Office of the New York State Comptroller  
      Home || Press Releases || Audits || Retirement || State Finances || Local Government || Reports || NYC Oversight || Pension Fund

1998-99 Budget Analysis:
Review of the Governor's Proposed Budget

February, 1998

H. Carl McCall
State Comptroller



February 3, 1998

To the People of the State of New York:

This budget is very different from the last three budgets we have seen. Simply put, it is a lot bigger. There are really no large budget cuts to speak of, just a few symbolic reductions. Healthy spending increases were proposed for schools, for tax relief, and other programs. And on top of this, the budget would commit to a much higher level of borrowing which -- although for worthy causes such as higher education facilities and transportation infrastructure -- will drive much higher debt service payments in the future. The growing debt burden highlights the continuing need for reform of the State's debt practices.

This relative largess is supported by yet another banner year on Wall Street. For three years running, the financial sector has enjoyed record high bonuses and profits, and for three years the State has been able to have its cake and eat it too. New tax cuts have been enacted and there are promises for greater cuts in the future; at the same time, many of the State's long-term problems are being ignored, and there is little preparation for a time when less revenues are available.

As Comptroller, it's my job to raise cautions and talk about risks, and my greatest concern is that we've become accustomed to this continuing boom. It has temporarily solved the State's problems, and it may be giving the public a false sense of security. The paradox is that good times often make bad policy acceptable.

Instead of paying down debt with this surplus, or making structural changes in budget and financial systems to help prepare the State for the future, this budget simply plows ahead by delivering enough money to enough areas to make it an "EZ-PASS" budget. This is an opportunity missed.

Instead, we should be taking a long hard look at our higher education resources, our school finance system, our social services programs . . . indeed, at everything government does. "Reforms" should not be limited to budget cutting actions; we should work just as hard at making improvements when money is being added. For example, the Executive Budget may be passing up on an opportunity to use already committed funds to improve access to health care for needy children. Enhancements to the State's Child Health Insurance Program (CHIP) should be among the first changes considered to the budget proposal.

This budget increases school aid without reforming it. It accelerates implementation of a new $2.7 billion property tax relief program without taking steps to reform the administration of that tax. It commits to a dramatic increase in capital spending for the public university systems in the complete absence of any sort of comprehensive plan for higher education.

As I have been saying for years, New York's budget process is clearly beyond dysfunctional. To his credit, the Governor has put forward some budget reform initiatives. We need to take steps to ensure that the budget is enacted on time, although the temporary abundance and lack of controversy may also help to achieve that goal this year. But we also need to make changes to force a long-term focus on the process.

If the Legislature enacts the budget in a timely fashion this year, it will of course be a great improvement. It would not mean, however, that the State's budget process problems are solved. There has been enough study and discussion of this issue by this date, and the citizens of this State deserve action on this problem. Enacting real reform to this process will do much to ensure that our budgets will support our long-term interests in the future.


H. Carl McCall
State Comptroller



The 1998-99 Executive Budget proposes $71.9 billion in all funds spending. Adjusting for accounting changes to produce comparable year-over-year figures, this represents a growth rate of 8.5 percent. State funds spending grows 10 percent; and General Fund growth is 7.1 percent. This is a substantial increase compared to budgets proposed during the last ten years.

Fiscal year 1997-98 will end with a projected $1.8 billion cash surplus, much of which will be used to balance the 1998-99 budget. The size of the surplus may increase after historically volatile corporate and personal income tax collections are received. A large part of the surplus is proposed to be used to finance the Community Enhancement Facilities Program with $425 million in cash, instead of the originally planned authority bonding. The Executive Budget would also accelerate implementation of the STAR property tax program for senior citizens; the acceleration is valued at $537 million in 1998-99.

Spending growth in 1998-99 is largely driven by current law increases, with new initiatives generally concentrated in the capital budget.

Structural Balance

A significant cause for concern in the 1998-99 budget is the looming budget gaps in the two years following the budget. Adjusting the Executive Budget's projections with more appropriate assumptions yields projected gaps of $2.6 billion in 1999-00 and $4.8 billion in 2000-01. The gaps amount to 7.0 percent of General Fund receipts in 1999-00 and 12.8 percent in 2000-01. The State's success balancing smaller gaps in recent budgets is unlikely to continue, since those gaps were in part artificially created using overly conservative assumptions.

An improvement in 1998-99 is the lack of significant one-time actions; the 1997-98 budget was also balanced with a minimal number of one-shots.

Several positive budget reform measures are being proposed with the budget. Recent testimony by the Comptroller on budget reform is included as an appendix to this report.


Elementary and Secondary Education

A school aid increase of $518 million on a school year basis, or 4.7 percent, is proposed, bringing total aid to $11.4 billion. This increase is driven by increases under present law programs; about two-thirds results from growth under general aid formulas and about one-third is due to the phase-in of multiyear initiatives enacted last year. No reforms are proposed of the current complex and inefficient school aid formulas.

The budget contains no new funding for school facilities, although increases are provided under programs enacted last year, and there are positive proposals for improved capital planning, maintenance and more efficient school construction. The Comptroller has proposed a program for school facilities that dedicates a portion of the surplus for critical capital needs for schools.

The timing of the STAR payments to school districts is an area of concern. Because these payments replace property tax revenues, which are received by most districts early in the school year, there may be cash flow difficulties caused for school districts if they receive the STAR payments from the State later in the year.

Higher Education

This year's higher education budget represents a significant departure from the last three Executive Budgets in that it does not propose cuts in student aid, increases in public university tuition, or other operating budget cuts. The budget also includes a new capital plan that promises $3 billion over five years for capital projects at the public university systems, including $2 billion for SUNY and $1 billion for CUNY.

Health and Social Welfare

Child Health

New York is eligible to receive $256 million in new federal funds to provide health insurance for children and has a State commitment of $164 million for the same purpose. The 1998-99 budget, based on the Governor's November 1997 plan submitted to the federal government, does not take advantage of approximately $109 million in state and federal funds. The only change to the current Child Health Insurance Plus (CHIP) program proposed by the Governor was to reduce the required premium contributions for certain families. His plan did not include any changes in eligibility or the scope of services covered; it also fails to use more than $300 million in funding over the next three years. This funding could help children receive needed health care.

The Governor will be submitting a program bill to the Legislature within the next few weeks that could contain modifications to the November plan. Given the availability of funding, eligibility expansions and the addition of vision and dental benefits should be considered.


Unlike prior years, the Executive Budget includes no new cost containment. Growth in Medicaid is expected to increase moderately from the historically low rates experienced the past two years.


The federal welfare windfall is estimated to total $593 million in 1998-99. The Governor is proposing to use two-thirds, approximately $409 million, for general state and local fiscal relief. Welfare caseloads continue to decline, reducing the funding necessary for public assistance grants. The funding increases for child care and employment programs are attributable almost entirely to federal funds.

A major issue in last year's debate on welfare reform was the need for an effective evaluation of the new system. Legislation requires the Executive to report on the evaluation study; the report recently issued left many questions and issues unaddressed. As a result, it is unclear whether an effective evaluation study will be conducted.

Debt and Capital

New York's debt burden would continue to grow under the proposed budget, with debt service increasing by close to 40 percent, or to $4.5 billion, by the end of the five-year capital plan. Total state-supported debt per person would increase from $1,860 today to $2,270 by 2002-03, or a 22 percent increase.

The State is financing its capital program with a growing share of debt, bringing pay-as-you-go financing down to 14 percent of nonfederal capital in 2002-03, compared to 37 percent this year. The wrong kind of debt -- backdoor authority borrowing -- is used extensively. Backdoor borrowing will finance 80 percent of capital spending at the end of the plan period.

The budget includes several new programs, including major increases in capital resources for higher education, accelerated transportation spending, and a new prison.

Only a modest reduction in planned borrowing would be needed to slow the growth in the State's debt burden. If the State modified its capital plan to reduce reliance on back-door borrowing by 10 percent in each of the next five years, total debt outstanding would be reduced by $1.5 billion and the State would save about $75 million per year in interest payments alone.


The 1998-99 Executive Budget proposal is essentially a baseline budget: spending increases are driven by current law, rather than by program expansions; no significant spending reductions are proposed; and only a few new initiatives are proposed for funding.

