July 23, 1998
To the People of the State of New York:
New York's 1998-99 budget represents a missed opportunity to begin serious reforms of our State's short-sighted financial practices. Although the state will likely end this fiscal year with a surplus of over $1 billion, the budget made no attempt to reduce the use of debt or create real reserve funds to deal with looming future budget gaps. The large surplus in this year's budget should not mislead anyone. In a way, the surplus is a result of borrowing, because it is only made possible because much of the State's capital spending is being financed with debt.
New York's budget process saw a mix of improvement and deterioration. On the positive side, conference committees made the budget process more open, and allowed more rank-and-file legislators to participate in negotiations. New York's budget was also adopted close to the start of the fiscal year, a vast improvement over 126 days late in 1997.
A significant negative this year was the Governor's unfortunate veto of many spending items without public debate or input. Badly needed funds for higher education and cost of living increases for direct care workers should not have been vetoed, and most likely would not have been if the public were allowed to participate in the decision.
The most pressing concern in this year's budget is the future. New York has been fortunate to be home to the world capital of finance during one of the strongest bull markets in history. The stock market's performance since the beginning of 1995 has generated revenues beyond expectation, created surpluses when gaps were expected, and has allowed the state to cut taxes significantly.
My concern is that budgets are being planned assuming that we have entered a new era of permanent prosperity. This report projects a gap of $5.5 billion in 2000-01; while past gaps have been closed with unexpected revenues, budget makers may confront the gap two years from now with an economy that has slowed or financial markets that have retreated from record highs.
The problem is that there are
no plans if these contingencies take place. New York has made tax
cut and spending commitments over the next several years that may
be difficult to fulfill, or may require harmful cuts in other programs.
New York has a long history of resorting to short-sighted financial
gimmicks that only harm the State's finances in the long term. I
am concerned that these failed policies of the past will return
if revenue growth falters.
H. Carl McCall,
All funds spending in the enacted 1998-99 budget totals $71.5 billion, an increase of $5.5 billion, or 8.3 percent. State funds spending increased at a slightly higher rate, 9.8 percent, and General Fund spending increased 7.1 percent. Most of the increase in spending over 1997-98 is for education and the School TAx Relief (STAR) program. Spending in the 1998-99 budget increases more than the past three years, representing a reversal of the trend to keep spending growth near or below inflation.
The budget was easily balanced without any significant cuts because of a more than $2 billion surplus from 1997-98, continued strong growth in tax receipts, and moderated growth in entitlement spending. The Executive projects the 1998-99 enacted budget results in a $761 million surplus. This is a conservative estimate and the actual surplus will likely exceed $1 billion, due to strength in personal income tax collections.
With the exception of additional aid for schools, the enacted budget does not differ significantly from the proposed Executive Budget. General Fund spending increased $700 million, state funds spending increased by only $100 million and all funds spending declined $100 million.
Despite the relatively minor changes from the proposed to the enacted budget, the budget process changed dramatically. For the first time, conference committees were used by the legislature to publicly debate legislative spending priorities. The legislature adopted its budget on April 14, only two weeks past the constitutional deadline after years of prolonged late budgets.
The Governor vetoed $763 million in all funds spending added by the legislature. The Executive also disagreed with some of the spending and revenue reestimates used by the legislature in developing their budget. However, despite these disagreements, the Governor did not veto spending because the 1998-99 budget was unbalanced. In fact, after his vetoes the Governor estimated the state would have a $666 million General Fund surplus.
Multi-Year Impact of the Budget
The multi-year financial plan accompanying the Executive Budget projected gaps of $2.514 billion in 1999-00 and $4.771 billion in 2000-01. OSC estimates that actions taken in enacted 1998-99 budget reduce the gap for 1999-00 by $706 million and increase the gap by $758 million in 2000-01. The gap improves in 1999-00 because the added spending is more than offset by an estimated 1998-99 surplus of more than $1 billion.
The 2000-01 gap is much higher than 1999-00, growing from $1.8 billion to $5.5 billion, due to the implementation of nearly $1.9 billion in new tax cuts in 2000-01. Although the estimated increases in the gap from the proposed to the enacted budget are smaller than projected over the past three years, the second year gap is larger than it has ever been.
School aid for next year goes up by $850 million, or 7.8 percent, bringing total aid up to nearly $12 billion. Other than the Rebuilding Schools to Uphold Education (RESCUE) program and teacher support aid, the Governor's vetoes did not have much effect on school aid. Unfortunately, despite the large increase, there was no reform of the complex and unfair maze of aid formulas currently in use.
The treatment of higher education in this year's budget was a significant departure from recent years, where the focus was largely on restoring cuts proposed by the Executive. This year, in the absence of proposed cuts, the Legislature included a number of positive additions, totaling over $100 million. After the Executive's vetoes, however, only about $20 million of these additions remains.
Legislative adds for more full-time faculty at the public university systems, increased aid to independent institutions, and restoration of the 1995-96 cuts to opportunity programs were vetoed. A $150-per-student increase in aid to community colleges was vetoed, but subsequently administratively reversed. The only major addition not vetoed was an increase in TAP for students attending independent institutions.
Child Health Insurance
The legislature deferred action on children's health insurance programs during budget negotiations, but reached agreement on broadening existing state programs for children's health insurance at the close of the legislative session. The final agreement expanded the Child Health Plus (CHIP) benefit package to include certain dental, vision, speech and mental health services. The approved package also expanded Medicaid eligibility for all children in families with income below 133 percent of the federal poverty level. By 2000, CHIP eligibility will be expanded from 222 to 250 percent of poverty.
New York needs to embark on
an aggressive marketing, outreach, and enrollment campaign to alert
eligible families and children of these programs. A recent audit
by the Office of the State Comptroller found that only 37 percent
of children estimated by the Department of Health to be eligible
for CHIP were actually enrolled.
Health and Social Welfare
Unlike prior years, the 1998-99 enacted budget does not include any new Medicaid cuts. Medicaid growth has moderated: the underlying state Medicaid program growth in 1997-98 was 3.9 percent and is estimated to be 4.6 percent in 1998-99.
Federal welfare funding is provided to New York through an annual block grant of $2.4 billion, based on the 1995 public assistance caseload. Since caseloads have declined significantly, New York now receives a greater share of total program costs from the federal government. This additional amount of federal funding is often called the "welfare windfall."
The 1998-99 welfare windfall is estimated to total $708 million, representing an increase of $73 million over last year's windfall. The 1998-99 adopted budget uses over one-half, approximately $396 million, of the excess federal funding for general state and local fiscal relief. The remaining one-half is allocated for other employment and child care programs and an increased set aside in the New York Works Compliance Fund.
The enacted budget includes a package of new tax cuts, in addition to prior tax cuts that are already being phased-in, valued at $714 million in 1998-99 and $831 million when fully implemented in 2002-03. The Executive Budget recommended $718 million in tax cuts for 1998-99 and $72 million when fully implemented in 2001-02. The enacted tax cuts include the package proposed by the Governor in addition to new cuts primarily in business taxes. The cost of the Governor's tax cuts declined in the second year because they were accelerations of previously enacted tax cuts. The cost of tax cuts in the enacted budget is $491 million higher in 1999-00 and $759 million higher when fully implemented.
