The Empire Page

Background: A nonpartisan, nonprofit civic organization founded in 1932, the Citizens Budget Commission has defined four roles for itself:  (1) watchdog, (2) research organization, (3) monitor of implementation and (4) disseminator of information.  Earlier this summer the CBC supported Gov. Paterson's call for the State Legislature to cut spending rather than raise taxes to solve the budget shortfall.  We talked to Elizabeth Lynam, Deputy Research Director, about how they see things in the days before the Legislature comes back to Albany to face an even larger shortfall.

Q:  What's the CBC's best estimate for the current state budget shortfall and what are the likely consequences if the Legislature does not act before the end of the year to balance the budget?

A: The Governor's mid-year update, released on October 28, projects a current year deficit of $1.5 billion. Although the mid-year significantly reduced the revenue forecast from the previous plan it still relies on overall revenue growth of 1 percent from the prior year. We believe there is downside potential in the forecast as it stands, particularly in business taxes, which are expected in the Governor's forecast to remain at last year's levels. The monthly cash reports issued by the State Comptroller's Office have shown sharp business tax losses and we are concerned that this year's collections could still fall well below the current plan.
 
It takes time to implement savings plans that are well designed to preserve core services and also produce big dollar reductions. Postponing action is likely to necessitate more harmful and drastic action later.

Q If you were asked to draw up a plan to balance this year's budget what steps would you take?

A: As the governor and Legislature grapple with this challenge, they should be guided by four principles:

Principle No. 1: Stop funding programs that don't work or aren't needed. Rarely do elected officials cancel programs, even when they haven't been successful. One example is the Empire Zone program. Originally designed to attract jobs to hard-hit areas of the state, it has evolved into a large-scale program of corporate tax breaks, with no verifiable justification for the public investment.

Everyone from editorial writers at major newspapers to leaders of the Assembly and Senate and the state Comptroller have decried this program. Governor Eliot Spitzer's downstate chairman of the Empire State Development Corporation, which runs it, said, "On balance, the Empire Zone program has been a failure, and in some ways a gross failure." Yet Empire Zones continue and expand.

The same is true for prisons, whose inmate population declines, while staffing continues as if they were full. Yet the Legislature has resisted beginning the process to close even one.

Principle No. 2: We cannot afford gold-plated government employee benefits. The generous health insurance and retirement packages developed to attract people to work in state government are no longer necessary or affordable. Most working people in New York pay a large portion of their health insurance premiums and contribute to their own pensions. It is unfair for these taxpayers to subsidize public employee benefits that are far out of line with those in the private sector — and with those of most other states.

Uncontrollable health care costs for employees and retirees and ballooning pension payments have driven the big three automakers to the brink of disaster, and they will do the same for our state government, if the Legislature doesn't cut back. In the past, it has repeatedly gone beyond what has been negotiated with public employee unions to "sweeten" benefits by law. Now, it must change direction, increase employee and retiree payments toward their health insurance premiums, and restructure pension benefits for new state employees.

Principle No. 3: When you help needy parts of the state, don't sweeten the pie for all others, too. When efforts have been made to address inequities in school funding, the practice has been that, as funding for poor districts is increased, funding for wealthy districts is also enhanced. Per-pupil property wealth in the richest 10 percent of school districts in New York is 30 times the property wealth in the lowest 10 percent. More school aid to the wealthiest districts is not needed, but they get it whenever the state helps truly needy pupils.

Similarly, providers in the Medicaid program such as nursing homes are protected from cuts when the rates are restructured to assist truly under-funded providers. As a result, New York spends almost 70 percent more per beneficiary than the national average. These costs need to come down, even if it means that some institutions will no longer be treated as generously as they have been.

Principle No. 4: Don't allow New York to become less economically competitive. New Yorkers pay the highest taxes in the nation. New York's combined state and local tax burden is 33 percent above the national average. As state spending is cut, we must be careful not to put New York in an even less economically competitive position by passing costs onto localities or discouraging businesses from staying and coming to New York.

These four principles are tough to follow. But, if political leaders show the courage to protect all of the state's taxpayers, instead of vocal special interests, New York can emerge from this crisis stronger and better able to serve its residents and businesses.