A budget that is easily balanced with no spending cuts is possible because of three major factors:

  • The phase-in of tax cuts enacted during the past three years occurs in a way that minimizes the additional cost during the 1998-99 fiscal year. See figure below.
  • Spending growth for entitlement programs continues to be moderate, with public assistance caseload declining and moderate Medicaid growth.
  • The boom in incomes led by strong financial market performance continues and helps tax collections to grow, although at what is projected to be a slower pace.



Size of the Proposed 1998-99 Budget

All funds
(1) spending in the proposed budget totals $71.9 billion, an increase of over $5 billion as presented in the Executive Budget; that is a growth rate of 7.6 percent, with a state funds spending increasing at a slightly higher rate, 8.5 percent, and General Fund spending increasing at a reported 2.9 percent rate.

Spending by Fund Type
As presented in the 1998-99 Executive Budget

Comparison Basis:

1998-99 Spending

Change Year to Year
(amount and percent)

All funds $71.9 billion + $5.1 billion, + 7.6 %
State funds $48.8 billion + $3.8 billion, + 8.5 %
General Fund $36.2 billion + 1.0 billion, + 2.9 %

These are the growth rates as presented in the Executive Budget; several accounting and payment changes were made in 1997-98 and 1998-99 that artificially increase 1997-98 spending and reduce 1998-99 spending. In addition, funding for the STAR school property tax program is classified as being disbursed from a dedicated fund; by dedicating a portion of the Personal Income Tax to STAR, General Fund spending is reduced, thus artificially reducing the reported growth for 1998-99.

Adjusting for these accounting and payment changes produces an all funds growth rate of 8.5 percent (almost a percentage point above the reported 7.6 percent); state funds growth would be 10 percent, compared to the reported 8.5 percent; and General Fund growth would be 7.1 percent, compared to the reported 2.9 percent.(2)

1997-98 Financial Performance

Financial performance in 1997-98 has been much better than expected. The budget enacted in August projected a $530 million surplus; the Comptroller's report on the enacted budget noted that this was a conservative estimate and that the actual surplus was likely to be higher. The financial plan now assumes that the year will end with a $1.8 billion surplus.

Much of the better-than-expected results has been driven by the Personal Income Tax, with strong growth in both withholding and estimated payments. New York is not alone in experiencing brisk revenue growth; the federal government has seen its income tax collections exceed expectations(3) as have other states.(4) While it will not be possible to conclusively identify the sources of this income growth for several years (after tax returns have been filed, processed and analyzed), it is likely that the major factor is the strong financial markets combined with changes in federal tax policy:

  • The Federal government's 1997 reduction in the top rate on capital gains has likely resulted in an "unlocking" effect, as taxpayers take advantage of lower tax rates that had been under serious discussion in Washington for several years. New York benefits from both the increased activity and because the State did not adopt a preferential rate on capital gains.
  • The gains that are being taken are for stocks that have sharply increased in value. Since the beginning of 1995 -- a three year period -- stock prices have climbed more than 100 percent. Bonds have also performed well recently.
  • New York, as the home of major financial markets, collects taxes on the earnings of those employed in the securities industry. The industry's earnings and the compensation it pays to employees have risen sharply.
  • Other factors, such as the growing use of mutual funds(5) by individuals, and compensation in the form of nonqualified stock options, are also providing revenue.

The 1997-98 Surplus

The Executive Budget projects a $1,825 million surplus in 1997-98; $649 million of this amount will be used in 1997-98, with the remaining $1,176 million to be used in 1998-99. The table below outlines the Governor's proposed uses for the surplus.

Uses of 1997-98 Surplus

Description 1997-98 1998-99
Uses Earmarked for Specific Purpose:
Accelerate STAR program $537
Fund Community Enhancement Facilities Program with Cash $425
Deposit to Tax Stabilization Reserve Fund $68
Reserve for Accelerating Existing Tax Cuts $100
Temporary Clothing Sales Tax Holidays $20 $25
Farmers Tax Reduction $3
Deposit to Contingency Reserve Fund $35

Subtotal: Surplus Funds Earmarked

$513 $700
Funds not Earmarked:
Pre-Pay Medicaid One Day Early $136
Remainder of Surplus $330
27th Payroll $146

Subtotal: Surplus Funds Not Earmarked

$136 $476
TOTAL $649 $1,176

The Executive Budget's characterization of the Medicaid prepayment and the 27th payroll may be confusing. The Medicaid prepayment does not eliminate any of the lags in reimbursement that were created as a budget balancing measure during the last period of deficits. Instead, it makes a Medicaid payment one day earlier, shifting it from 1998-99 to 1997-98.

The 27th payroll is also presented in an opaque manner. The $146 million that the Executive Budget associates with an extra payroll is not prepaid in any way. The sum is merely earmarked for a purpose that would have otherwise been payable. The $146 million is, in effect, a resource that may be used for any purpose in 1998-99.

Sources of Spending Growth in 1998-99

General Fund spending is projected to increase by $1,015 million in 1998-99. The growth is largely driven by current law growth. The components of the increase include: $607 million for school aid; $224 million for other education; $437 million for Medicaid, Mental Hygiene, and Health; $117 million for debt service; $102 million for the Judiciary budget; and $102 million for public protection, largely for staffing prisons. Two items disbursed in 1997-98 will not continue in 1998-99, and offset growth: the $425 million the Governor plans to use for funding the Community Enhancement Facilities Program with cash and $170 million for legislative initiatives.

In addition to the $1 billion in General Fund spending growth, the STAR property tax program is proposed to be funded from a dedicated portion of the Personal Income Tax. Currently, the entire income tax is deposited in the General Fund and the STAR program was enacted as part of the General Fund. By shifting the program to a special revenue fund, the $724 million in 1998-99 STAR spending understates General Fund growth in 1998-99.

Capital spending growth of $1 billion is planned for 1998-99, with a $275 million increase in transportation spending, $151 million in prisons, $97 million for environmental conservation, and $375 million from the Community Enhancement Facilities Program (CEFP). It is unlikely that the full $375 million from CEFP will actually be disbursed in 1998-99.

Other Actions proposed in 1998-99

The Executive Budget proposes several tax and fee changes to begin in 1998-99: a $100 million reserve for accelerating existing tax cuts; $25 million for a clothing sales tax holiday; $3 million to accelerate an existing agricultural tax credit; $1 million in racing tax reductions; $3 million in Estate and Gift Tax cuts; and $49.2 million from a 25 percent cut in motor vehicle registration fees.



The 1998-99 budget contains provisions that both improve and worsen New York's structural budget gaps. The most pressing issue is the growing budget gaps projected for the two years following the budget. Positive measures include the absence of any significant one-time actions and several budget reform proposals.

Future Budget Gaps

The Executive Budget projects a budget gap of $1.7 billion in 1999-00 and $3.8 billion in 2000-01. These gaps are artificially understated by assuming that the State would receive $250 million in each year from the tobacco settlement currently being considered by Congress and by assuming $600 million in unspecified savings in 1999-00 and $800 million in 2000-01.

Executive Budget Projections for Future Year Budget Gaps


Multiyear Gap Projections
(in millions)

1999-00 2000-01
Executive Estimate $ (1,748) $ (3,753)
Tobacco Settlement $ (250) $ (250)
Unspecified Efficiencies $ (600) $ (800)
Total Gap To Be Closed $ (2,598) $ (4,803)

Source: 1998-99 Executive Budget.

There is no plan that would produce the unspecified savings and there is no indication that the State will receive any funds from the tobacco settlement, or what the local government share of the settlement would be. The gaps also assume moderate growth in receipts; if the economy slows, the size of the gaps would increase. An accurate measure of the gaps would thus be $2.6 billion in 1999-00 and $4.8 billion in 2000-01.

The $2.6 billion gap in 1999-00 represents 7.0 percent of projected General Fund receipts(6); the gap is projected to grow to 12.8 percent of projected receipts in 2000-01. The gaps have been dismissed as manageable given the size of budget gaps closed during the past three years. This is not a valid argument; budgets during the last two years saw gaps that were closed using significant reestimates. In other words, the gaps were reduced or eliminated because forecasts were overly conservative, not from spending reductions or other efficiencies.