Debt and Capital
New York's debt burden continues to grow in the enacted 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 increases from $1,860 today to $2,260 by 2002-03, or a 21 percent increase.
The state is financing its capital program with a growing share of debt, bringing the share of pay-as-you-go borrowing down. Backdoor borrowing finances 80 percent of capital spending at the end of the plan period.
At the end of the 1998 legislative
session, an ad hoc pension cost of living supplement as well as
several pension reform measures were adopted. The supplement is
a one-time increase in contrast to the Comptroller's permanent performance
OVERVIEW OF THE ENACTED BUDGET
This section provides a summary
description of the state budget, focusing on the financial plan
Overall State Spending
According to the state's financial plan, all funds(1) spending in the budget totals $71.5 billion, an increase of $5.5 billion; that is a growth rate of 8.3 percent, with state funds spending increasing at a slightly higher rate, 9.8 percent, and General Fund spending increasing at a 7.1 percent rate. Spending growth is higher than it has been in the past three years, representing a reversal of the recent trend to keep spending growth near or below inflation.
The financial plan figures
reflect several accounting and payment changes that 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. These types of changes highlight the
increasing importance of state funds as the more accurate and appropriate
measurement of state spending.
by Fund Type
Adjusting for these accounting and payment changes produces growth rates for all measures of spending that exceed 9 percent. All funds growth rate would be 9.3 percent; state funds growth would be 9.7 percent; and General Fund growth would be 9.8 percent, compared to the reported 7.1 percent.(2)
1998-99 General Fund Revenues
General Fund receipts are estimated
to increase by $3 billion, or 8.7 percent, over 1997-98. When receipts
are adjusted to reflect surplus rollovers and STAR, the projected
increase declines to 3.8 percent, or $1.3 billion over 1997-98.
General Fund taxes are forecast to grow 5.5 percent, or $1.7 billion.
The growth in taxes is entirely attributable to the personal income
tax and higher collections associated with strong financial markets.
General Fund Receipts
1998-99 General Fund Spending
General Fund spending is projected to increase by $2.43 billion in 1998-99. The growth is largely driven by current law.
General Fund Spending
The enacted budget did not increase one-shots above the $64 million in actions recommended by the Governor. These one-time actions include: $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 are objectionable.
1998-99 Projected Surplus
The Executive estimates the 1998-99 enacted budget will finish the year with a significant surplus. That is, after reflecting required and planned fund balances, receipts will exceed disbursements by $761 million, according to the Executive.
The 1997-98 enacted budget also included a planned surplus of $530 million. Financial performance in 1997-98 was much better than expected. The Comptroller's report on the 1997-98 enacted budget noted that this was a conservative estimate and that the actual surplus was likely to be higher. The Governor projected a $1.8 billion surplus in January 1998. The actual surplus, as estimated by OSC, was $2.17 billion.(3)
Much of the better-than-expected 1997-98 results were 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(4) as have other states.(5) Much of this growth has been fueled by robust financial markets and federal tax cuts on capital gains.
Strong growth in the 1998-99
personal income tax, both in the settlement of the amount of tax
owed for the prior year (April 15th filings) and current
year withholding and estimated tax collections is likely to continue.
Although personal income tax collections are difficult to predict
with precision due to the volatility of the financial markets that
are driving much of the income growth, it is likely that the Executive's
estimates are conservative. For this reason, the Office
of the State Comptroller projects that 1998-99 will close with a
surplus exceeding expectations of more than $1 billion.
Summary of the 1998-99
of Spending Levels Proposed by the Executive and Enacted
Although the size of the 1998-99 budget did not change dramatically from the Executive Budget proposal to its enactment, the budget process changed quite significantly.
The process used to negotiate
New York's 1998-99 budget included two significant improvements
when compared to recent history: the budget was enacted close to
on-time (April 14th) and a conference committee system
was used to involve rank-and file members in public negotiations.
The use of conference committees was a significant change in the method New York has traditionally used to negotiate the budget. The former system relied on closed-door "leaders meetings," where the Governor, Speaker and Senate Majority Leader negotiated the budget in private. The legislative leaders used closed party conferences to discuss policy issues with their members in private; the results of these negotiations would then determine each house's policy priorities.
This system has been criticized because policy debates occur without public scrutiny, the members of minority parties are excluded, and the compromises required to reach agreement are frequently made by the legislative leader without consultation with individual members.
Following a practice used in previous years, each house of the legislature passed its own version of the budget in March. After the adoption of these "one house" budget bills, a General Committee -- consisting of the senior members of both parties in both houses -- convened to set spending targets by program area. The targets represented limits on increases to the Executive Budget.
Nine subcommittees (organized by program areas) were then appointed by the General Committee to recommend specific spending changes within the General Committee's spending targets. The subcommittee chairs were generally also the chair of the legislative committee with jurisdiction over the program area. Subcommittee members included members of the minority parties. The subcommittees could identify spending reductions to allow new spending. The subcommittees reported their recommendations on spending changes to the General Committee, and these changes were incorporated into the budget that was eventually enacted
Both the General Committee and the subcommittees met in public, allowing the public, press, and interest groups to observe deliberations.
A significant feature of the conference committee process used this year was that the Governor was excluded from negotiations, and the Governor did not make comments on the deliberations. In the past, there was generally some assurance that the Governor would not veto significant portions of the budget because of his participation in budget deliberations.
The Governor made significant alterations to the budget adopted by the Legislature, vetoing 1,379 provisions. Most of the vetoes involved specific spending additions which the Governor has clear authority to reject. However, 55 items were vetoed from nonappropriation bills -- legislation that accompnaies the budget, but does not provide authorization to spend funds.
The ability of the Governor to veto provisions in nonappropriation bills is currently the subject of a legal action by the Assembly Speaker.
The methodology used to prepare the estimates in this report uses the Executive Budget's original forecast and then makes adjustments based on changes included in the enacted budget. The estimated gaps presented in the Executive Budget were artificially understated by assuming that the state would receive $250 million in each year from tobacco settlement monies (there is no indication that these funds will be received) and by assuming $600 million in unspecified savings in 1999-00 and $800 million in 2000-01 (there is no plan on how to achieve these savings). The Executive gap estimates presented in this report exclude these unspecified savings and tobacco settlement monies.
The Executive estimate of a $400 million improvement in the 1999-00 gap incorporates two assumptions that may not be realistic: first, there will be no spending on legislative initiatives (also known as member items) even though traditionally they are included in the budget; second, the $158 million balance in the community projects fund will be used to fund non-legislative initiative spending.
However, the reduction in the
Executive estimate of the improvement in the 1999-00 gap is more
than offset when adjusted to reflect a surplus of more than $1 billion
(due to additional personal income tax receipts) and the recurring
portion of this surplus as projected in this report.
