The fiscal year 2016 Executive Budget presented by Governor Andrew Cuomo last week contains many worthwhile proposals that should not be overlooked in the wake of the Assembly leadership crisis. It limits State-funded spending growth to 1.7 percent, the one-time windfall from bank settlements is designated for one-time investments including transportation and transit infrastructure, and the State is once again in a position to add significantly to its reserves. Nonetheless, some misguided elements should be eliminated or modified by the Governor in budget amendments or by the legislature during the adoption process.

State Budget Hits

1. 2 percent spending growth for fifth straight year. In 2011 New York State’s leaders committed to maintain a self-imposed cap of 2 percent on state-funded operating spending, and this budget fulfills that promise with a proposed increase of 1.7 percent. Persistent fiscal discipline has facilitated a turnaround in the State’s fiscal condition; in January 2011, cumulative budget gaps over the four-year financial plan were projected to be $64.5 billion compared to $14.2 billion in the budget released last week. The average annual expense growth rate has slowed from 7.8 percent for fiscal years 2005 to 2008 to 2.0 percent for fiscal years 2012 to 2015.  Controlled growth in two of the “Big 3” areas of state spending – State operations and Medicaid – has helped the turnaround and partly mitigated larger-than-planned growth in the largest of the Big 3, school aid.  
2. Medicaid cost cap continues.  In 2011 New York initiated a critical effort to rein in the State’s exceptional Medicaid costs and improve health outcomes with the formation of a Medicaid Redesign Team (MRT) and by implementing a “global cap” limiting spending growth to the 10-year average of the medical component of the inflation index. The Commissioner of Health was granted special authority to unilaterally reduce spending if it breached the cap. The fiscal year 2016 Executive Budget continues the MRT and makes the global cap and the powers of the Commissioner permanent. The work of the MRT has reduced per-beneficiary costs in the Medicaid program and is transitioning health care providers to a performance-based payment system. 
3. Agency spending discipline. For the fifth consecutive year, agency operations spending will be held flat, with continued efforts to find efficiencies and preserve services. Continued discipline across state agencies will reduce the size of the Executive-controlled workforce from 131,741 in fiscal year 2010 to a projected 119,160 in fiscal year 2016, a decrease of 12,581 personnel or 9.5 percent. The fiscal year 2016 Executive Budget also commits to performance management for state agencies, finally unveiling the NY Performs platform for agency data, as recommended by the Spending and Government Efficiency Commission (SAGE) in 2012. New York State has long lagged other states and New York City in using performance data and making it publicly available.
4. Rainy day reserve enhancements. The fiscal year 2016 Executive Budget sets aside $850 million for a possible settlement of a rate dispute with the federal government over Medicaid payments for residential facilities for the disabled and makes a $315 million deposit to rainy day funds for future economic downturns. The $850 million Medicaid settlement set-aside is funded from the unprecedented $5.7 billion state regulators collected from resolving litigation with financial firms. In addition to proposing a $315 million deposit, the budget includes two sensible revisions to the rules for the accumulation and use of rainy day funds: 1) an increase in the allowable annual contribution from 0.3 percent of general fund disbursements to 1 percent, and 2) an increase in the maximum allowable reserves from 3 percent to 8 percent of disbursements. The proposal also allows the State to access these funds after three consecutive months of economic downturn instead of five months. Shoring up the State’s ability to withstand adverse economic conditions is a sensible way to invest one-time surplus resources. 
5. Transportation infrastructure funding boost. New York has significant unfunded capital needs in its transportation and transit infrastructure. Among the most notable examples are the shortfalls in the financing plans of the $3.9 billion Tappan Zee Bridge replacement and the $32 billion proposed capital plan of the Metropolitan Transportation Authority (MTA). To partly address these needs the Executive Budget allocates $1.3 billion of bank settlement proceeds to the Thruway Authority for the new bridge and another $750 million in the State’s five-year capital plan for bridge and road projects. For the MTA the Governor proposes $400 million in one-time funds from the bank settlements for the Access to Penn Station project and for parking and development near commuter rail stations.  In addition, capital commitments to the MTA, funded from appropriations for the State’s five-year capital plan, are extended from fiscal year 2017 to 2020, adding $750 million. 
6. Design-build procurement expansion.  In 2011 New York authorized the use of design-build procurement for three years for capital projects at the Department of Transportation and several other state agencies. Under the design-build process, one contract is issued for the design and construction phases of a capital project, allowing architects, engineers, and contractors to collaborate and produce better-designed and lower-cost projects. This procurement method is common in the U.S and internationally; 41 states and the District of Columbia allow design-build. At the end of 2014 the design-build authorization lapsed; the fiscal year 2016 Executive Budget permanently extends design-build and expands it to all state agencies. Project Labor Agreements (PLAs) are required for projects more than $50 million unless savings less than 5 percent are documented. Although the PLA requirement is cumbersome and potentially limits the State’s ability to capitalize on savings from partnering with the private sector by increasing the cost of labor, it is important not to allow design-build authority to permanently lapse. 
7. School Tax Relief (STAR) program modifications. The School Tax Relief (STAR) program is New York’s largest property tax relief program, costing $3.4 billion. In general STAR exempts the first $30,000 of home value from local property tax assessment (adjusted for local property value and enhanced for low-income seniors); the State sends replacement aid for the forgone revenue directly to local school districts. The program suffers from three serious flaws. First, because the basic relief offered under STAR bears no relationship to income it is poorly targeted. Second, because the exemption is adjusted by local property values communities with great property wealth receive more generous benefits. Finally, because STAR relief is paid directly to school districts the program has the unintended consequence of incentivizing school district spending. The fiscal year 2016 Executive Budget modifies the program to provide a tax credit for new homeowners, so taxpayers would bear the full burden of their school taxes directly, and school districts would gradually lose the state subsidy. It also eliminates taxpayers in New York City making more than $500,000 from the program, freezes the exemption benefit, and recoups improperly claimed tax benefits from past years. Although many of the basic flaws of STAR still remain, these changes would deliver tax relief more effectively and better target benefits to those who most need them.
8. Preschool special education rate-setting reforms. Again this year the Executive Budget introduces regional rate setting for preschool special education providers. New York provides mandated special education for children ages 3 to 5 largely by contracting with private non- and for-profit agencies. Counties pay for the service and submit claims for reimbursement to the State Education Department. Rates are based on historical costs and vary widely from provider to provider within counties. Setting rates on a regional basis eliminates irrational variation and helps contain costs for local governments. 
9. Tax credit loophole closures. Reforms to the $500 million per year Brownfields Tax Credit would encourage environmental remediation and better target benefits. The Executive Budget also calls for a more stringent approval process for state tax breaks issued by local Industrial Development Agencies (IDAs). The IDA changes help limit and coordinate economic development spending with the activities of Empire State Development and the Regional Economic Development Councils (REDCs). In addition, the investment tax credit is to sunset for financial services firms for which the investment incentive is no longer needed. 