The 1997-98 Executive Budget indicated that the State would face a $2.3 billion gap; however, during budget negotiations, the 1997-98 receipts forecast was reestimated to be $1.5 billion higher, spending was reestimated to be $351 million lower, and the 1996-97 surplus turned out to be $481 million higher. These three factors transformed the $2.3 billion gap into a $530 million surplus at the time of budget enactment. The actual surplus is now projected to be $1.8 billion because of even stronger growth in receipts and slower spending. The gap presented in the 1997-98 budget existed only because of overly conservative assumptions, and it was closed by adjusting those assumptions.

The 1996-97 gap was originally presented as $3.9 billion in the Executive Budget. The enacted budget reduced the gap by $581 million because spending was estimated to be too high, and the forecast for receipts was increased by $1.1 billion. These two adjustments reduced the gap to $2.2 billion. This gap and added spending was funded with measures including $1.3 billion in one-time actions and $1.1 billion in Medicaid cost containment.

A $5 billion gap was presented in the 1995-96 budget; measures that reduced this gap included: revenue reestimates of $300 million, spending reestimates of $389 million, and $1.1 billion in one-time actions.

In summary, no gap existed for 1997-98; the 1996-97 gap was reduced almost by half using more realistic revenue and spending estimates, with half of the remaining shortfall closed with one-shots. The 1995-96 gap was also overstated; the actual spending cuts that were included were difficult and included tuition increases and cuts in financial aid programs.

The better-than-expected revenue growth New York has enjoyed may end -- or at least moderate, resulting in the need for painful budget actions in the near future. The prospect of spending cuts of over twelve percent of General Fund resources cannot be dismissed as a non-issue based on past experience. Either substantial reductions in programs or financially risky transactions may be required.

Non-Recurring Actions (One-Shots)

The Executive Budget includes only $62 million in one-time actions, consisting of $27 million in retroactive welfare reimbursements, $25 million from a refunding, $5 million from the sale of the 14th Street Armory, and $5 million in fund transfers. None of these actions is objectionable.

Budget Reform

Measures to reform the State's dysfunctional budget process were included with the Governor's budget proposal. In addition, both the Assembly and the Senate recently released their own proposals to reform the way New York's budget process operates.

The Senate has proposed a constitutional amendment (S. 2430) that would provide for the prior year's budget to take effect if a budget is not in place by April 1. Earlier Senate proposals would also use conference committees to work out differences between the Senate and Assembly.

The Assembly recently proposed (A. 8923) that conference committees be used to negotiate disagreements over the budget. The Assembly has previously proposed legislation that would change the State's fiscal year and increase financial reporting, among other measures.



The Governor announced that he would propose a package of budget reform items, including:

  • Constitutional amendment requiring a two-thirds majority to pass major tax
  • Constitutional amendment that would provide for automatic adoption of the Executive Budget (including Article VII bills) if the budget is not adopted by April 1.
  • Constitutional amendment enhancing the Tax Stabilization Reserve Fund by increasing the amount that can be deposited (from 0.2% to 0.5% of the General Fund) and the total amount the fund can hold (from 2% to 5% of the General Fund).
  • Conference committees to negotiate budget disagreements. The Conference committees would be preceded by an agreement on revenues and spending targets.
  • The Budget Division would prepare a financial plan (including multiyear estimates if possible) before the Legislature passes bills.
  • Balanced Budget. The Legislature would be required to pass a budget that was balanced.

These are largely positive proposals that would improve the framework for budgeting in New York. However, the constitutional amendment that would cause the Executive Budget to be automatically enacted if the Legislature did not pass a budget by April 1 is seriously flawed. If enacted, this provision would remove any incentive for the Governor to negotiate the budget with the Legislature. Automatically adopting Article VII legislation runs counter to the State Constitution's separation of powers.

The Governor, Senate and Assembly have each proposed elements that, taken together, would lead to better budgeting in New York.

Effective budget reform in New York requires addressing five areas:

1) Ensuring that the budget is adopted by the start of the fiscal year;

2) Moving New York to a state of long-term structural balance;

3) Including contingency planning in the budget;

4) Ensuring that a rigorous economic and revenue estimating process is used; and

5) Opening the process to the public and to rank and file legislators.

These are discussed in more detail in the appendix, which contains the Comptroller's testimony at one of the Assembly's hearings on budget reform.



The budget contains a positive increase in school aid (although without any aid formula reforms), and several new programs are proposed for the year following the budget. In the higher education area, no tuition increases or cuts are proposed and the Executive Budget pledges to fund a higher level of capital spending under a five-year plan. Although the increased commitment to education is positive, virtually all of the budget's funding increases are provided under present law or plans, and the additional cost for the capital spending will not be felt for many years, when the debt service for the increased borrowing begins to come due.

School Finance

School Aid

A school aid increase of $518 million, or 4.7 percent, is proposed for the 1998-99 school year, bringing total aid to $11.4 billion. This increase is composed entirely of aid increases under present law programs. About two-thirds of this increase is driven by the operation of current aid formulas without any changes in their structure, and about one-third is due to the phase-in of multiyear initiatives enacted with last year's budget.

Aid payments generally increase from year to year even without changes in the formulas because school district input data change. For example, reimbursed expenditures generally increase, as do enrollments for most districts. Wealth measures and other formula inputs go up and down, but most aid formulas operate in a manner that only allows increases, and so the net effect of fluctuating data is an overall increase. Additionally, many districts have a substantial portion of their major operating aids withheld under the "transition adjustment" -- a capping device which was put in place in 1993 in conjunction with changes to the formula that increased the aid calculations. Thus, even without any formula changes, aid increases for most districts continue to phase in under the transition cap.(7)

The multiyear initiatives enacted with last year's budget for early childhood education, instructional technology, and school building and maintenance also contribute substantially to the overall increase. Largest among these is the universal pre-kindergarten program, with a first year's allocation of $50 million, growing to $500 million over four years. Other early childhood initiatives include full-day kindergarten and class size reduction aid incentives (although the class size program does not begin until 1999). Interestingly, some of the most prominently discussed aid programs in the budget descriptions receive a relatively small share of the funding increase in 1998-99. For example, the increases for textbooks, library materials and technology all together total only $15 million in 1998-99, less than 3 percent of the overall school year increase.

The two new school aid programs proposed in the budget do not actually begin until the 1999-2000 school year (the year after the budget); they are:

-- An aid program for English immersion summer school programs for students with poor English skills; $20 million is promised in 1999-2000.

-- A summer school reading program for 4th graders who do poorly on standardized tests; $45 million is promised in 1999-2000.

"Advantage Schools" is an after-school pilot program for which $10 million is promised in 1999-00. This program, however, is not school aid, it is a social services grant program to be administered by the Department of Children and Family Services. It would provide funds to local governments and not-for-profit agencies working with schools, child-care providers and other agencies to provide model after-school programs.

Thus, the budget essentially continues current law programs without change, addition or subtraction. The only exceptions are the addition of two new aid programs in the year following the budget, and the proposed elimination of two categorical programs (teacher support aid and student information systems).

The budget contains no reform of the current complex and inefficient school aid formulas, including "spend-to-get" formulas which reward spending increases and penalize efficiencies. And although the STAR program will offer tax relief, there is no substantial connected effort to reform the administration of this tax, which is very poor in some areas of the State. There are additional reporting requirements for assessors contained within the "property taxpayer's bill of rights" which begins to take effect in 1998, and taxpayers will receive additional information on their school tax bills, including the assumed market value of their property. These new requirements may well cause pressure for improved assessing in the long term, but the initial impact will probably be increased taxpayer complaints and contested assessments.

One area where reforms are promised is special education. Although the budget contains no specific changes to these aid formulas, the Executive has promised to join with the Regents in seeking reform. The Regents proposal, which is still in development, is intended to remove fiscal incentives toward more restrictive placements and conform to new federal requirements.

School Facilities Needs

A recent federal study found that in New York State 90 percent of schools report a need to upgrade or repair buildings to bring them to a good overall condition. The State Education Department estimates that meeting current capital program needs, just to bring facilities to adequate conditions, would require $15 billion statewide over a five-year period.

The Executive Budget contains no new funding for school facilities, although increases are provided under programs enacted last year, and there are positive proposals for improved capital planning, maintenance and more efficient school construction. Last year's budget included three initiatives to provide additional funding for school facilities in 1998-99 and beyond:

-- A building aid enrichment for new projects,(8) which recognizes varying regional costs and also increases the effective reimbursement rate for virtually all school districts by 10 percent. These changes are expected to increase aid by $28 million in 1998-99.