Estimate of Future Gaps
Revised Estimates of Future Gaps
The enacted 1998-99 budget reduces the gap for 1999-00 by $706 million from the $2.514 billion Executive Budget estimate. The gap increases by $758 million in 2000-01 from the $4.771 billion Executive Budget estimate. One of the reasons the gap increases in 2000-01 is because it does not have the benefit of a planned surplus from the prior year. Although the increases in the gap from the proposed to the enacted budget are smaller than experienced in the past 2 or 3 years; the second year gap of $5.5 billion is still larger than it has ever been. Almost two-thirds of the second year gap is attributable to already scheduled tax cuts such as STAR.
Estimate of Future Gaps
The net impact of the revenue reestimates, changes in tax cuts, and the use of the prior year's surplus and fund balances reduces 1999-00's gap by $1.280 billion and increases the 2000-01 gap by $184 million.
The enacted budget financial plan assumes that 1998-99 receipts will be $592 million above the Executive Budget estimate. Given personal income tax collections through June 1998, this report estimates that 1998-99 receipts will be $300 million higher than projected in the enacted budget and approximately half of the increase will be recurring. This has the effect of increasing the projected 1998-99 surplus to $1.063 billion which reduces the 1999-00 gap.
The enacted budget projected recurring receipts would be approximately $350 million higher than projected in the Executive Budget. The recurring portion of this report's higher 1998-99 receipts projection increases the additional receipts reestimates to $500 in 1999-00 and 2000-01 which also improves the out year gaps.
The enacted budget included $491 million more in tax cuts in 1999-00 and $684 million more in 2000-01 than proposed in the Executive Budget.
The enacted budget contains
a planned balance of $158 million in the community projects fund
and $50 million in the Debt Reserve Reduction Fund. This report
assumes the community projects fund balance will be used to fund
legislative initiatives included in the 1999-00 budget.
Revenue Actions on Multi-Year Budget
The enacted budget increases spending by an estimated $574 million in 1999-00 and in 2000-01 over what was proposed in the Executive Budget. This is the net effect of approximately $724 million in new spending for 1999-00 and 2000-01, offset by approximately $150 million in spending reestimates (which have no effect on program recipients). Most of the added spending is for education and legislative initiatives.
The downward spending reestimate of $80 million in Medicaid spending included in the enacted budget is assumed to recur in future years, reducing the gap in 1999-00 and 2000-01. The spending reestimates for general state charges and debt service decline from $26 million in 1998-99 to $20 million in 1999-00 and 2000-01.
Components of the spending changes are generally larger than the amount added to 1998-99 spending because they are fully annualized. They include:
of Spending Changes in Multi-Year Budget
The future gaps could be decreased if growth in receipts is better than projected and growth in spending is lower than anticipated. A one percent error in estimating State Funds would result in a variance of nearly $500 million. Large upward revenue reestimates have been common for the past two years, and they may continue in the future, especially if financial markets continue to perform well. In addition, if welfare and Medicaid caseloads continue to decline and prices remain stable, expenditures could be lower than projected, which would also reduce the gaps. However, revenues could trend lower if Wall Street suffered a significant downturn. A general economic recession is also always a major budget risk.
The risk of lower stock prices is heightened by the relatively high valuations of the market today. At the end of 1994 the S&P 500 stood at 459 -- 17 times earnings. At the end of June 1998, the S&P 500 was 1133, or 29 times earnings.(8) While there are strong arguments for a higher earnings multiple given low inflation and interest rates, there are significant risks -- including tight labor markets in the United States and economic unrest in Asia -- that would suggest a more cautious valuation. A deterioration in the earnings outlook could result in a much lower earnings multiple, and thus significantly lower stock prices.
The relationship between the
earnings multiple and stock prices can be illustrated by calculating
the value of the S&P 500 assuming current earnings, but the
market's earnings multiple at the end of 1994. At 17 times earnings,
the S&P 500 would have been 664 at the end of June, instead
of 1133. If the Dow traded at December 1994's 15 times earnings,
it would be at 5817, instead of 8952.
The enacted budget provides a school year aid increase of $851.3 million (+7.8 percent), bringing total school aid to $11.8 billion. On a school year basis, this increase is $333 million greater than the Executive's proposed $518 million.(9) Computer runs distributed to school districts at the time of budget enactment show a total statewide increase in aid of $740 million, which remains in place after vetoes; this figure, however, does not include increases under some of the programs enacted with last year's budget, such as full-day kindergarten and pre-kindergarten incentive aids and the new minor maintenance aid and building aid formula enrichments.
The general school aid package signed into law is essentially the same as that enacted by the Legislature, with two major exceptions. The RESCUE school facilities program (REbuild SChools to Uphold Education) and teacher support aid were both vetoed. The RESCUE veto does not affect 1998-99 school aid, and is discussed further below, under facilities. The veto of teacher support aid eliminates a $67.5 million aid program supporting teacher compensation in the Big 5 cities. Executive Budgets for several years have proposed elimination of this program, and this year the legislative budget would have not only restored it, but also added $10 million.
The elimination of this aid category will have varying impacts among the Big 5 cities, depending upon the contractual agreements in place: in Buffalo, Rochester and Syracuse, it is probable that the portion of compensation this aid previously covered will have to be picked up by increased local taxes, but in Yonkers teacher compensation may be reduced by the veto. In New York City, a commitment has been made to replace the lost aid with local funding.
Most of the Executive's education
veto actions were outside of the general school aid categories,
including some programs available statewide and others going to
particular districts. Among these, the largest items vetoed were
teacher mentor intern programs and teacher centers. The teacher
mentor intern program veto eliminates the state funding for the
program, which totaled $20 million in the 1997-98 school year. The
teacher centers veto blocked a planned doubling of the state funding
for this program, which will continue to receive $10 million on
a school year basis. A variety of small adds to other programs and
many items directed to specific school districts were vetoed.
An Absence of Reform
Unfortunately, the large school aid increase was provided without any real reform of the formulas, which are now even more complex than ever. Although formula changes were made that largely targeted increased funding to low-performing, low-resource school districts, there were other actions taken tending to make the formulas less equalizing. The larger picture is that the changes enacted did very little to improve the equity of the aid distribution and nothing to improve its efficiency. The enacted budget's school aid increase was accomplished largely through increases under present law aid formulas,(10) along with some alterations to the formula components, and the addition of new formula responding to a desire to announce that aid is being provided to address higher standards.
As is the case in most years, the changes to the aid formulas are designed to effect a bottom line aid distribution meeting political concerns. The changes are not only technically obscure, but also largely bereft of any theoretical basis, and for those reasons a close examination of them is not particularly instructive. For example, one of the aid ratio calculations within the operating aid formula was altered in a manner touted as providing additional aid to low-wealth districts. The actual impact of this change, however, is not readily apparent, because the increased operating aid formula reduces aid in another formula (tax equalization aid), and both aid categories are subject to the provisions of the "transition adjustment," a governing device which may either completely override or proportionally alter the outcome.
Formula changes in other aid categories are similarly obscure. For example, both "extra-ordinary needs aid" (ENA) and "educationally related support services aid" (ERSSA) were increased through changes in formula components such as divisors and thresholds. However, since none of these factors have a real-world meaning, the changes to them are best described only in terms of the aid increase they produce -- a 20 percent increase for ENA, and 25 percent for ERSSA. These aid categories are rhetorically linked to positive educational goals, such as assisting schools with high concentrations of at-risk children and providing services to avoid referrals to special education, but the only real impact of the changes is on the aid distribution.