State Budget Misses

1. Pension payment deferral. During the depths of the recession, the State approved a plan to amortize (that is, defer) required contributions to state employee pension funds. By the end of the current fiscal year, the State will have deferred $3.2 billion in required payments. These deferrals must be paid back with interest over a 10-year period. These deferrals are in effect, borrowing from the pensions funds and place the funds at risk. The Executive Budget compounds this problem by proposing an additional borrowing of $395 million in required pension payments in fiscal year 2016. Although the State’s fiscal circumstances were bleak when the pension amortization plan was adopted in 2010, circumstances have markedly improved and further deferral of pension payments is unwise and unwarranted.  Moreover, all the outstanding liabilities should be repaid.
2. Super-size school aid increase without rational distribution plan. Although the Governor and legislature previously committed to controlled spending growth in school aid, capping it at the annual rate of growth in personal income, increases for the past two years have exceeded this cap. This year the Executive Budget proposes a 4.8 percent increase, a figure well above the 1.7 percent allowable under the cap. The fiscal year 2016 Executive Budget conditions the increase on the adoption of education reforms including modifications to teacher evaluations and tenure, intervention in failing schools, and other provisions. School aid runs traditionally released with the budget to detail the proposed distribution of funds by district have been withheld. Attention to the sizeable and ambitious education agenda should not overshadow the real and pressing need to overhaul flawed school aid formulas. School aid should be distributed according to student need and district ability to pay, but over the years New York State has added many loopholes and exceptions that contribute to the misallocation of funds. The proposed $1.1 billion school aid increase amounts to an additional $400 per student on average, a significant increase to the state’s highest-in-the-nation average spending of more than $20,000 per student. The increase in school aid should be targeted to the neediest districts, and the allocation details should be available to the public for review and analysis well in advance of budget adoption. 
3. Excessive economic development spending. The Executive Budget proposes using $1.5 billion of the bank settlement funds for an Upstate Revitalization fund that will award $500 million apiece to three of the seven upstate Regional Economic Development Councils (REDCs) on a competitive basis. The return on these investments is far from certain. Over the last four years, New York has greatly expanded economic development spending, allowing certain companies to operate tax free for 10 years through START-UP NY and granting $600 million in capital grants through the REDCs, as well as adding a myriad of other new programs. The fiscal year 2016 Executive Budget also proposes a fifth round of $150 million in capital grants to the REDCs, a $50-million expansion to the State’s venture capital fund, and $110 million to SUNY and CUNY for 2020 challenge grants. Excelsior tax credits would also extend to entertainment companies, ensuring retroactive eligibility for $11 million in tax breaks granted to The Late Show last year. Despite many unknowns about the impact of grants and tax subsidies to businesses, the Executive Budget further commits significant state resources to economic development. The $1.5 billion in one-time settlement funds, in particular, would be better invested in infrastructure needs.
4. Placeholder savings drive aspirational surplus. The financial plan continues to include placeholder savings based on the assumption that spending growth will be held to 2 percent and show surpluses until fiscal year 2019. Against the assumed, or aspirational, surplus, the fiscal year 2016 Executive Budget proposes a phased-in $1.7 billion income tax credit, or “circuit breaker” program, for taxpayers whose property taxes as a share of income reach 6 percent. Although the proposed tax credit is an improvement over the current property tax freeze rebate, it is premature to “spend” the surpluses. The Legislature should understand this aspirational aspect of the financial plan and refrain from adopting large, long-term spending commitments or tax reductions.