-- Minor maintenance aid, a popular aid program of several years ago, was reinstated; $50 million in aid will be provided in 1998-99 through this program.

-- The $2.4 billion school facilities bond act which was defeated by the voters last November.

Although the increases in building and maintenance aid provided under last year's legislation are significant, it should be noted that they were enacted as part of a three-part plan to address facilities needs. The defeat of the bond act is widely held to have been caused by public concern over the lack of an implementing plan. Despite its defeat, the pressing school capital needs remain, and there have been a number of calls for some sort of substitute measure.

Comptroller's School Facilities Proposal

In addition to issuing a comprehensive report on school facilities issues(9) the Comptroller has called for dedicating a portion of the $1.8 billion year-ending surplus to school facilities needs. His proposal calls for a needs-based extraordinary allocation of funding for critical building needs, increased minor maintenance aid, and other reforms. The Comptroller's proposal for additional building aid is designed to mesh with current aid program in a way that does not interfere with ongoing building plans; funds under this approach would be directed to middle- and lower-wealth school districts with the most critical needs, based on a ranking system.(10)

In addition to providing increased funding, substantial changes must occur in the underlying system in which school building and maintenance decisions are made, because the system itself tends to encourage deferred maintenance and, eventually, greater capital expenditures. The Comptroller has recommended that these incentives be countered by a combination of better enforcement of existing regulatory requirements, and improved statewide and local capital planning and reporting.

The Executive Budget contains a number of very positive initiatives which address these issues, and which are supported by the Comptroller's reports on the topic. Following is a summary of the key changes proposed:

--A streamlined capital planning process will be offered and improved maintenance planning will be required for new projects. Compliance with these processes will be a precondition for receipt of the additional 10 percent allocation of building aid described above. (As noted in prior reports, part of the problem is that many school districts are not complying with the existing system).

--To encourage cost-effective construction, value engineering reviews will be required, as originally recommended in a Comptroller's audit.

--The Commissioner of Education will be given expanded authority to close school buildings which endanger the health and safety of students.

--Mandate relief actions to decrease the cost of school construction and rehabilitation are proposed including reform of the Wicks law, and State rules governing asbestos remediation. Additional flexibility in school calenders is also proposed.

STAR Property Tax Relief

The STAR program (for School TAx Relief) enacted with last year's budget provides state- funded tax exemptions for school taxes. When fully implemented in 2001, this program will provide an estimated $2.3 billion in property tax relief for all homeowners. Seniors get exemptions 66 percent larger than other homeowners; this larger exemption is available to persons at least 65 years of age, with household income no greater than $60,000. The seniors exemptions will first be available in 1998, while the other exemptions are not scheduled to begin until next year.

The Executive Budget proposes accelerating the STAR program for seniors, fully implementing their exemptions in 1998-99, rather than phasing them in over four years, as the program was enacted. This speed-up will increase the 1998-99 fiscal year state cost for the program by $537 million (this also includes a small amount for accelerating a portion of the New York City personal income tax reduction associated with STAR). No acceleration of the program for non-seniors is proposed at this time by the Governor; these exemptions are not scheduled to begin until 1999, and will phase in over three years, being fully effective in 2001.

Another change proposed by the Executive would substitute federal adjusted gross income (or AGI) for household income in the seniors income eligibility requirement. This change is estimated to increase the statewide cost of the seniors exemption by $20 million because more seniors will be eligible (household income is a broader definition than AGI, which excludes tax-exempt interest and some social security income), and will also ease some administrative difficulties. Additionally, an increase of $15 million in aid to local governments for implementing STAR is proposed ($2 million is currently provided).

Although there have been proposals to accelerate STAR by beginning the exemptions for non-seniors in 1998, it has been concluded that this would be administratively impossible, even if a bill were passed by March, because it simply would not leave enough time for an application process to be implemented. Speeding up the seniors exemption poses no similar administrative problem because those eligible are already applying for the exemption, and so it is merely an increase in its value. The acceleration does, however, make the consequences of errors in the first year's implementation, or missed deadlines to apply, much more serious. Legislation passed in January extends the application deadline for this year to no sooner than March 2 for most localities (some areas, including towns in Westchester and Erie counties, have later deadlines).

Taxpayer Savings from Seniors STAR Exemption Sample $ Value
Upstate Suburban "Average" $850
Low-Tax Rural Area $500-800*
NYC Suburbs (High Wealth/High Tax) $1,000-$2,500
New York City $320


*But not to exceed school property tax bill; the exemption will completely eliminate school taxes for many seniors in many rural or below-average property value areas.

Under current law, the seniors first year's exemption equates to an 11 percent reduction for an average priced home; the full seniors exemption equates to 45 percent. The table above shows some examples of the value of the entire tax savings to seniors. These savings in the first year would equal about one-quarter this amount without the acceleration.


School District Cash Flow

Another issue of concern is the timing of the STAR payments to school districts. Because they replace property tax revenues, which are received by most districts early on in the school year, there may be cash flow difficulties caused for school districts if they receive the STAR payments from the State later in the year, under the existing school aid payment schedule. The revenue shift may be substantial, although it will vary significantly among school districts. There is the potential for significant cash flow problems as a result of this change. School districts may lose interest earnings, or perhaps even having to borrow short-term.

Last year's budget established a School District Cash Flow Study Commission to address this issue. Membership includes State Comptroller's Office, the Division of the Budget, the State Education Department, the Office of Real Property Tax Services, and a representative of the School Boards Association. This group is studying the issue and will soon make recommendations on when STAR payments should flow to school districts. Absent any change, the STAR payments will be paid in accordance with the existing school aid payment schedule, except that all payments will be made prior to the end of the State fiscal year (March 31).

STAR and School Aid

The Executive Budget includes projections of school aid and the costs of the STAR property exemptions for the next four years.(11) These projections portray the State's share of total school spending (including STAR payments) rising to approach 50 percent funding of education by the school year beginning 2001; this is a long-time goal of many educational organizations. The growing share described in the budget's calculations, however, is based on a questionable approach and assumptions.

First, the budget calculation inappropriately includes the New York City personal income tax cut as property tax relief; this cut has been linked to the STAR exemptions in budget negotiations, but it is in truth an entirely separate cut and unrelated to school property taxes. Second, the budget calculations make very optimistic assumptions about school aid increases in the coming years. Each of the annual aid increases projected is assumed to exceed the increase proposed this year by the Executive, both in total dollars and in percentage terms, increasing by 5 percent annually on average; school district expenditures are projected to increase at a lower rate, 4.5 percent.

Even with these assumptions, the Executive calculations show a significant increase in the State share only because the STAR exemptions are counted as being part of school aid -- if the STAR payments are not included, state aid does not rise appreciably as a percentage of spending. It should be noted, moreover, that local taxes continue to rise according to the Executive Budget projections, despite the optimism of the underlying assumptions.

Perhaps the most significant methodological issue in the calculations is the mixing of the STAR payments with school aid to arrive at an increasing state share. This approach is questionable, because the STAR payments are not intended to be school aid, or provide the type of assistance that school aid provides. Their purpose is solely to lower taxes on homeowners, not, for example, to provide additional revenues to help schools to raise standards, or to produce greater funding equity among school districts. This issue needs additional consideration and discussion as STAR is implemented, because there is a substantial theoretical issue involved, and many existing State reports and calculations will need to be revisited in the context of this new program.(12)

The point that the STAR exemptions should not be viewed as contributing to educational programs is amplified by a recent study from Syracuse University, which was commissioned by the Regents as part of their 1997 School Finance Symposium.(13) This research has found that the STAR payments when viewed from a distributional perspective are essentially antithetical to the long-term goal of fiscal equity among school districts.

The STAR exemptions go solely to homeowners and are adjusted upward for higher property values and higher taxes. Poorer, particularly urban school districts usually have much larger proportions of renters, lower property values and often lower property taxes. Thus, the STAR payments overall actually go proportionally more to well-off schools than to poor schools. In this sense, the STAR payments tend to work against equity. The Syracuse study notes that large performance disparities already exist between high- and low-wealth districts, and concludes that the STAR program may serve to magnify these inequities. This paper will soon be published along with other scholarly works presented at the Regents' October symposium, which focused on school finance reforms to support higher standards.