"Operating Standards Aid" provides $82 million through a new aid formula, adding yet another piece of algebra to the existing complex aid distribution. This new formula, like most others, is replete with fudge factors which have no meaning outside of the aid distribution they produce. For example, this new formula provides a per-pupil aid amount equal to $6 plus the product of $61.50 and a new aid ratio, but there is no underlying analysis describing how any of these factors might relate to higher standards. It is also doubtful that the aid amounts provided are either sufficient or related to the difficulties many districts will have in implementing higher standards. A variety of research was presented at the Regents 1997 symposium and published in the compendium resulting from it: Educational Finance to Support High Learning Standards. Most of the research presented therein very strongly suggests that a minor incremental addition to the existing aid allocation will not have a significant effect on school district capabilities to meet the new standards.
Perhaps the most significant alteration to the 1998-99 aid distribution results from the application of the "transition adjustment." This aid governing device has since 1993-94 limited the increases districts can receive under major aid categories and also provided save-harmless protection against losses in aid. This year, school district increases are limited as usual, with some changes in the limiting factors. What is different is that for the first time the transition adjustment now provides guaranteed increases in aid to all districts. All districts are guaranteed at least a 1.8 percent increase, with lower-wealth districts guaranteed an increase of up to 2.5 percent. The provision of guaranteed minimum increases responds in part to the perception that the current formula treats many districts unfairly, but it also limits the equalization provided.(11)
The net effect of all of the formula changes enacted this year (and the probable real purpose) is to produce an aid increase approximately equivalent in percentage terms across the major regions and types of districts. The computerized aid categories show a statewide increase of 7.2 percent, and no major regional category receives a percentage increase that diverges from this figure by more than one percent (see the Table following). In essence, the net effect of the 1998-99 budget is to provide a roughly equivalent aid increase across the state, at least in the aggregate. Individual school districts, as always, vary significantly.
Unfortunately, the budget contains no reforms aimed at helping school districts to be more cost-effective or efficient. For example, the complex and inefficient maze of school aid formulas is left in place, including "spend-to-get" formulas which reward spending increases and penalize efficiencies.
Special education is another area where change had been considered, but the enacted budget failed to take action. Moving away from a placement-based reimbursement system is one important component of reforming New York's special education finance system. However, special education reform should not be limited to finance, but also include changes in the system under which placements are made and improved program management support from the Education Department.
Several years ago, the Regents
held a symposium on cost-effectiveness, and produced a compendium
of scholarly research on the topic.(12) There were calls for a renewed and dedicated
focus on cost-effectiveness and legislation was passed requiring
a comprehensive study by the Education Department, including an
analysis of both effective and ineffective practices, and a review
of educational mandates, including laws and regulations. Unfortunately,
the study eventually released went little beyond rhetoric, and did
not accomplish the statutorily specified charge.(13)
Last year's state budget included three initiatives to provide additional funding for school facilities. Two of these are taking effect, as planned, in the 1998-99 school year:
A third initiative included in last year's budget legislation, the School Facilities Bond Act, was defeated by the voters in November 1997. Following the Bond Act's defeat, there were calls for some sort of substitute measure, including a proposal put forth by the Comptroller. The Comptroller's proposal was for a $500 million program to address some of the most severe facilities problems on the basis of a statewide prioritization of needs, and funded out of the year-ending surplus.
This year's legislative budget included $500 million for school facilities through a new program entitled RESCUE (Rebuilding SChools to Uphold Education). Funding for the RESCUE program was vetoed by the Executive, although this veto did not impact the 1998-99 budget's state spending level, because the funds were to be spent over four years beginning in 1999-2000. The RESCUE funding was to have come from a mix of cash and backdoor borrowing (through the Dormitory Authority): capital projects would be funded through bonding and qualifying maintenance or repair projects through cash. It is probable that the vast majority of projects would have been capital projects paid for through bonding.
RESCUE funding was to be allocated to school districts up to a maximum based on each district's share of statewide enrollment (including public and private school pupils). Funds were to be used for the purposes of correcting emergency situations, or projects addressing accessibility, health and safety, capacity expansion and educational technology. RESCUE could also be used for the local portion of expenses not reimbursed through regular state building aid.
Although the appropriation for RESCUE was vetoed, the program legislation also included a number of new inspection and capital planning requirements and additional data collection and regulatory activities on the part of the State Education Department.(14) All of these changes were unaffected by the veto and will go forward without the aid program; many also respond to conditions described and recommendations made in the Comptroller's earlier reports on facilities. The new requirements include:
This new approach is only broadly outlined by the budget legislation, and the details will have to be developed administratively. Although the details are uncertain, the approach outlined appears to be a sound method of establishing a better planning system for local school districts and providing better management information at the state level. This will enable more effective oversight and support of school facilities needs. Utilization of enhanced capital planning tools, such as value engineering and life-cycle cost analysis should be considered in developing the regulations for this program.
Given the extreme nature of many of the school capital needs statewide, it is unfortunate that the additional funding for facilities was vetoed. However, several of the objections to the RESCUE program listed by the Executive are reflective of general concerns described in connection with the proposal put forth by the Comptroller in December.(16) These include concerns about funding through backdoor borrowing, a distribution to school districts that is not needs-based, and funds supplanting local resources or being used for projects that could be funded in a timely fashion within existing resources and state aid streams.
Nevertheless, in the course of developing next year's budget, it is desirable to move forward with a facilities program utilizing any additional available revenues and perhaps with improvements to the originally enacted RESCUE program. For example, consideration should be given to incorporating mandate relief measures to decrease the cost of school construction and rehabilitation, including reform of the Wicks law and state rules governing asbestos remediation.
It is also evident at this
time that the existing aid incentive offered by last year's changes
to the building aid formula are causing a great deal of school building
activities. In their latest data submissions to the State Education
Department, school districts have identified additional projects
expected to eventually drive approximately $225 million in state
building aid. A revised supplemental capital program could build
on the new capital planning requirements and should aim at the most
severe needs that would probably not be met on a timely basis through
existing funding programs.
School Tax Relief (STAR)
The STAR program enacted in
last year's budget will reduce school property tax bills paid by
qualifying homeowners, with exemptions that eventually provide more
than $2.2 billion in tax relief statewide. Seniors over 65 with
incomes below $60,000 are eligible for enhanced exemptions, which
are 66 percent larger than those other homeowners receive. The seniors
exemptions begin in 1998, and under the budget enacted will be fully
effective immediately (rather than being phased in over four years,
as originally enacted). Other homeowners will begin receiving exemptions
in the fall of 1999, and these will be phased in, becoming fully
effective in 2001-02. The exemptions for seniors in 1998-99 provide
significant and dramatic tax relief to those who are eligible.
