Keeping State Operating Funds to 2 Percent Growth

State Operating Funds spending totals $96.2 billion in fiscal year 2017, including all spending from the State’s General Fund, Special Revenue Funds, and Debt Service Funds. State Operating Funds excludes spending of Federal Funds and on long-term capital projects; therefore it is an appropriate measure for tracking operating budget growth.

Table 1: Projected Disbursements of State Operating Funds

(dollars in millions)

Note: Medicaid disbursements include all State Medicaid spending for the Department of Health and other State agencies.
Source: New York State Division of the Budget, FY2018 Executive Budget Financial Plan (January 2017).

The two largest areas of State Operating Funds spending are school aid and Medicaid, which comprise half of the total. Education spending has been the subject of increased investment in recent years with annual growth rates generally above 4 percent, and in fiscal year 2018 it is projected to grow 5.1 percent.¹ Recent efforts have slowed Medicaid spending growth to approximately 3 percent per year; it is projected to grow 4.6 percent in fiscal year 2018.²

Because the two largest items of spending are growing at more than 4 percent, spending growth in other areas of the budget must be kept below 2 percent to adhere to the 2 percent cap. In order to accomplish this, the Executive Budget proposal includes four fiscal gimmicks totaling $1.2 billion which shift funds, delay costs, or assume unspecified savings:

1. Shifting workforce costs to the capital budget;
2. Converting the New York City School Tax Relief (STAR) benefit to a Personal Income Tax credit;
3. Including a placeholder for unspecified “agency financial management” gains; and
4. Delaying repayments to the New York Power Authority.

Questionable State Operating Funds Spending "Savings"

(dollars in millions)

Source: New York State Division of the Budget, email to Citizens Budget Commission staff (January 6, 2017); and FY2018 Executive Budget Financial Plan (January 2017), p. 27. 

1: Shifting Workers to Capital Funds

Because State Operating Funds growth does not include funding disbursed from Capital Projects Funds, increases in capital spending do not count against the 2 percent cap. Therefore, any spending shifted from State Operating Funds to Capital Projects Funds appears as savings in the operating budget. The Fiscal Year 2018 Executive Budget shifts the costs of more than 3,000 employees to Capital Projects Funds, yielding a ‘savings’ of approximately $227 million.³

2: The STAR Conversion

The Executive Budget also proposes reducing State Operating Funds spending by converting STAR property tax exemptions to tax credits.⁴ The STAR program traditionally allowed property owners to claim an exemption against their local property tax bill; the value of this exemption was paid back to school districts by the State and appeared as spending on the State’s books.  In the Fiscal Year 2017 Enacted Budget STAR property tax exemptions were converted to Personal Income Tax (PIT) credits for new homebuyers. These new homeowners receive the same size benefit they would under the old program, but the credits reduced tax revenues instead of counting as additional spending.

The Fiscal Year 2018 Budget further proposes that the credit approach be applied to the New York City PIT rate reductions that are also part of the STAR program. (Since New York City is a city of renters, there is a personal income tax component to the STAR program.) This proposal would require New York City taxpayers to pay more City income tax throughout the year, and then receive a credit or refund against their outstanding tax liability when filing taxes returns. The proposal would not change net benefits to taxpayers, but would change the mechanism through which the taxpayer receives the benefit.

By offering a PIT credit for the STAR benefit to New York City STAR beneficiaries, the State “saves” a disbursement of $277 million; instead it is reflected as a reduction in revenue.⁵

3: Unidentified Agency Savings

The Executive Budget proposes $500 million in annual savings to be achieved by Executive agencies. While this would represent very real savings of approximately 2.5 percent against agency operations, the specific measures that would generate the savings have yet to be identified.

State agencies may struggle to find these savings. Spending on personal service and non-personal service has been held to 1.3 percent annual growth, on average, since the 2 percent cap was introduced. If agencies reduce these costs by $500 million in fiscal year 2018, growth will be just 0.2 percent.⁶ Having already limited growth year after year, these unidentified savings will be difficult to achieve, especially with limited time. 

4: Extending NYPA Repayments

The Executive Budget also amends scheduled repayments to the New York Power Authority (NYPA) for loans taken by the State. This action yields savings in fiscal year 2018, but will increase costs in the out-years.

In 2014 Standard & Poor’s indicated that the State’s loan repayments to NYPA are important for maintaining the Authority’s credit rating.⁷NYPA’s Financial Plan states that “greater voluntary contributions or other obligations” to NYPA could have an adverse impact on NYPA’s financial position and credit ratings.⁸ Not only does this proposal push out its costs, it creates a burden on NYPA at the same time.

Conclusion

These four budget actions reduce State Operating Funds spending by more than $1 billion without reducing state costs. Absent these measures, State Operating Funds spending would grow by 3.2 percent in fiscal year 2018.  In its intent, the cap is financially prudent, but it has fostered the use of fiscal gimmicks that make the state’s budget more complicated to understand and undermine transparency.

Updated, February 14, 1:37 pm