Higher Education

This year's higher education budget represents a significant departure from the last three Executive Budgets in that it does not propose cuts in student aid, increases in public university tuition, or other operating budget cuts. The budget also includes a new capital plan that promises $3 billion over five years for capital projects at the public university systems, including $2 billion for SUNY and $1 billion for CUNY.

The operating budgets for both public university systems were essentially straight-lined, except that negotiated salary increases were funded at SUNY. Because CUNY does not yet have a collective bargaining agreement covering 1998-99, no funding is shown for a general salary increase (this is only a presentation difference, however, as it is the Executive's stated intention to fund such an increase once it is negotiated). Inflation in nonpersonal service items is not funded at either system.

The increased capital plan is a significant increase in funding for both systems, although it is supported almost entirely by additional debt, and has no material costs in the 1998-99 fiscal year. Spending comparisons for capital projects are problematical, because capital spending fluctuates widely from year to year, and variations in timing of projects produce large changes in spending, without any change in the programmatic commitment. Although the new capital plan largely funds projects already underway or planned, it nevertheless represents a greatly increased commitment, perhaps as much as double the overall level of spending envisioned in last year's capital plan. However, the increased spending is supported by debt and will cause annual state debt service to increase by about $200 million by 2001-02.

The $150 per student aid hike for community colleges recommended by the SUNY trustees (and which would also apply to CUNY) is not funded in the budget. The budget narrative states that the University is now re-examining the funding structure of community colleges with an emphasis on reviewing current sources of support and identifying potential alternative sources.

The State-of-the-State address promised a "bold new initiative" to "pump new life, ideas and energy into SUNY and CUNY." Although the increased commitment to educational facilities is certainly an improvement from the public universities' perspective, the capital plan does not in itself represent a comprehensive plan for higher education.

The Executive Budget moreover offers very little to the State's independent colleges and universities, which have lost a significant amount of support since the early 1990's fiscal problems. The Tuition Assistance Program (TAP) had a maximum grant which covered 60 percent of average tuition at an independent college in 1974, but which today covers only 25 percent. Bundy aid, which goes to independent colleges and universities based on the number of degrees granted, has been reduced by more than half since it was last funded at its statutorily intended level in 1990. In New York State, a relatively high proportion of undergraduate enrollment attends independent colleges and universities: 45 percent of enrollment in New York compared to 25 percent nationally.

The Higher Education Opportunity Program (HEOP) is currently in a crisis situation, because a combination of funding cuts and inflexible administration of the program is threatening to cause a number of independent colleges to withdraw. HEOP was cut by nearly 25 percent in the 1995-96 budget, or $5.6 million. Given the less stringent circumstances of this year's budget, it would seem that this highly successful program, and those at the public institutions, should be considered for restoration. Administrative impediments to HEOP's efficient operation at independent institutions should also be removed.

As has been noted in earlier reports, there is essentially a policy vacuum for higher education in New York State. Most program choices in this area are made in annual budgets, and are driven largely by fiscal concerns, rather being guided by purposeful policy decisions and economic development considerations. Even in areas where policies do exist, they were usually adopted long ago and are currently being ignored. Examples of this include the statutory provisions for community college support and Bundy aid to independent institutions that are annually over-ridden, and the reductions in the Tuition Assistance Program (TAP) to levels far below its historical rate and original mission. The Comptroller has urged that policy choices on higher education be based on a strategic plan embracing a broadly shared consensus about the role and mission of higher education institutions. This plan should focus on the maximization of economic development and employment impact, and the proper relationship of state government to the public university systems and other institutions of higher education.

One area of improvement in the budget is the Scholarships for Academic Excellence program, first implemented last fall. Under current provisions, 2,000 awards of $1,000 each and 3,000 awards of $500 each are available to New York State students based on academic achievement, to help fund their education at public or private institutions within the State. Under the Executive proposal, the award for the top 2,000 students would be increased to $1,500 and the number of students receiving the smaller $500 award will be doubled to 6,000. This program is essentially modeled after the Regents scholarships, which had originally been provided at a significant level, but were reduced over a period of two decades and finally eliminated in 1991, owing to fiscal concerns. This is a positive program which encourages academic achievement and may serve to encourage bright students to remain in New York State for their higher education.



Unlike prior years, the Executive Budget does not propose any new cost containment actions. Included in the 1997-98 enacted budget was State Medicaid savings of $723 million, which grow to approximately $800 million in 1998-99. The bulk of these savings, approximately $441 million, maximizes federal funding and has little impact on health care providers. These provisions were enacted in 1997-98 with a two-year sunset.

The Executive Budget estimates Medicaid spending growth of 1.8 percent in 1997-98 and 3.9 percent in 1998-99. Several adjustments are needed to present year-over-year growth in a comparable manner:

  • The 53rd Medicaid payment paid in 1997-98. The extra payment causes program growth to be overstated in that year. This payment was scheduled to for 1998-99 but was accelerated into 1997-98;
  • The increased value of federal revenue maximizing actions above 1996-97 levels;
  • The federal share of Medicaid expenditures for Home Relief recipients. With federal approval of the State's mandatory Medicaid managed care program, federal matching funds are now available;
  • The annualized value of spending added in the 1997-98 budget; and,
  • The anticipated increase in Medicaid spending resulting from greater awareness and marketing of the State Child Health Insurance Plus program.

After making these adjustments, underlying state Medicaid program growth is estimated to be approximately 3.9 percent in 1997-98 and 6.0 percent in 1998-99. The projected growth rates appear to be reasonable and may be slightly overstated for 1998-99 given anticipated increases in reimbursement rates of nearly 3.0 percent and declining caseload and acute care utilization.

Department of Health General Fund Medicaid Spending: Executive Budget
(dollar amounts in millions)

Amount Growth
1996-97 Actual $5,374
1997-98 Proposed $5,469 1.8%
1998-99 Proposed $5,681 3.9%
1997-98 Adjusted $5,523 3.9%
1998-99 Adjusted $5,857 6.0%

It is generally expected that after the past two years of historically low increases that Medicaid spending will grow at a higher rate. The Congressional Budget Office projects federal Medicaid spending will grow 5.2 percent in federal fiscal year 1998 and 6.9 percent in 1999.(14) These growth rates are higher than the 3.3 and 3.9 percent growth experienced in federal fiscal years 1996 and 1997, but are significantly below the extraordinary growth of over 20 percent in the early 1990s and 10 percent in the mid-1990s.(15)

Child Health Insurance Plus (CHIP)

Current Program

CHIP provides fully subsidized and partially subsidized health insurance coverage for uninsured children whose family gross income is below 222 percent of federal poverty level (FPL) -- $35,631 for a family of four. Families who are eligible for Medicaid cannot be enrolled in CHIP. Premium contributions are required from families with income exceeding 120 percent of the FPL. CHIP health insurance covers basic primary and preventive care and; beginning in 1997, it also included hospital inpatient care. However, unlike Medicaid, it does not include vision or dental coverage.

The New York Health Care Reform Act of 1996 significantly expanded eligibility, coverage, and funding. Program funding is provided by a surcharge on hospital and other health bills and is set in statute to increase from $82 million in 1996 to $207 million in 1999. The Health Department projects enrollment in the current program will increase from 115,000 in 1996 to 251,000 in 1999. In 1996, there were an estimated 200,000 children who were eligible for CHIP but not enrolled.

Federal Block Grant for State Child Health Insurance Program (SCHIP)

There are about 10 million uninsured children in the United States. The Balanced Budget Act of 1997 included $48 billion in funding over the next ten years, primarily in the form of state block grants for lower income uninsured children. New York is eligible to receive up to $256 million annually in federal funding.

States can choose to provide health insurance coverage to children through Medicaid or a separate state health insurance program. Federal funds can provide 65 percent of New York program costs. The remaining 35 percent must come from state funds. A maintenance of effort equal to 1996 spending levels is required.

Executive Budget

On November 3, the Governor submitted a plan to the federal government. The only change in that proposal from the existing CHIP program was to lower family premium contribution requirements. Premium contributions for families with incomes between 120 to 160 percent of FPL would be eliminated. Federal law prohibits contributions from families with income less than 150 percent of FPL. Premium contributions for families with incomes above 160 percent would be reduced from $156 to $108 per child annually. The plan did not expand eligibility or the health services covered by insurance.