Q:  Gov. Paterson has gone to Washington to ask for help.  Given that Washington is pre-occupied with consumers, banks, insurance companies and the auto industry, is there any realistic hope that Washington will send more money to Albany any time in the near future?

A: New York's leaders should not wait for Washington. They will certainly not provide the level of aid we would need to close the $12.5 billion budget gap we are facing in the coming 2009-10 fiscal year that begins on April 1. Although the federal government should step in to help states during recessions past aid for New York State has been relatively insignificant, in the $300 million to $500 million range. Larger amounts are being discussed this time around but it is still very likely that we will have to solve a large part of this problem on our own.

Q: If Albany doesn't get help from Washington, NY is looking at an even bigger shortfall -- the governor says over $12 billion -- in 2009 and beyond in part as a result of lost tax revenue from layoffs in the financial industry.  What options does Albany have to balance the budget in 2009?

A: The massive changes underway in the financial sector, upon which New York relies for 20 percent of its revenues, have major long run implications for government spending. New York State will in all likelihood need to tighten its belt not just next year but for the foreseeable future. The way the State does business needs to change and that must include major restructuring across almost all of its agencies. Unfortunately, since nearly 70 percent of State agency budgets are tied up in employee compensation, this means that there must be changes in these areas.
 
The State's relationship with local governments will also need to be overhauled. Much of the State budget is doled out to local governments and those funds have always had strings attached in the form of State mandates on how to spend the money, some of which have driven up dramatically the cost of local services. State leaders need to reverse course and change the rules for local governments by eliminating some of these mandates so that local governments can contend with less State aid.

Q:  Some people are calling for increased taxes on higher income New Yorkers?  Does the CBC have a position on this policy?
 
A: The problem is so big at this point that more than one approach is going to be needed to address it. However, since legislators tend to resist spending reductions it is important to keep the pressure on them to start to find ways to balance the budget on the spending side first. The temptation for them to look for easier ways out of the problem--large damaging tax hikes, one-shot gimmicks- and mortgaging our future by doing a large deficit financing--is strong and so it is important to get them to do some hard work first before they go down that road.
 
Q:  Has CBC studied the potential savings that can be achieved by shared services and consolidating local government agencies?  If so, what have been your findings?

A: Our findings have shown that in one area --school districts--we have more local government units than we should. Research has shown that consolidation produces the most savings (from economies of scale) for districts of 1,000 pupils or less. Since New York has about 200 districts that fit this size criteria these should be a prime target for consolidation. Since local officials have a very difficult time getting their constituents to agree to consolidation the State must make it easier to consolidate and at the same time get more aggressive about making it happen by using the leverage in the State aid it provides.
 
Q:  You suggest that the state could save money by closing prisons that are no longer needed because of declining inmate population.  Has anyone done a close analysis of this situation?   How many prisons could be shuttered and how much could be saved?

A; The inmate population in the custody of the Department of Corrections has fallen by 10 percent since 1999 while the staffing has decreased only by about 1 percent. This means that there about 8,000 fewer prisoners in the State system. Correctional facilities, mainly minimum and medium security, are underutilized. At an average annual per inmate cost of $39,000 the State could save about $310 million. To realize these savings facilities would need to be shut down, which has traditionally been politically impossible because some of them are located in Senate districts upstate where well paying State jobs are a real boon to the local economy. Consequently, Senate Republicans have in the past blocked any effort to close prisons. However, the State can no longer afford to run institutions that are not being run efficiently.

Q: You stated that it would require legislative action to close prisons. Does the governor require legislative approval to close prisons?

A: By statute the Governor must notify the community in which a prison is located of his intention to close the prison and engage in a one-year planning process with the community to identify potential alternative uses for the facility and replacement jobs. Occasionally in past years the legislature has tried to extend the planning process from one to two years to make it even harder for the Governor to proceed. Communities tend to protest prison closure and thus the public input process becomes very contentious and time consuming. However, if the legislature decided to it could set aside this procedure and move forward with the necessary closures. Since many of the communities in question have very real economic development needs part of the deal could be to redirect some of the savings from closures in to stimulus for needy areas.