Review of the Governor's Proposed Budget
TABLE OF CONTENTS
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
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
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
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
Spending growth in 1998-99 is largely driven by current law increases,
with new initiatives generally concentrated in the capital budget.
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
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.
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
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
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
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
- 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
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.
by Fund Type
As presented in the 1998-99 Executive Budget
Change Year to Year
(amount and percent)
||+ $5.1 billion, + 7.6 %
||+ $3.8 billion, + 8.5 %
||+ 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
- 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
- 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.
of 1997-98 Surplus
Earmarked for Specific Purpose:
Community Enhancement Facilities Program with Cash
to Tax Stabilization Reserve Fund
for Accelerating Existing Tax Cuts
Clothing Sales Tax Holidays
to Contingency Reserve Fund
Surplus Funds Earmarked
Medicaid One Day Early
Surplus Funds Not Earmarked
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
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
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
Gap To Be Closed
Source: 1998-99 Executive
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
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
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
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.
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
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
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
- 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
The Governor, Senate and Assembly have each proposed elements that,
taken together, would lead to better budgeting in New York.
reform in New York requires addressing five areas:
1) Ensuring that the budget is adopted by the start of the fiscal
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.
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);
-- 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
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
--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
--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).
Savings from Seniors STAR Exemption
Suburbs (High Wealth/High Tax)
*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
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.
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
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
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
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.
AND SOCIAL SERVICES
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.
of Health General Fund Medicaid Spending: Executive Budget
(dollar amounts in millions)
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
Child Health Insurance
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
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
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.
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
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
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.
Allocation of the Federal Welfare Windfall
Screening and Treatment
to Child Care Block Grant
Assistance Program for Immigrants
and Incentive funding for local districts
(such as: pregnancy prevention, WIC)
Welfare Windfall Spending
Unspent in 1997-98 and Re-allocated in 1998-99
Screening and Treatment
and Incentive funding for local districts
(such as: pregnancy prevention)
State and Local Fiscal Relief from the Federal Welfare Windfall
in General Fund Public Assistance Spending
in General Fund spending due to social services block grant
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.
Assistance Program 1998-99 Funding
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.
and Families Program 1998-99 Proposed Funding
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
Growth in Debt Service
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.
in Debt Service Compared to General Fund Receipts
(dollar amounts in millions)
General Fund Receipts
Debt Service Payments
Debt Service as a Percent of General Fund Receipts
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.
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
of Nonfederal Capital Financed
by Public Authority Bonds
Back Door Borrowing
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)
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.
Comptroller's Budget Reform Testimony
H. CARL MCCALL
NEW YORK STATE ASSEMBLY PUBLIC FORUM ON
REFORMING THE NEW YORK STATE BUDGET PROCESS
SYRACUSE, NEW YORK
DECEMBER 15, 1997
N.Y.S. Assembly Forum on Budget Reform
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
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:
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
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
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
New York has to plan for downturns in the economy, something we
have been lucky not to experience for several years. I would suggest
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.
ECONOMIC AND REVENUE FORECASTING
The revenue forecasting process continues to be ineffective, despite
recent legislation that mandated a forecasting conference and consensus
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
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.
BUDGET REFORM TESTIMONY
STATE CREDIT RATINGS
Standard and Poor's Ratings of State General Obligation
(As of December 10, 1997)
Moody's Ratings of State General Obligation Bonds
(As of December 10, 1997)
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
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.
Budget Office, The Economic and Budget Outlook: Fiscal Years
1999-2008, January 1998. Chapter 3 discusses revenue performance.
Revenue Report, December 1997.
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.
on Executive Budget estimates adjusted to eliminate proposed dedication
of STAR spending and tobacco settlement receipts.
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.
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
Facilities: Conditions, Problems and Solutions, Office of the
State Comptroller, October 1997.
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.
York State 1988-89 Executive Budget, figure 46, page 121.
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.
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
Economic and Budget Outlook: Fiscal Years 1999-2008. Congressional
Budget Office. January 1998.
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.
may not add to totals due to rounding.
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
of the State Comptroller, Evaluating Welfare Reform: A Proposal
for New York.
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.