The 1998-99 Executive Budget does not include legislation on CHIP. However, a program bill is expected to be released within the next few weeks. The budget included the authority to spend up to $256 million in federal funds and $164 million in state funds. These appropriations represent the maximum federal funding level and the full amount of the currently available state funds. However, cash payments included in the financial plan total $197 million in federal funds and $114 million in state funds. The financial plan figures reflect the plan the Governor submitted to the federal government in November and leave $109 million in federal and state funds unspent in 1998-99. According to budget figures requested by the federal government, the November 3 plan leaves unspent at least $300 million in state and federal funds over the next three years. The new federal law allows a two year rollover of funds and incorporating some fiscal cushion is a financially wise decision, however, this is a large amount of funding that could go a long way toward providing health insurance for children.

Given the additional funding available, other options that should be explored include:

  • Expanding coverage. Although the current CHIP package is comparable to many commercial plans, coverage could be expanded to include services such as eye and dental care (provided under Medicaid).
  • Expanding eligibility. While the federal legislation focused on insuring children with income less than 200 percent of FPL, there are special provisions that would allow states to provide coverage to families with higher incomes. Connecticut recently decided to expand eligibility to 300 percent of FPL. Although New Jersey has yet to submit a formal plan to the federal government, there is discussion of eventually covering up to 400 percent of FPL.

Roswell Park Cancer Institute

Chapter 5 of the laws of 1997 authorized the transition of Roswell Park Cancer Institute from a state institution to a public benefit corporation in order to improve the Institute's ability to compete in the changing healthcare marketplace. The Executive Budget recommends General Fund and special revenue funds subsidy of $105 million. This represents an increase of approximately $29 million over last year.


Last year, major programmatic and financing changes were made to New York's public assistance programs in response to the Federal Personal Responsibility and Work Act. Aid to Families with Dependent Children was replaced with Family Assistance which consists of a time-limited cash grant. Home Relief was replaced with a new safety net program for adults, which in many instances will provide non-cash benefits. Both programs have a number of federal and state-imposed work requirements. If the federal work requirements, which gradually increase over the next five years, are not met, the State could face substantial fiscal penalties.

Federal funding is provided to New York through an annual block grant of $2.4 billion. The amount of this grant is based on the 1995 public assistance caseload. Since that time, caseloads have declined significantly and New York now receives a greater share of total program costs from the federal government. The additional amount of federal funding compared to the old program is often called the "welfare windfall."

The 1997-98 budget included $730 million in additional federal funding. This amount included a current-year windfall of $530 million and $200 million attributable to the prior year that was available due to the early submission of a plan to the federal government. The 1998-99 welfare windfall is estimated to total $593 million, representing an increase of $63 million over last year's windfall (excluding the prior-year amount). The windfall's increase is due to continued declines in caseload.

The Governor recommends that over two-thirds, approximately $409 million, of the additional federal funding be used for general state and local fiscal relief. The remaining one-third is allocated for other employment and child care programs. In addition, $133 million of the 1997-98 windfall allocated to these programs was unspent due to the late enactment of the budget and rolled over to 1998-99.

Proposed Allocation of the Federal Welfare Windfall
(in millions(16))

Program 1997-98 1998-99 Change
State Fiscal Relief $222 $181 ($41)
Local Fiscal Relief $256 $228 ($28)
Welfare Systems Redesign $50 $50 $0
Set-Aside for Future $0 $0 $0
Employment Programs $57 $13 ($44)
Drug Screening and Treatment $18 $12 ($6)
Education Programs $16 $6 ($10)
Transfer to Child Care Block Grant $45 $60 $15
Transportation $8 $5 ($3)
Food Assistance Program for Immigrants $13 $23 $10
Transition and Incentive funding for local districts $34 $10 ($24)
Other (such as: pregnancy prevention, WIC) $11 $3 ($8)
Total $730 $593 ($137)

Welfare Windfall Spending
Unspent in 1997-98 and Re-allocated in 1998-99

(in millions)

Program Amount
Welfare Systems Redesign $40
Employment Programs $36
Drug Screening and Treatment $15
Education Programs $12
Transportation $6
Transition and Incentive funding for local districts $20
Other (such as: pregnancy prevention) $4
Total $133

State and Local Fiscal Relief from the Federal Welfare Windfall
(in millions)

State Savings Local Savings Total
Reductions in General Fund Public Assistance Spending $75 $75 $150
Reduction in General Fund spending due to social services block grant transfer $89 $119 $208
State Administrative Activities $15 $0 $15
Other $2 $34 $36
TOTAL $181 $228 $409

The Executive Budget projects the number of family assistance and safety net assistance recipients will decline from 1.22 million to 1.15 million in 1998-99, a decline of 5.6 percent. The safety net caseload is expected to decline at a faster rate than the family assistance caseload. Due to the restructuring of the program, it is difficult to make accurate comparisons from year to year.

Consistent with a projected decline of 5.6 percent in public assistance caseload, total spending on temporary assistance is projected to decline by 6.5 percent. The state share of spending declines more rapidly than the total due to the higher estimated reductions in safety net caseload which is a non-federal program.


Temporary Assistance Program 1998-99 Funding
(in millions)

Federal State Total
Amount % Change Amount % Change Amount % Change
Family Assistance $1,406 -6.8% $544 -6.0% $1,950 -5.4%
Safety Net (17) $27 n.m. $349 -12.8% $376 -6.0%
Total $1,433 -5.0% $893 -8.8% $2,326 -6.5%

The 1998-99 Executive Budget contains $400,000, in federal funds, for evaluation of the State's restructured public assistance program. This includes $50,000 from the 1997-98 Budget for this purpose that was unspent. The 1997-98 budget directed the Departments of Labor and Temporary and Disability Assistance to submit to the Legislature and Division of Budget a report that outlined an initial plan for a comprehensive evaluation of the State's welfare system. A draft of the report Framework for Development of a Comprehensive Evaluation of Welfare Reform in New York State was prepared and submitted in January 1998. The report briefly summarizes areas to be considered for study; details some methodological points; and discusses data availability and needs and the State's larger issues related data resource development. The draft report identifies the need to take a multiyear approach to this effort and to conduct the assessment consistent with professionally designed research methodologies. It also suggests the need for the State to avail itself of independent, outside experts. However, the report lacks detail in critical areas related to substantive priorities, a process for determining those priorities, a discussion of how research might be best conducted and clear timetables. Elements of a successful welfare evaluation program were described in detail in a report from the Comptroller's office in 1997.(18)

Children and Families

Total disbursements for the Office of Children and Family Services are estimated to increase nearly 15 percent, almost entirely attributable to an increase of almost $300 million in federal funds. A significant portion of the increase in federal funds is due to unspent 1997-98 monies rolled into 1998-99.

Children and Families Program 1998-99 Proposed Funding
(in millions)

1997-98 1998-99 Change Percent
General Fund $1,115 $1,126 $11 1.0%
Special Revenue $35 $26 ($9) -25.7%
Federal Funds $891 $1,188 $297 33.3%
Total $2,041 $2,340 $299 14.7%

Child Care

In 1997-98 the child care funding streams (public assistance, transitional, at-risk, and state low income day care) were combined into one seamless Child Care Block Grant. In 1997-98, total federal, state, and local funding for this block grant was estimated at $428 million. This represented an increase of almost $100 million from the prior year. The Executive Budget proposes 1998-99 funding of $446 million, an increase of $18 million over last year. This funding will support the addition of 49,000 child care slots from the 1996-97 level. Only 7,000 of the 49,000 additional slots are attributable to the 1998-99 funding increase proposed in the Executive Budget.




The five year capital plan released with the 1998-99 Executive Budget continues a trend of the past several years of increased reliance on debt to finance the State's capital spending. Fiscally objectionable elements of the capital plan include

  • Debt service grows at three times the rate of overall spending; as a result, debt service will consume a larger share of budget resources.
  • Debt outstanding continues to grow, and will total $41.4 billion at the end of the plan period.
  • The type of debt used is increasingly back-door, authority bonding.

Growth in Debt

Debt outstanding is projected to grow from $34.1 billion in 1997-98 to $41.4 billion by the end of the plan period. This would raise debt per capita from $1,860 to $2,270 by 2002-03, or 22 percent.

No new General Obligation bond referendums are proposed for the plan period, and General Obligation bond retirements will exceed new issuances. As a result, all net new debt is generated by authority bonding.

