How serious is New York’s looming fiscal crisis?
It’s so serious it may force the state to do something that’s hardly considered its strong suit: cut spending.
Last week Gov. David Paterson announced that projections for next year’s budget deficit had risen from $5 billion to $6.4 billion, the result of falling revenues and rising government expenses, and that this year’s budget is running a $630 million deficit. In a televised address, he said that the state is officially in a recession, and called for a 7 percent cut in state agency spending and a hiring freeze, as well as a property tax cap and an increase in home heating assistance.
Budget observers, even as they praised Paterson for attempting to deal with the problem, said the governor failed to mention key areas of spending, such as Medicaid, health care, school aid and economic development.
“To find significant savings, they’re going to have to re-examine bigger ticket items,” said Elizabeth Lynam, deputy research director for the Citizens Budget Commission, a non-profit group that monitors the state’s finances.
“The things [Paterson] is talking about are about as non-controversial as you could make them,” said E.J. McMahon, director of the Empire Center for New York State Policy. He said the problem isn’t so much falling revenue as overspending; the state’s revenues are expected to increase by 2 percent next year, while spending is expected to jump 11 percent. The bulk of this spending, he noted, is on Medicaid and school aid.
“You don’t have to cut Medicaid and schools so much as stop growing them,” McMahon said. “Paterson hasn’t mentioned Medicaid. I don’t know where he is on Medicaid.” He noted that Medicaid and school aid comprise about $4 billion of the $6.4 billion shortfall. “They cannot close the gap totally with state operations savings,” he said.
In a detailed press release, the Citizens Budget Commission outlined steps the group believes the state could take to save $4.7 billion. The first step involves restructuring Medicaid for an annual savings of $1.8 billion; right now, the state spends far beyond national norms for its Medicaid program, the group says, accounting for 14 percent of Medicaid spending nationally.
The Citizens Budget Commission also suggests reducing state operations costs by renegotiating fringe benefits for employees and retirees. According to the group, the state could save $75 million annually by requiring an additional 4 percent contribution toward family plan premiums for post-1983 hires, another $216 million by restructuring pensions. “Many government workers are now paid more than their private sector counterparts — the generous health insurance and retirement packages developed to attract them to work in the public sector are no longer justified,” the press release states.
Ron Deutsch, executive director of New Yorkers for Fiscal Fairness, warned against cutting state services and jobs, saying it would reduce the amount of money flowing into local economies.
“Spending cuts can deepen and lengthen a recession,” he said.
He also suggested that New York stop funding projects that are of questionable benefit to state residents. “The governor needs to be more open to ways to generate savings,” he said. “If you’re looking to generate savings, you could say, ‘We’re not going to do the (Advanced Micro Devices computer chip factory in Malta).’ ”
Paterson should also consider ending Empire Zones, industrial development agencies and brownfield cleanup programs, he said.
Progressive groups called on the state to enact a “millionaire’s tax,” something Paterson has said he’s not considering.
Mark Dunlea, executive director of the Hunger Action Network of New York State, agreed. He said the tax cuts for the wealthy enacted during the Pataki era cost the state $16 billion annually, but have failed to stimulate the economy or stave off recession. The problem, he said, is that the state is afraid of Wall Street, which accounts for 20 percent of state revenues.
“But it’s not like Wall Street is a friend to us,” Dunlea continued. “The middle class has watched their 401ks disappear. We’d like to see our governor be a little more assertive and say there’s a lot of financial abuse going on here. Rather than step away from Wall Street because it’s so important to our economy, we should say, ‘These guys are causing our problems.’ ”
Faced with an $11.5 billion deficit in 2003, the state enacted a three-year income tax surcharge on the state’s wealthier residents. Deutsch said this measure was successful, and that it didn’t hurt the rich as people with incomes over $200,000 saw their incomes increase 105 percent between 2003 and 2008. He noted that the tax rate on the richest 1 percent of New Yorkers — those with an average income of $1.6 million — is 6.5 percent, compared to 11.6 for families earning between $27,000 and $44,000.
But McMahon said a tax on millionaires would only exacerbate the state’s financial problems by making wealthy New Yorkers less likely to make critical investments and spend money in the state. “It would hurt the economy even more and create bigger holes in the future, even if it floats the boat in the short term,” he said. He also said that such tax increases are not fair, because they don’t affect the vast majority of the state’s residents. “This desire to narrowly target, to raise mass sums of money from nobody you know, is a sucker’s bet,” he said. “A classic surcharge affects everyone. But they want 99 percent of the people to pay nothing more.”
McMahon also said that it isn’t fair to compare 2003 to the current situation, because the tax hikes enacted that year occurred right around the time the federal government passed one of the biggest tax cuts in history.
Lynam said that a millionaire’s tax wouldn’t generate the amount of money the state needs to close the budget gap. A tax plan floated by Assembly Speaker Sheldon Silver, for example, would only raise about $1.5 billion. “You still have a long way to go,” she said. “There are going to have to be some other things happening.”
Look at spending
“We think the first line of defense should be the spending side,” Lynam said. “Taxes in New York are high already. The Legislature needs to go through and make a rigorous effort to rein in spending. Then they can come to the taxpayers — that might be warranted.”
Dunlea described the state’s Medicaid system as “irrational,” and said that the state has protected special interests when it comes to health care. “There are lots of savings that are very possible in health care, and no one has tried them yet,” he said. For instance, the state could try purchasing drugs in bulk to save money. He also called for greater oversight of the state’s economic development programs. “We have very ineffective economic development programs in New York,” he said. “That’s not a small amount of money.”
Hany Shawky, a professor of finance and economics at the School of Business at the University at Albany, said he thought the state should consider a millionaire’s tax, but only a temporary one. “It would have to be temporary,” he said. “You don’t want to scare people away. We want rich people to stay in New York.”
In his speech, Paterson asked the state Legislature to return to the Capitol on Aug. 19 for an “emergency economic session” to find a way to save $1.2 billion — $630 million in executive agency spending cuts, and $600 million in additional legislative action — with the goal of getting a jump on next year’s budget process. The 7 percent reduction in state agency spending Paterson proposed comes on top of a 3.35 percent cut already included in this year’s budget.
Shawky predicted that the state would be on firmer financial footing by 2009. In the meantime, some painful cuts must be made.
“Cutting expenses is a must in this scenario, but it will take a lot of sacrifice, even though every agency head believes there’s no fat to cut,” Shawky said. “In New York State, we’ve lived through a lot of cuts. New York government is not as fat as people like to think.”