FOR RELEASE:

Executive Budget Leaves $7.9 Billion Gap for Next Two Years

Spending Grows Faster than Revenues; Budget Temporarily
Plugs Structural Gaps with Debt, One-Shots & Risky Revenues

Although the 2006-07 Executive Budget is balanced for fiscal year 2006-07, it creates budget gaps totaling $7.9 billion over the following two years because it cuts taxes while increasing spending, prolongs the rapid growth in debt, and maintains the use of non-recurring revenues or one-shots to pay for continuing expenses, a report issued today by State Comptroller Alan G. Hevesi finds. In addition, the 2006-07 budget has $4.2 billion in risks that could eat up some or all of the projected $2 billion surplus for 2005-06.

“With an estimated $2 billion surplus from the current year, the State has an opportunity to invest in reducing its costs and eliminating the persistent structural imbalance, as Mayor Bloomberg is doing with the prudent use of New York City’s surplus,” Hevesi said. “Instead, the proposed budget increases the future gap between revenues and spending and increases the State’s already huge debt burden. The proposed budget makes the State’s fiscal problems worse and leaves it to someone else to fix the growing problem.”

The report finds:

• Spending growing faster than revenues. The Executive Budget includes a three-year financial plan during which General Fund spending is projected to increase by 19.4 percent, more than two and a half times the 7.3 percent growth in revenues.
• Out-year impact of tax cuts. Tax cuts are a major contributor to the growing imbalance. The Executive Budget includes tax cuts with relatively minor fiscal implications of $397 million for 2006-07, which explode in 2008-09 to $3.4 billion – a tenfold increase.
• Out-year impact of spending plans. The budget includes new General Fund spending of $406 million in 2006-07, which expands to three times that and reaches $1.2 billion in 2008-09.

“Properly designed tax cuts can spur improvements in the State’s economy, but to be responsible, such tax cuts should be matched by spending cuts. This budget, instead, proposes large spending increases on top of tax cuts, paid for with one-shots,” Hevesi said.

• Risks to the budget plan. The 2006-07 Proposed Budget is balanced but contains risks that could be as high as $4.2 billion. These include the possibility of additional costs related to the 2003 Campaign for Fiscal Equity court decision ($1.4 billion); revenues that are unlikely to materialize, including video lottery terminal dollars to support education spending ($358 million) and overestimation of abandoned property revenue (also $358 million); unrealistic savings projections from Medicaid anti-fraud activities ($125 million); and a number of proposals to reduce spending or raise revenues that have been rejected by the Legislature in previous years ($2 billion).
• Use of non-recurring resources. The Executive Budget again relies on other non-recurring resources totaling $1.6 billion, bringing the two-year total to $5.5 billion. It allocates the $2 billion surplus to reduce future deficits, which is again using non-recurring revenues to pay for continuing expenses, rather than using the surplus to reduce long-term expenses.
• Debt levels. Responding to demands for controlling the State’s huge debt burden, the budget includes a debt reform proposal that claims to implement a more realistic count of debt and to ban backdoor borrowing. However, the count is designed to understate actual growth in debt and the ban does not prevent backdoor borrowing from continuing to grow.
• Growth in debt. The Executive’s reform plan also does not effectively constrain the growth of debt issued without public approval.
  • Outstanding State-Funded debt will increase to $56.6 billion by the end of 2010-11, representing a 17.3 percent increase from 2005 and a 103 percent increase from 1995.
  • State-Funded debt service is projected to increase to $6.5 billion in 2010-11, an increase of $2.1 billion or 48 percent from 2005-06 and an increase of 137 percent from 1995.
  • General Obligation debt is planned to increase $653 million, or 19 percent. In addition, appropriation-backed debt issued by public authorities (back-door borrowing) is expected to increase 25 percent, or $9.3 billion, by 2010-11.
  • Overall Spending. The Governor’s spending plan on an All Funds basis for 2006-07 totals $110.6 billion, an increase of $4.4 billion or 4.1 percent over 2005-06. General Fund spending totals $49.7 billion, an increase of $2.5 billion or 5.2 percent over 2005-06. On a State Funds basis spending totals $75.0 billion, an increase of $4.6 billion or 6.5 percent over 2005-06.

“In addition to spending that doesn’t match revenues, this budget continues to rely too heavily on debt. For too long, we have used debt to permit unsustainable levels of government spending. This is simply wrong and it needs to be brought under control,” Hevesi said.

The report notes that the combination of spending and revenue actions will place enormous pressures on the State’s financial plan in the next two years. In addition to the risks noted above, additional risks include high energy prices, a weakening housing market, and rising interest rates, which have the potential to reduce State revenues.

“Today, thanks to strong revenues from last year, the State has a tremendous opportunity to initiate reforms in the State’s financial management that could have a positive impact for years to come,” Hevesi said. “We simply cannot afford to do business as usual anymore. Abandoning the shortsighted budgeting for a long-term vision for the State will not only improve the State’s financial standing and make us more competitive, but will have a favorable effect for years to come.”

Click here for a copy of the Comptroller's report.

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