Growth in Debt Service Burden

In 1997-98 debt service is projected to total $3.2 billion, or 9.1 percent of General Fund receipts. By the end of the five-year plan period, debt service will total a projected $4.5 billion, or 11.2 percent of General Fund Receipts. The growth in debt service is 39.3 percent during the period, compared to 13.1 percent for receipts.

The trend of debt service growing at a much faster rate than budget resources is disturbing, and if allowed to continue will result in less budgeting flexibility in the future.

Growth in Debt Service Compared to General Fund Receipts
(dollar amounts in millions)

Fiscal Year

General Fund Receipts

Debt Service Payments

Debt Service as a Percent of General Fund Receipts

1997-98 $ 35,197 $ 3,197 9.1
1998-99 $ 36,939 $ 3,488 9.4
1999-00 $ 37,262 $ 3,877 10.4
2000-01 $ 37,528 $ 4,112 11.0
2001-02 $ 38,654 $ 4,335 11.2
2002-03 $ 39,813 $ 4,452 11.2

Source: Debt service projections for all years are from the Executive Budget's capital plan; General Fund receipts figures through 2000-01 are projections presented in the Executive Budget adjusted by eliminating the dedication of STAR payments and tobacco tax settlement funds; figures for the last two years are OSC estimates based on 3 percent growth.



Reduced Pay-as-You-Go Financing

New York finances its capital spending through federal grants, General Obligation bonds, authority borrowing (back-door borrowing), and from current resources (pay as you go). A key measure of financial health is the share of capital financed on a pay-as-you-go basis; a large proportion funded pay-as-you-go indicates that debt is being moderated. During periods of economic contraction, the share of capital financed pay-as-you-go can also be reduced and replaced with bonding, creating a virtual reserve fund, and the reverse can be done during times of economic growth.

Pay-as-you-go financing in New York began the 1990s at 9.6 percent of capital spending, the lowest level in recent history. As the State's finances improved, the share moved to about one-third. The five-year capital plan assumes a declining share, with pay-as-you-go dropping to 14 percent of capital spending. This trend is accompanied by an increase in the use of back-door borrowing, which will account for 80 percent of nonfederal capital financing by 2002-03.

Back-door borrowing is objectionable because it bypasses the State Constitution's requirement for voter approval of debt. Authority bonding is also generally more expensive, because investors require a higher interest rate from these bonds.

Note: Data through 1996-97 is actual; 1997-98 through 2002-03 is the Executive Budget projection.

Share of Nonfederal Capital Financed
by Public Authority Bonds

Fiscal Year

Back Door Borrowing

1997-98 46.9%
1998-99 48.6%
1999-00 61.9%
2000-01 68.1%
2001-02 76.4%
2002-03 80.0%

If the State modified its capital plan to reduce reliance on back-door borrowing by 10 percent in each of the next five years, total debt outstanding would be reduced by $1.5 billion and the State would save about $75 million per year in interest payments alone.(19)

Capital Spending

New capital spending initiatives in the budget include:

  • Increasing the level of bridge and highway construction contract awards by $100 million in 1998-99 and 1999-00; engineering services are also increased.
  • $3.1 billion for the State and City University systems.
  • $365 million in new state funds for the Department of Correctional Services, including $180 million for a new 750 cell maximum security prison.



APPENDIX: Comptroller's Budget Reform Testimony


DECEMBER 15, 1997

Prepared Testimony for:
N.Y.S. Assembly Forum on Budget Reform
ON Center
Syracuse, New York
December 15, 1997

Mr. Speaker, Majority Leader Bragman, Chairman Farrell I am pleased to be here in Syracuse to speak at the Assembly's Forum on Budget Reform.

The Assembly has a long history of budget reform initiatives, including the GAAP law in 1981 and the creation of LGAC and elimination of Spring borrowing a decade later. I hope that this series of public meetings will lead to similar iniatives that can finally put New York back on track with a budget process that makes spending decisions openly and prudently.

Since taking office as State Comptroller in 1993, I have made improving the State's financial condition a top priority. I have been speaking out, urging the Legislature and the Governor to reform what has become a budget process that defies description. Until this year, I believed "dysfunctional" was an apt description; but we moved beyond dysfunctional in 1997. And while I've run out of things to call the budget process, one thing is clear, we need to reform it.

The last on-time budget was enacted in 1984; since 1994 budget lateness has grown exponentially -- to 126 days this year. I have included a chart in my testimony that illustrates the record.

These late budgets have meant missed payments to local governments.

In 1996, school districts were forced to wait a month for $1.4 billion in school aid payments; as a result 230 school districts were forced to borrow $470 million. This is simply an unnecessary expense.

In 1995, state employees faced the prospect of not being paid when the Governor threatened to shut down government as a budget negotiating tactic. Prison guards, state police officers, nurses in hospitals were all treated as pawns.

Lateness has done other harm to our State:

  • New York continues to have the second lowest credit rating in the nation; this costs us at least $10 million a year in extra interest costs. The table I have included in my testimony shows New York's rating compared to other states.
  • Uncertainty in budgeting may also increase costs to the state in purchasing goods and services; vendors bidding on state work often increase their charges to account for uncertainty in payments.
  • Finally, a dysfunctional budget process reduces the public's confidence in government. There is intangible harm, including lowering voter turnout, and increasing cynicism and apathy.

Although lateness is the most visible symptom of a broken process, there are other problems, including:

  • a closed process that shuts out the public and rank-and-file legislators;
  • lack of contingency planning in the event of bad economic news;
  • a revenue forecasting process that is closer to alchemy than science; and,
  • a lack of long-term planning that results in significant future budget gaps; an exhibit attached to my testimony contains my estimates for the gaps during the next four years.

I have cited five principles that are needed to reform the state budget process:

1. Timeliness
2. Structural balance
3. Contingency planning
4. A rigorous economic and revenue estimating process, and
5. Opening the process to the public and to rank and file legislators.

I will comment on each of these principles and discuss reform options.

My approach to budget reform has been to suggest broad principles that need to be addressed. I am not wedded to any of the specific reforms that I will speak about today; however, it is important that reforms in each of these broad principles be enacted.


Two areas need to be addressed to ensure that budgets are enacted by the start of the fiscal year.

First, the budget deliberation period has to be extended. New York's legislature has one of the shortest periods for budget review and this certainly has contributed to late budgets.

The options that have been discussed include accelerating budget submission or changing the fiscal year. I believe a good approach would be a July 1 fiscal year, with a requirement that the budget be enacted by June 15. This would allow time to formulate the financial plan and also provide an orderly end of session for other legislative business. June 15 should also be sufficient notice to schools and other local governments who have to set their own budgets. Changing the fiscal year can be done in statute. In contrast, an earlier budget submission requires a constitutional change and couldn't be put to the voters until 1999.

Second, we need a mechanism to ensure that the budget is in place by the beginning of the fiscal year.

A number of approaches have been suggested: docking the pay of elected officials, adopting last year's budget, adopting the governor's budget, adopting an austerity budget, and shutting down government. All these approaches would make matters worse.

The real solution, and the one that can be put in place instantly, is developing the political will to act in a timely manner.

If the Governor and the 211 members of the Legislature decide that a timely budget is a priority, I believe it can be done, especially if the budget deliberation period is extended. Discipline and accountability are the best remedies for our late budget.

A related issue is the recent practice of linking non-budget issues with the budget.

There is no reason unrelated issues to be linked to the budget and to be held hostage together. Part of the discipline of budget reform must be a commitment to deal with issues on their own merits, rather than as pawns to promote unrelated positions.


A well known feature of New York budgets is the practice of putting off paying for new initiatives. Starting new programs in the last month of the fiscal year, for example, makes it easy to pay for new spending -- until the full year's bill comes due.

In this year's budget, an ambitious $4.8 billion tax-cut program was put in place, but only $51 million was financed this year. School aid enhancements were also adopted that cost nothing this year, but grow to $1.2 billion in 2001-02.

Better disclosure of how current actions affect future budgets will improve structural balance in New York.

I suggest that new budget initiatives that have a significant impact on the future be accompanied with a fiscal note. Instead of focusing on the impact this year, the note would describe the impact until the provision was fully implemented. This measure would allow the public and legislators to know the cost of what is being considered before it is voted on.

We also need improvements in the multi-year financial plan.

