Blog State Budget

About Last Night: The Good News and the Bad

August 03, 2010

After months of discussion and rancor the Legislature last night passed the final piece of the budget for fiscal year 2010-11, which began April 1. The good news is that the plan partially addresses the current year deficit and helps with next year's. The bad news is that the plan leaves fundamental issues unaddressed, and contains substantial risky elements, and some downright bad ones. In fact, little was done that could be categorized as the structural reform New York needs to live successfully on its recurring revenues.

Good news

Overall the budget contains about $4.0 billion in spending reductions that are "solid" meaning realistic and appropriate. The most significant of these is the $1.5 billion school aid cut that resulted from the Governor's vetoes. These cuts adhere to the Executive Budget and are targeted to wealthier school districts and do less harm to the neediest districts. School aid comprises nearly one-third of the State's own-source spending, and it must be addressed if spending is to be contained in future years.

The likelihood that the federal government will extend the federal Medicaid assistance money to the tune of $1 billion as the financial plan had assumed has improved in the past 24 hours but the legislation has still not passed both houses. The Legislature addressed the potential loss of these funds with a contingency plan which exempts some categories of spending, but provides enough of a start toward spending cuts to qualify as a fiscally prudent measure.

Hedge fund managers can cancel plans to sit down with officials from Connecticut with the removal of the controversial plan to tax them at higher rates than they otherwise enjoy. The final revenue bill, with $50 million less in revenues to count on, was passed without it. Although they did not make up the loss of revenue from the hedge fund proposal with other measures the Legislature did pass an amended revenue bill instead of leaving a hole of $1 billion in the current year until the fall, or after the election as some had feared.

Member items for this year were canceled, saving $190 million. Spending on these projects on behalf of individual legislators at this time would have been nonsensical.

An additional positive note is that the notoriously flawed Empire Zone program was finally ended. The new replacement program - Excelsior - will provide improved accountability for economic development incentives and be a better all-around tool for attracting and retaining the right kinds of businesses for New York.

Bad news

In the "big three" areas of State spending that comprise more than two-thirds of the State funds budget - school aid, employee compensation, and Medicaid - serious problems remain. Even after the cuts this year, school aid is projected to increase more than $7 billion over the next four years, as the postponed commitments from the Campaign for Fiscal Equity lawsuit are phased in. School district and State leaders have not yet figured out how to improve the impact of the State's added investments in education and will have to do so to manage with reduced aid and constrained local funds. Employee compensation has not been checked in any significant way. Although $500 million in plugs remain in the financial plan for savings from labor for early retirement and agency initiatives, these are unlikely to be realized. Likewise, the $775 million Medicaid cost containment package that was passed earlier in the year relies on $300 million in fraud recovery that may not fully materialize. With $47 billion in total Medicaid costs that are expected to grow 10 percent annually, $445 million in savings is just a drop in the bucket.

Unfortunately three significant opportunities were missed. Reforms proposed for SUNY and CUNY tuition policy and for the Power for Jobs program were not adopted. The SUNY system remains tied to the Legislature, and it will be hard to rebuild momentum for necessary changes now that session - and the prospect for imminent special session - is over. Perhaps worse is the extension of Power for Jobs for another year. Businesses will have their breaks back but longstanding problems with the program, enacted as a temporary measure in 1987, were left unaddressed for yet another year. In addition, the tax on sugary beverages, which would have provided recurring revenues from a consumption tax with public health benefits, was not enacted.

The worst element of revenue bill passed last night is the plan to "borrow" from the State and local pension funds by under-funding them for up to six years. Required contributions will now be capped, masking the true long-run costs to taxpayers and potentially jeopardizing the soundness of the plans long-term funding. 

By Elizabeth Lynam