1998-99 Taxpayer Savings from Seniors STAR Exemption
However, the non-seniors exemptions
will eventually drive the majority of the STAR tax relief savings,
because although the seniors exemptions are higher, there will be
more non-seniors exemptions offered. The following table shows the
currently expected statewide total school property tax relief offered
by the STAR exemptions.
Statewide STAR Tax Relief
Although the STAR program offers
dramatic tax relief beginning this year, there is no substantial
connected effort to reform the administration of this tax, which
is very poor in some areas of the state.
STAR and School Aid
The STAR program will provide a great deal of tax relief to homeowners, but the state funding for this program should not be confused with state aid to education, because the purpose and effect of STAR payments is tax relief. The STAR exemptions lower the amount of taxes homeowners pay on their bills and the state reimburses schools for the revenue foregone; schools are really only a go-between.
STAR is an entitlement program that is precisely defined in state law, although it is implemented by local assessors and school districts. The exemptions are only available to homeowners on their primary residence. Those living in rental properties do not benefit, nor do out-of-state owners, second homes, or commercial and industrial properties. The STAR exemptions do not reduce the tax rate which applies to all properties -- they only reduce payments from qualifying homeowners (and the amount of the STAR reduction will be shown on their individual tax bills).
The state STAR reimbursements only replace revenues forgone due to lower tax payments from homeowners. Unlike education aid, these payments will not help schools provide programs or raise standards. STAR payments also will not help eliminate fiscal disparities among school districts.
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.(17) This research 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.
This relationship occurs primarily because 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, STAR payments overall actually go proportionally more to well-off schools than to poor schools. The Syracuse study notes that STAR may eventually magnify the large performance disparities already existing between high- and low-wealth districts.
The STAR program is homeowner tax relief, and as such, one would not expect to find a distribution similar to that provided by school aid. However, since some have argued that STAR should be viewed as school aid, a comparison of the two essentially opposite distributional patterns is instructive. Shown on a per-pupil basis, it can be clearly seen that the state school aid payments produce aid payments that are equalizing in impact: lower wealth school districts receive higher aid payments than higher wealth districts.(18) School aid payments for the poorest tenth of districts average $6,884 per pupil, more than five times the amount received by the wealthiest tenth: $1,355.
STAR payments measured on a per-pupil basis have a completely opposite distribution, with the wealthier school districts receiving proportionally greater STAR reimbursements. Upon full implementation, the poorest tenth of school districts will receive an average of $648 per pupil from STAR receipts, less than half of the average $1,558 received by the wealthiest tenth. The diametrically opposed distributional patterns between STAR and school aid, together with an examination of their different purposes, demonstrates the reasons why STAR should not be counted as school aid in any comparisons.
The Office of the State Comptroller, in reviewing the changes that must be made in financial reports on both local and state government finances, has determined that STAR reimbursements must be separately accounted for. For Municipal Accounting purposes, a new discrete account code for STAR will be provided within the category "Real Property Tax" items. In reports covering school district finances, STAR will be displayed as a discrete real property tax item separate from other items. STAR will be shown as an additional state contribution, reducing the otherwise necessary property levy, but not as school aid.
In most areas school property taxes are received by school districts largely in the early fall, and a problem connected with the STAR program is that schools will be financially disadvantaged because payments from the state will be received later in the school year. This change has the impact of tightening school district cash flow situations, reducing interest earnings, and potentially causing additional local borrowing.
To address this issue, last
year's budget legislation established the School District Cash Flow
Study Commission, chaired by the State Education Department and
including the Office of the State Comptroller, the Division of the
Budget, the Office of Real Property Services, and a school boards
representative. The State Comptroller served on this Commission
and throughout the deliberations held firm to a position the state
should take action to ensure that schools are not financially damaged
by STAR implementation. The Commission issued recommendations in
March which were reflected in part by the enacted budget.
In addition to the revised and separate payment schedule for STAR, the Commission also unanimously recommended that school districts be allowed to carry higher unreserved fund balances to ameliorate cash flow difficulties (current law includes a limit on unreserved fund balances of 2 percent of their budget). Another recommendation, jointly proposed by the State Comptroller and the School Boards representative but opposed by the Division of the Budget, was for the state to reimburse school districts for their interest earnings losses and borrowing costs resulting from the delayed receipt of STAR revenues. The enacted budget addressed the payment schedule issue but did not take action on the fund balance or interest loss reimbursement recommendations.
Taking advantage of the State's surplus going into the budget year, the Legislature provided for even faster payments in the first year of STAR implementation. Payments in 1998-99 will be made under a schedule as follows: 35 percent in October, 35 percent in November, 10 percent in December, and the remaining 20 percent in January. In 1999-2000 and thereafter, the Commission's recommended payment schedule will be used.(19)
The earlier payments this year, in combination with the fact that the STAR program is just beginning implementation (operating at about one-quarter of its eventual level), both help to ameliorate the interest losses and cash flow difficulties school districts will experience initially. However, over the longer term, it is essential that further action be taken to ensure that the delayed receipt of STAR reimbursements is not allowed to fiscally disadvantage school districts. Although the Commission recommendations represent a substantial improvement, they are not sufficient to prevent financial harm to school districts -- approximately 85 percent of which will still experience adverse cash flow impacts, with an average loss in interest earnings (or increased borrowing costs) equaling 10 percent of their current interest earnings.
One part of this solution is an increase in the allowable fund balances school districts can carry. There should also be a reimbursement program for interest earnings lost and borrowing costs to prevent fiscal harm to school districts as they serve as a pass-through entity for STAR. The State Comptroller and school district organizations continue to support interest reimbursement. This program would cost an estimated $10 million upon full implementation of STAR in 2001-02. It would ensure that STAR is implemented without financially harming school districts and is not an inordinate cost to bear in the context of a $2.2 billion tax relief program.
The 1988-89 Executive Budget for higher education was a significant departure from the last three years in that it did not propose cuts in student aid, increases in public university tuition, or other cuts. On the affirmative side, it did include a new capital plan promising $3 billion over five years for projects at the public university systems ($2 billion for SUNY and $1 billion for CUNY). However, the budget essentially straight-lined the public university operating budgets, except for negotiated salary increases; this means that inflation in all other items was not covered.(20)
The budget passed by the Legislature also represented a departure from recent years. Rather than merely restoring proposed cuts, it included a number of positive additions, totaling over $100 million. Most of the legislative adds essentially made partial restorations of previous years' cuts and began to move state funding of higher education in a positive direction. After the vetoes, however, only abut $20 million remains. Following are the major additions included in the legislative budget that were vetoed:
The Executive's proposed $3
billion capital program was adopted by the Legislature, and the
legislative budget went further than the Governor, by statutorily
identifying projects for the next five years -- the specific identification
of future projects was deleted from the bill by veto, although the
overall funding commitment remains.
The increase is very welcome at independent institutions, where TAP grants have fallen far behind average tuition over time. In 1974 the TAP maximum grant of $1,500 covered 60 percent of average tuition at an independent institution ($2,510); in 1990, the maximum was $4,125, and it covered 40 percent of average tuition; but in 1997 the TAP maximum had been reduced to $3,900 -- actually lower than in 1990 -- and it covered only 25 percent of average tuition at an independent institution, which had risen to over $15,000. The $225 increase in the TAP ceiling restores the level of $4,125 that was in place in 1990, and will at least temporarily halt the erosion of state support. However, the improvement will not be dramatic, and depending upon changes in tuition charges, may end up leaving the share of tuition covered by the TAP maximum essentially unchanged at 25 percent.