Currently, this plan is released with the budget and not updated until the following year. For the past three years, I have included an estimate of future gaps, but this is something that should be done by the Governor. A requirement that the multi-year financial plan be updated 30 days after budget enactment should be put in place.


New York has to plan for downturns in the economy, something we have been lucky not to experience for several years. I would suggest two approaches:

First, build up a reserve fund. The state's existing tax stabilization reserve fund is not flexible enough to be used for a large rainy day fund. We should explore legislation that would -- over time -- build up a fund equal to 5 percent of current spending. Some form of reserve is done in most other states.

Second, change capital financing to reflect available cash. Despite having three years of sizable surpluses, New York has been financing an increasing share of its capital program with bonds. During good economic times, we should instead be using more pay-as-you-go for capital; debt could be used if revenue growth contracts.


The revenue forecasting process continues to be ineffective, despite recent legislation that mandated a forecasting conference and consensus report.

For example, the consensus report issued for this year's budget, rather than identifying a revenue figure, stated that no consensus could be reached. In effect, negotiators formed a consensus that there was no consensus.

While forecasting is not a science, and there are legitimate reasons why a forecast can change daily, at some point the participants have to agree to a number. It may be easier to come to that agreement if there is a rational way to update the forecast as conditions change. With the current process, the Legislature has only one chance to identify a revenue number; if conditions improve, the Executive is able to control how the new resources are spent. The revenue forecasting process would be improved if the Legislature had a role in updates ... thus eliminating the pressure to find the perfect number.


One of the most disturbing features of the budget is how centralized decision-making has become. "Three men in a room" is all too true in New York, and ways to increase participation -- both by the public and rank-and-file members -- need to be adopted.

Conference committees is one area where the Governor and both houses of the legislature are in agreement. Conference committees would charge a group of members from both houses with the task of resolving differences, and would carry out this responsibility in public.

In closing, I would like to stress the need to act before we set another record for lateness.

We have a window -- between now and budget submission -- during which the Governor and both houses of the Legislature can sit down and agree to reforms.

Mr Speaker, to get this process moving, I urge you to use the insight and information gained during these public forums to create a reform agenda. This agenda has to be acted on quickly, so that improvements can begin with the 1998-99 budget.

I urge you to continue the leadership you have demonstrated holding these forums to bring the Governor and Senator Bruno together to agree on a plan of action . . . and to implement that plan as the Legislature's first order of business when they return to Albany.

Thank you.



Standard and Poor's Ratings of State General Obligation Bonds
(As of December 10, 1997)

Georgia Delaware Alabama Connecticut California New York Louisiana
Maryland Florida Alaska Montana Hawaii
Minnesota Kansas Arkansas North Dakota Massachusetts
Missouri Maine Illinois Pennsylvania
North Carolina New Hampshire Kentucky Rhode Island
South Carolina New Jersey Michigan Vermont
Utah New Mexico Mississippi West Virginia
Virginia Ohio Nevada
Tennessee Oklahoma
Washington Oregon

Moody's Ratings of State General Obligation Bonds
(As of December 10, 1997)

Aaa Aa1 Aa Aa2 Aa3 A1 A2 A3
Georgia Delaware Alabama Florida Arkansas California New York Louisiana
Maryland New Jersey Alaska Michigan Connecticut Massachusetts
Minnesota New Mexico Mississippi Hawaii Pennsylvania
Missouri Ohio Nevada Illinois Rhode Island
North Carolina Washington New Hampshire Maine West Virginia
South Carolina Oregon Montana
Tennessee Vermont North Dakota
Utah Wisconsin Oklahoma

1. All funds includes state funds plus federal funds. State funds is spending from state imposed taxes, fees and other charges; state funds includes dedicated funds, such as the Lottery. The General Fund contains all state-imposed taxes and fees that are not dedicated to a specific use.

2. The adjustments to the Executive Budget figures are:

A)Reducing all funds and state funds disbursements by $32 million in 1997-98 and by $114 million in 1998-99 to account for the funding mechanism used for the Child Health Insurance Program. The program is being funded by health care provider assessments that were not previously appropriated. This adjustment reduces spending growth in both years.

B)Reducing 1997-98 all funds disbursements by $331 million ($136 million state funds and General fund) and increasing 1998-99 spending by the same amount to account for the acceleration of a medicaid payment. This payment was originally scheduled for 1998-99; the adjustment increases 1998-99 growth.

C)Reducing 1997-98 state funds and General Fund disbursements by $425 million to reflect the deposit of cash into a Community Facilities Enhancement Program fund. This program was originally to be funded with bond proceeds. The $425 million payment is a one-time action that artificially increases 1997-98 spending and thus reduces the 1998-99 growth rate. This payment is being made as a transfer to a new fund; little, if any, cash will actually be disbursed in 1997-98.

D)Moving $724 million in 1998-99 STAR spending from special revenue funds to the General Fund. The Executive Budget proposes to fund this program with a dedicated portion of the Personal Income Tax. The use of a dedicated fund was not part of 1997-98 legislation that established the STAR program.

3. Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008, January 1998. Chapter 3 discusses revenue performance.

4. State Revenue Report, December 1997.

5. Mutual funds pay distributions of the fund's earnings each year. These distributions are likely to have been significant in 1997 because of gains in security prices and the practice of fund managers to trade frequently. Individuals must pay taxes on the distributions even if they have not chosen to sell the mutual fund.

6. Based on Executive Budget estimates adjusted to eliminate proposed dedication of STAR spending and tobacco settlement receipts.

7. Under the continuation of last year's specifications for the transition limit, 265 districts receive aid increases which total $231 million for the categories of aid governed by this device (operating, tax effort, tax equalization, gifted and talented, and limited English proficiency). Districts eligible for aid increases among these five categories are allowed increases of up to 4.5 percent, or an increase equal to 17.6 percent of the overall increase they would receive without any cap, if that is greater. The 265 districts with their aid limited would receive an additional $475 million in aid payments if there were no cap in place. Another 86 school districts receive aid increases less than 4.5 percent (and so are not impacted by the cap). The remaining 331 districts do not receive aid increases, but their aid is held constant under a save-harmless provision -- these districts would lose $140 million in aid without this protection.

8. Under current law, only building projects approved by local voters after July 1, 1998 are eligible. Positive proposals have been made to accelerate this change to include bond proposals approved at the time of the universal budget vote, in May. This change would have the benefits of helping to ensure high voter turn-out and saving school districts the cost of holding a second referendum after July 1.

9. School Facilities: Conditions, Problems and Solutions, Office of the State Comptroller, October 1997.

10. This proposal is described in Meeting School Facilities Needs: A Conceptual Proposal for Consideration in the 1998-99 Budget, Office of the State Comptroller, December 17, 1997.

11. New York State 1988-89 Executive Budget, figure 46, page 121.

12. The Executive has consistently characterized STAR as a tax cut, and thus the approach of also counting it as an increase in aid is somewhat inconsistent. For example, the rationale that STAR is a tax cut is employed to justify removing the associated state expenditures from the General Fund and thereby artificially deflating the year-to-year increase in spending shown on that basis of accounting.

13. An Analysis of Two Educational Policy Changes in New York State: Performance Standards and Property Tax Relief, William Duncombe and John Yinger, Center for Policy Research, The Maxwell School, Syracuse University.

14. The Economic and Budget Outlook: Fiscal Years 1999-2008. Congressional Budget Office. January 1998.

15. The Congressional Budget Office (CBO) attributes the low growth rates of 1996 and 1997 to the strong economy resulting in lower caseloads, state initiatives to slow provider reimbursement rates, one-time savings associated with enrolling recipients in managed care, and certain restrictions on state Disproportionate Share (DSH) payments. CBO is projecting growth rates will increase due to diminishing savings from moving to managed care, slower caseload declines, changes in the Medicare and welfare programs.

16. Detail may not add to totals due to rounding.

17. The safety net program includes a small amount of federal funding due to the reclassification of certain HIV/AIDS recipients. There was no such federal funding offsetting the safety net program in 1997-98. The state share of safety net assistance does not include the state SSI payments.

18. Office of the State Comptroller, Evaluating Welfare Reform: A Proposal for New York.

19. See a similar analysis done for New York City: New York City Comptroller, Fiscal Year 1998 Annual Report of the Comptroller on Capital Debt and Obligations, December 1997.