid distribution, driving too much funding to wealthy districts.5 The Executive Budget imposes an additional calculation on top of the existing distributions and increases funding to all districts including those that are affluent and not in need of further State support. The Executive Budget also caps growth in expense-based aids beginning in school year 2020. The Enacted Budget should reform the Foundation Aid formula to direct aid where it is needed most and reprogram expense-based aid into it.  In doing so, State education spending will remain under the school aid cap while providing all districts with sufficient funds to provide a sound basic education.⁶

Design-Build Authorization: The Executive Budget extends design-build authorization to five additional State agencies and authorities.⁷ 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.⁸ This proposal should extend authorization to New York City, which has requested it in the last three legislative sessions.

School Tax Relief (STAR) Cap: STAR is a poorly designed program that drives excessive benefits to wealthy taxpayers by benefiting only property owners and providing larger benefits to regions of the State with the highest property values. The Governor proposed freezing the benefit at current levels; while it is a step in the right direction to stem the growth of this inadequately targeted program, STAR should be repealed entirely. This would save $3.4 billion annually. The State should also eliminate the property tax rebate which is based on a property owner’s STAR savings and costs $1.2 billion annually.⁹

Health Insurance Company Conversion Proceeds: The Fiscal Year 2019 Financial Plan includes $750 million in revenues attributable to the conversion of nonprofit health insurance companies to for-profit status. In the past, such conversions have experienced delays and unpredictability, and the State should not rely on these revenues to balance the budget.

Proposals to Support

Continued Spending Discipline in Agency Operations: While certain financial maneuvers artificially lower the rate of total spending growth from 4.1 percent to 1.9 percent, the Executive Budget does continue spending discipline in agency operations.¹⁰ For example, full-time employees remain level at 182,565 after peaking at 199,916 in fiscal year 2009, and outside of a few targeted programs, agency costs are held to current levels.

Medicaid Cost Controls: The Medicaid Redesign Team (MRT) recommendations continue to deliver savings.¹¹ The State’s share of Medicaid, one of the largest areas of spending in the budget, continues to remain under the Global Growth Cap of 3.2 percent. Furthering efficiency, the Delivery System Reform Incentive Payment (DSRIP) program has invested Medicaid savings into reducing avoidable hospital use as the State moves to value-based payments. To continue progress, the Legislature should accept the Governor’s Medicaid proposals, including the repeal of spousal refusal, to help contain Medicaid costs.¹²

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 pays for the standard premium and the Income-Related Monthly Adjustment Amounts (IRMAA) levied on high-income retirees (couples with incomes in excess of $170,000 per year).¹³ 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. Retiree health insurance liabilities, commonly referred to as other postemployment benefits (OPEB), are $87.3 billion, and the State has no assets reserved to address these future costs.¹⁴ The proposed measures are reasonable and necessary to control expenses.

Internet Sales Tax Fairness: Online retailers that have a physical presence in New York State are required to collect sales tax on the sale of their products, but they do not necessarily collect sales tax when they act as a marketplace for other sellers. Online sales should be subject to the same taxes as brick and mortar retailers, regardless of the intricacies of how those sales are arranged.

Finally, CBC supports the Governor’s efforts to address the impact of the federal tax law’s capping of the State and Local Tax (SALT) deduction. While the Governor has submitted tax reform proposals as part of the 30-day amendments, changes to the State tax code should be deliberated carefully, and therefore, are best considered outside the budget process. CBC has convened a special committee of business and civic leaders and tax experts to consider reforms and will issue a report on the Governor’s proposals in coming weeks.

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