Appropriations totaling $19.5
million to support a $150-per-student increase in community college
base aid for SUNY and CUNY institutions were vetoed by the Executive.
However, the Executive has essentially reversed the decision to
veto this item. In a June 6 press release, following the veto by
only 41 days, the Executive declared that the increased community
college aid would indeed be provided, using existing resources.
HEALTH AND SOCIAL SERVICES
Unlike prior years, the 1998-99 enacted Budget does not include any new cost containment actions. Included in the 1997-98 enacted budget was state Medicaid savings of $723 million, which grows 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 enacted Budget estimates state Medicaid spending growth of 2.8 percent in 1998-99. Several adjustments are needed to present year-over-year growth for 1997-98 and 1998-99 in a comparable manner:
After making these adjustments,
underlying state Medicaid program growth in 1997-98 was 3.9 percent
and is estimated to be 4.6 percent in 1998-99. The Executive lowered
spending estimates by $80 million from the projections included
in the Executive Budget, representing a more than one percentage
point reduction in the growth rate. The projected growth rate contained
in the enacted budget is in a reasonable range given scheduled increases
in reimbursement rates of nearly 3.0 percent and recent programmatic
changes that result in a higher state share for AIDS patients and
immigrant offset by declining welfare-related caseload and acute
of Health General Fund Medicaid Spending
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.(21)
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.(22)
Child Health Insurance Plus (CHIP)
The legislature deferred action on expansion of children's health insurance programs during budget negotiations. At the conclusion of the legislative session, agreement was reached on broadening existing state programs for children's health insurance. The federal Balanced Budget Act of 1997 included a new block grant program for states to provide expanded health insurance coverage for children. New York is eligible to receive approximately $256 million annually. This new funding, combined with existing state funding provided the state with a unique opportunity to dramatically increase the number of children with health insurance.
Even before the new federal program was created, New York had a nationally recognized Child Health Plus (CHIP) 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 levels (FPL) -- $36,519 for a family of four. CHIP health insurance covers basic primary, preventive care, and hospital inpatient. However, it does not cover certain vision, dental or mental health services.
When currently scheduled program enhancements are fully implemented in 1999, CHIP is projected to serve 250,000 children at a state cost of $207 million. This is separate and distinct from the newly available federal funding.
The Governor, Assembly, and Children's Defense Fund all had proposals to use these funds to expand health insurance coverage for children. Senator Hannon introduced the Governor's plan and held a hearing in December 1997 soliciting information and testimony from advocates as well as officials from other states.
The Governor proposed a modest reduction in the required family CHIP premium contribution and an expansion in the services covered by CHIP (vision, dental and mental health). These changes are improvements to the current program. Unfortunately, according to calculations made by the State Comptroller's Office, the Governor's current plan left an estimated $650 million in available funding unspent over the next six years.(23)
The final agreement included the following:
In addition to the enacted
expansions, it is vital that New York embark on an aggressive marketing
and outreach campaign to alert eligible families and children of
these programs. A program expansion is a good first step, but if
the families with children that need these programs are not aware
of them, very little progress will be made. A recent audit by the
Office of the State Comptroller found that only 37 percent of children
estimated by the Department of Health to be eligible for CHIP were
actually enrolled and of those currently enrolled in CHIP an estimated
41 percent should actually be enrolled in the Medicaid program.
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 $834 million in excess federal funding. This amount included a current-year windfall of $634 million and $200 million attributable to the prior year that was available due to the early submission of a plan to the federal government. Over one-half, approximately $478 million, was used for state and local fiscal relief. The 1998-99 welfare windfall is estimated to total $708 million, representing an increase of $73 million over last year's windfall (excluding the prior-year amount). The windfall's increase is due to continued declines in caseload.
The 1998-99 adopted budget uses over one-half, approximately $396 million, of the excess federal funding for general state and local fiscal relief. The remaining one-half is allocated for other employment and child care programs and an increased set aside in the contingency fund. 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.
of the Federal Welfare Windfall
State and Local Fiscal Relief from the Federal Welfare Windfall
General Fund appropriations for public assistance were reduced by the legislature by $31 million due primarily to reestimated safety net spending. The Executive disagrees with the legislative analysis, but was unable to veto the change because it was a reduction.
Assistance Program 1998-99: General Fund
The 1998-99 Executive Budget
contained $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. The appropriation language directs
the Commissioner of the Office of Temporary and Disability Assistance
to submit an evaluation report to the Governor and legislature by
December 1, 1999. The evaluation is to include an assessment of
the effectiveness of public assistance programs in assisting recipients
to secure and retain unsubsidized employment. The commissioner may
use a not-for-profit corporation to assist with the evaluation.
Elements of a successful welfare evaluation program were described
in detail in a report from the Comptroller's office in 1997.(27)
Children and Families
Total disbursements for the Office of Children and Family Services will increase by 15.2 percent; this growth is primarily attributable to an increase of almost $200 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 $428 million. This represented an increase of almost $100 million from the prior year. The 1998-99 funding of $446 million, is an increase of $18 million over last year. The Legislative budget increased the transfer to the child care block grant from the welfare windfall from $60 million to $110 million; however, this was vetoed by the Governor.
The 1998-99 funding supports
the addition of only 7,000 more child care slots. A recent report
by the State Comptrollers Office found that the New York City child
care system is currently operating at capacity and has long waiting
lists. In addition, over 60,000 new slots would be required due
to the work provisions of welfare reform, with an annual cost of
up to $225 million beginning in FY 2000.(28)
The enacted budget includes a package of tax cuts valued at $714 million in 1998-99 and $831 million when fully implemented in 2002-03.(29) The Executive Budget recommended $718 million in tax cuts for 1998-99, $441 million in 1999-00, and $72 million when fully implemented in 2001-02. The enacted tax cuts are substantially the packaged proposed by the Governor; however, the cost of Governor's recommended tax cuts declined because nearly all of the tax reductions were accelerations of previously enacted tax cuts. The cost of tax cuts in the enacted budget is about the same as the Executive Budget in 1998-99; $491 million higher in 1999-00 and $759 million higher when fully implemented. Almost two-thirds of the fully implemented cost of the tax cuts added by the legislature is attributable to business tax reductions.
Reductions Included in the 1998-99 Budget
Description of the 1998-99 tax cut package
STAR (School Property Tax Reduction) acceleration. The enacted budget accelerated the previously enacted school property tax reduction for seniors. Seniors will be eligible to receive the full benefit of the tax reduction that was scheduled to be phased-in over four years. See this report's section on school aid.
Automobile Registration. The biennial registration fees on passenger vehicles are reduced by 25 percent on July 1, 1998.
General Corporation Business Tax. The current 9 percent corporate franchise tax rate is reduced to 7.5 percent over three equal steps over three years beginning with taxable years starting on or after July 1, 1999.
