According to the budget the Governor submitted Tuesday, the State is facing a $6.7 billion budget hole in the 2010-11 fiscal year that begins on April 1 (that includes an additional $500 million deficit left over from this year.) This deficit amounts to about 8 percent of State operating funds, which are expected to climb to $84.9 billion without any action by the Legislature to reduce growth. To fill the hole the Governor has proposed $4.6 billion in spending control initiatives, $1.3 billion in revenue initiatives, $565 million in one-shots, and $262 million in pension cost deferrals. Together these actions reduce planned spending increases for next year from 7.2 percent to 0.9 percent. Although the proposals do not amount to outright year-over-year reductions they are cuts in real terms, as measured against an expected inflation rate of 2 percent. More will be necessary. The budget gap in fiscal year 2013-14 is still expected to reach $12.2 billion even if all of the Governor's proposals are adopted, and the reality of a slow and sluggish economic recovery is beginning to hit home. But the Governor's budget proposal today presents a straightforward beginning to our way out of our fiscal mess. Three points are significant:

1. The proposal squarely addresses school aid and Medicaid spending. The two most significant gap closing cuts are in school aid and Medicaid. These proposed actions are not surprising, because this is where the most money is in the State budget. Together, the two categories comprise 40 percent of State operating funds. They are also areas where unsustainable growth is expected. Without action, the State operating funds dedicated to school aid and Medicaid are projected to increase next year by $1.1 billion, or 5.3 percent, and $1.6 billion, or 14.5 percent, respectively. To put the school aid cuts in perspective, the Governor's proposed $19.9 billion in school aid is nearly $1 billion higher than the amount spent in 2007-08, and $2.6 billion higher than the amount spent in 2006-07. On a per pupil basis the reduction proposed is about $160, and wealth-adjusted so it will be smaller than that in needy districts. In Medicaid additional enrollment is expected as more New Yorkers are experiencing financial difficulties, and room must be made within the program to afford the coverage for additional people. The historical and projected trends including the Governor's proposed actions for both programs are shown below in Tables 1 and 2.

2. The proposal tells it like it is. Recognizing the limitations of relying on nonrecurring gap-closing measures, the budget proposal relies on one-shots to a lesser extent than many budgets in recent memory. The budget also labels revenue raising initiatives as just that rather than mischaracterizing some of them as spending reductions as was the case last year. The Governor's executive budget proposes $565 million in one-shots, using them to close 8.4 percent of the $6.7 billion budget gap. This compares favorably with last year's proposal and especially favorably with proposals made in the most recent economic downturn, 2002-03 and 2003-04. In fiscal year 2003-04, for example, the Executive Budget proposed to finance $5.2 billion of an $11.5 billion budget gap with one-shot borrowed funds from the tobacco settlement. (See Table 3 below.)

Also absent are mischaracterizations of revenue raising initiatives as spending reductions. Last year's budget contained about $1.8 billion in actions that were labeled as spending reductions when they were really revenue items. This year the proposal to increase gross receipts taxes on health care institutions by $216 million, for example, is more properly identified as a revenue raising initiative rather than a spending reduction.

3. The proposal does not pretend to solve out-year problems with assumptions of continued federal stimulus aid and/ or extended personal income tax surcharges. The 2010-11 budget increases state all funds spending by 0.6 percent, or $786 million, over last year, sustained with $4.4 billion in federal stimulus aid. But it contains no assumption that federal aid will continue beyond the parameters of the original aid package. A year from now the stimulus amount estimated to be made available to New York dwindles to just $220 million. This budget presentation does not attempt to paper over future problems by showing continued increased levels of federal aid. Likewise it assumes that the temporary personal income tax surcharge will expire on its original schedule, at the end of calendar year 2011.

The Legislature should seize the opportunity to move the State's finances toward structural balance by embracing the Governor's proposal for real and recurring spending reductions.

By Elizabeth Lynam