Alternative Minimum Corporate Tax. The corporate franchise alternative minimum tax rate is reduced from 3.5 percent to 3.0 percent in two equal steps beginning on July 1, 1998.
Fixed Dollar Minimum Corporate Tax. The corporate franchise fixed dollar minimum tax is reduced from $325 to $100 for certain small businesses beginning in 1998.
Corporate Investment Tax Credit for Securities. The current investment tax credit is extended to the financial services for investments in computer and telecommunications technology used by these firms and banks in the trading of securities.
S Corporation Tax. The entity level business tax imposed on S corporations is reduced over a three year period for taxable years beginning on or after July 1, 1999.
Child Care Credit. The income eligibility threshold for receiving a state tax credit for child and dependent care expenses equal to the maximum of 100 percent of the federal credit is increased from $17,000 to $35,000. Taxpayers with income between $35,000 and $50,000 will receive a larger child care credit.
State Sales Tax Exemption for Shoes and Clothing. Footwear is added to the sales tax free week in September 1-7, 1998 and the exemption threshold for clothing is increased to $500. An exemption for clothing and footwear costing less than $500 would be provided for an additional week from January 17-24, 1999. Footwear would be added to the permanent clothing exemption and the exemption threshold is increased from $100 to $110 when fully phased in beginning on December 1, 1999.
State Sales Tax Exemption for College Textbooks. College textbooks purchased by any undergraduate or graduate student will be exempt from the sales tax beginning June 1, 1998.
Truck Mileage Tax. The truck mileage tax is reduced by 25 percent beginning January 1, 1999.
Provider Assessment Tax Cut Acceleration. The scheduled phase-out of the gross receipts tax levied on medical providers was accelerated. On December 1, 1998, the assessment on hospitals is reduced from 0.6 percent to 0.2 percent instead of the previously scheduled reduction to 0.5 percent. On April 1, 1999, this rate is reduced to 0.1 percent and the rate for nursing homes is reduced from 4.8 percent to 2.4 percent on the Medicaid reimbursable portion of the tax. On April 1, 2000 all provider assessments are eliminated.
Other Tax Reductions. There
were a number of other tax cuts enacted: accelerating the farmers
school tax credit; an estate tax reduction on family owned business;
racing tax cuts; new sales tax exemptions or enhancements for certain
computer hardware, telecommunications cental office equipment, and
coin-operated phone charges; emerging technology initiatives; beer
tax reductions; changes in automobile registration refund procedures;
modifications to STAR; and Power for Jobs tax credits.
Value of Tax Cuts Enacted Since 1994-95
Source: New York State Department
of Taxation and Finance, New York State Fiscal Year 1994-95 Budget:
Summary of Tax Provision, June 1994; State of New York 1995-96 Tax
Provisions, June 1995; Summary of 1996-97 Tax Provisions, August
1996. Note: the total value of the tax cut enacted in 1994-95 for
that fiscal year was $471 million, $288 million was in business
taxes, $86 million in the personal income tax and $97 million in
Value of Tax Cuts Enacted Since 1994-95
The enacted budget made relatively few changes to the debt and capital portions of the Executive Budget. The most significant legislative actions that were not vetoed include:
The education section of this report discusses a $500 million school construction program that was vetoed by the Governor.
The Governor is required to provide a revised capital plan, reflecting changes made between the Executive Budget proposal and enactment, by July 30. The discussion that follows is based largely on the projections included with the Executive Budget's five year capital plan. Although few changes were made to this plan, this discussion will not completely reflect the State's current capital plan.
The five year capital plan (through 2002-03) 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:
Growth in Debt
Debt outstanding is projected to grow from $34.2 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 21 percent.
No new General Obligation bond
referendums are proposed for the plan period, and none were proposed
by the Legislature. General Obligation bond retirements will exceed
new issuances. As a result, all net new debt is generated by authority
Growth in Debt Service Burden
In 1998-99 debt service is projected to total $3.4 billion, or 7.2 percent of receipts available for debt service(30), compared to $3.2 billion in 1997-98. By the end of the five-year plan period, debt service was projected to total $4.5 billion, or 8.2 percent of available receipts. The growth in debt service between 1997-98 and 2001-02 is 39.3 percent. Debt service as a share of available receipts will nearly double between 1990-91 and 2001-02, when it reaches an estimated 8.4 percent, compared to 1990-91's level of 4.3 percent
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 Available Receipts
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 nonfederal 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.
of Nonfederal Capital Financed
New York Compared to
New York was ranked ninth in
debt service as a percentage of revenues. New York's share of debt
service to revenues was 6.6 percent, with Connecticut, Louisiana,
Delaware, Hawaii, Massachusetts, New Hampshire, Nevada, and Vermont
the eight states with greater burdens. New York's debt service burden
was 50 percent above the national average. Several of the states
with heavier debt service burdens have relatively small operating
budgets, as a result, debt service accounts for a larger share of
their spending .(33)
Certificates of Participation are a type of lease-purchase financing used by State agencies primarily for equipment acquisitions (COPs may be used to acquire real property only with specific legislative authorization). COPs are structured as a master lease with the Office of General Services as the master lessee. COPs are issued by a trustee at the direction of the Office of the State Comptroller; investors purchase a right to receive a share of the State's lease payments.
The State Finance Law provides that equipment must have a useful life at least equal to term of the COPs and a purchase price of $250,000 or more to be eligible for lease-purchase financing. Information technology services are only eligible for COPs financing if they are part of a project including hardware and/or software purchases. All State acquisitions through lease-purchase financing (both COPs and vendor financing) must be approved by the Division of the Budget (DOB). COPs proceeds may not be used to pay personal service expenses of state agencies (except for legal expenses of the Department of Law).
As part of the State budget each year, the Governor recommends and the Legislature enacts an annual authorization for COPs. Ten days prior to the COPs issuance, DOB provides the legislative fiscal committees with a description of the equipment to be financed by agency and program, including estimated cost, term and lease payments. After COPs are issued, DOB must provide quarterly reports to the legislative fiscal committees and OSC, updating this information. OSC must report annually on COPs issuance to DOB and the legislative fiscal committees.
Currently, the COPs agreements provide that the certificates are secured by the underlying property acquired. COPs are not classified as State debt but rather State supported debt; repayment is subject to the availability of appropriations. In the event appropriations are not available for the COPs installment payments, the certificate holders have the right to the proceeds from the sale of the underlying property.
In the 1997-98 budget, a total of $311 million in COPs was authorized. This included $228 million for the State's welfare management system, which was not issued. Of the remaining $83 million, $40 million was for replacement of the State's payroll system, and the remainder was allocated to a new Civil Service system and other equipment purchases.
In the 1998-99 budget, a total
of $430 million in COPS was authorized, including $228 million for
the welfare management system and $202 million primarily for equipment
Issues with COPs
Debt/Fiscal Policy Issues
Relying on COPs as a financing mechanism for information technology projects has caused a dramatic increase in the volume of COPs authorized from 1996-97 to 1998-99 -- from $107 million to $430 million. Although COPs are not technically classified as debt, in reality they add to New York State's debt burden. The justification for issuing increasing amounts of COPs is weak, when State general fund dollars are available for pay-as-you go financing.
Information technology experts predict that service costs will continue to grow as a percentage of overall information system costs; hardware and software costs will diminish in proportion. It could be argued that COPs financing of IT system projects places New York at the brink of a slippery slope leading to financing of services, a position recently rejected by the Legislature.
Utility as a Funding Source for Year 2000 projects COPs can only pay for services as part of a package that includes software or equipment. Many Year 2000 projects require programming services only.
One advantage of COPs is that their issuance essentially guarantees the availability of the funds for the completion of the information systems project; there is no year by year question as to the availability of an appropriation for the project. However, even when COPs are used to finance information system projects, there are significant costs related to the implementation of information systems that are not eligible for COPs funding. These ineligible costs include training, costs of State personnel, space, and system support costs after initial implementation. COPs is not a complete funding solution.
Administrative Relying on COPs financing may mean that project implementation is delayed or vendors are not paid until the COPs have been issued.
The COPs payment process is more cumbersome and time consuming than typical state payments, as payments must go through agency and OSC approvals, then go to OGS, then be paid by the COPs trustee.
Ownership of Intellectual Property COPs requires New York State to maintain complete ownership of intellectual property of the system until it is useable. This may be a disincentive for vendors to do business with New York State, or the vendor may compensate by charging New York higher rates. It seems to contradict the intent expressed in the 1995 Procurement Stewardship Act to develop "strategic partnerships" between business and State government.
Oversight COPs spending
is "off-budget". Payments to vendors are not posted on
the State's central accounting system, where they would be more
readily available to state agencies, the Legislature and the public.
The only payments that are recorded in the accounting system and
counted in the State's financial plan are the lease payments.
At the end of the 1998 legislative session, a pension cost of living supplement as well as several pension reform measures were adopted.
The supplementation measure
was a scaled-down version of a performance COLA proposed by the
Comptroller. The performance COLA would have funded cost of living
supplements when the Common Retirement Fund's investment performance
exceeded actuarial assumptions.
Three pension reform measures based on proposals by the Comptroller were also adopted:
was prepared by the State Comptroller's
Major Contributors to this report were:
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 $113 million in 1998-99 to account for the state funding mechanism used for the Child Health Insurance Program. The program is being funded by Health Care Reform Act pool monies that were not previously appropriated. This adjustment reduces spending growth in both years.
B)Reducing 1997-98 all funds disbursements 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 spending growth.
C)Moving $704 million in 1998-99 STAR spending from special revenue funds to the General Fund. The enacted Budget funds 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 and serves no purpose other than to reduce General Fund spending.
4. Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008, January 1998. Chapter 3 discusses revenue performance. In addition, these revenue estimates were further increased. See Congressional Budget Office, Revised Baseline Budget Projections for Fiscal Years 1999-2008, March 3, 1998.
6. This includes the rejection of the Executive proposal to pay cash for Community Enhancement Facilities Program (CFAP) in 1997-98 and the failure to transfer $50 million in 97-98 to a special Debt Reduction Reserve Fund (DRFF). However, the legislative budget did include the DRFF transfer but failed to provide appropriation authority to spend it; therefore, there will be a balance of $50 million in this fund.
7. The Governor vetoed $158 million of the total $311 million legislative addition for legislative initiatives. Thus, there is only authority to spend $153 million. However, the language requiring the full transfer of the $311 million to the community projects fund was not vetoed and a balance of $158 million is projected in this fund.
8. The earnings multiple of the S&P 500 is exaggerated by the largest companies in the index; because the index is weighted by the market capitalization, the high earnings multiple of a small number of companies raises the multiple for the entire index.
Despite this caveat, a similar trend in the relationship between earnings growth and stock prices is evident in the Dow Jones Industria ls Average: earnings have increased by about 50 percent since the end of 1994, while the Dow has increased by 134 percent.
9. The $850 million school year increase compares to the legislative budget's proposed increase in general aid categories of approximately $925 million (with teacher support aid), the legislative budget also included a number of other grants for specific programs and school districts which provided an overall increase in excess of $950 million. However, the discussion in this section is primarily directed to the general school aid categories covered under the $850 million increase and the RESCUE program. The school aid figures discussed here are always presented on a school year basis rather than a state fiscal year basis, and thus do not match those provided on a fiscal year basis elsewhere in this report, particularly those on the additions to the Executive Budget and the impact of the vetoes.
10. The Executive Budget's $518 million increase in contrast was composed entirely of aid increases under present law programs: two-thirds of which was driven by the operation of current aid formulas without any changes in their structure and about one-third was due to the phase-in of multiyear initiatives enacted with the 1997-98 budget.
11. Similar to the imposition of caps the transition adjustment initially provided, this addition of guaranteed increases for all has restored a formula device abandoned in the late 1970's in response to equity issues.
14. The legislative budget provided $250,000 for additional staffing at SED to implement the regulatory changes, but this funding was also vetoed. The implementation of these new responsibilities may be problematic without the application of additional resources.
15. These programs supplement the planning requirements under section 3602 of the Education Law, formerly known as CAPP -- for the Capital Assets Preservation Plan. The CAPP requirements were enacted in 1987 but never fully and effectively implemented statewide. For a discussion of these requirements and related issues, see School Facilities -- Conditions, Problems and Solutions, State Comptroller's Office, October 1997, and the Comptroller's Audit Reports The State Education Department, Oversight of Districts' Programs to Maintain and Preserve School Buildings (93-S-89), and State Education Department, Facilities Planning Unit (96-D-4).
17. 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. This report is published in Educational Finance to Support High Learning Standards, March 1998, New York State Board of Regents.
18. Although the payments are equalized, they do not provide enough resources to effectively equalize spending or educational programs. For a complete discussion of this issue, see An Agenda for Equitable and Cost-Effective School Finance Reform, Office of the State Comptroller, October, 1996.
19. However, since the Commission's recommendation was developed for STAR at full implementation, some adjustments were made in the budget legislation to reflect the phase-in schedule for the STAR exemptions.
20. A $41 million appropriation was provided in a bill passed after the budget, to provide for the recent collective bargaining agreement at CUNY; funding for SUNY's agreement was already included in the budget.
22. 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.
29. The legislature estimates the fully implemented cost of the tax cut package to be lower in 1999-00 and 2000-01 than the estimates used in this report. This difference is primarily due to the estimate of the reduction in medical provider assessments. The estimate used in this report is the financial plan cost which includes the loss of certain Medicaid reimbursement.
30. Receipts available for
debt service is a measure calculated by the Budget Division and
consist of state funds receipts (excluding bond proceeds received
by capital projects funds), a portion of the federal share of Medicaid,
and a portion of other federal funds transferred to the General
OSC's prior reports on the budget used General Fund receipts as a base to calculate debt service burden; because of the growing share of tax collections dedicated to special revenue funds, the General Fund measure is no longer valid.
33. Moody's Investors Service,
1996 Medians: Selected Indicators of Municipal Performance, no date.
Moody's did not include data on debt service in their 1997 publication.