Something’s Gotta Give: New York in Crisis

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerI’ve been in a funk since the 2009-10 state budget passed. The state’s elected leaders entered the budget negotiations confronting a potential $20 billion deficit, up from the $14 billion estimated when the Governor released his original budget proposal. That is, the state would have run a $20 billion deficit in 2009-10 if spending and revenue continued without changing anything structural (like tax rates or spending formulae). The faltering economy could no longer satisfy the state’s addiction to ever-greater spending.

Given such a dire forecast, we all wondered how the state would manage to find the money to avoid a major reduction in spending. Imagine our surprise when the Legislature and Governor pulled a rabbit out of the budgetary hat and increased budgeted spending by $12 billion, nearly 9% more than in 2008-09.

Let’s pass on the many substantive decisions that led to this outcome.  What troubles me is what it reveals about Albany’s inability to cut spending when confronting the state’s most troubling financial crisis since the 1930s.  Other states, less dependent on the financial services sector, can reasonably expect revenue to bounce back when the economy rights itself. We can’t make that assumption in New York. Wall Street, the goose that used to lay those lovely golden eggs, is sick.  And when this goose recovers, the eggs it lays will be sadly normal.

The new budget achieves spending growth partly through the massive stimulus package passed by the U.S. Congress and partly through conventional tax increases. Of course, we know that the stimulus money will last only a couple of years.  What happens then? We can debate whether increasing the state’s top tax rate to nearly 9% from 6.85% is sustainable, and whether it is a large enough increase to chase the more footloose of financial services firms and high-net-worth taxpayers to Connecticut, Florida or Dubai.

Yet on this we can all agree:  Our addiction to new spending won’t be satisfied with this tax increase, either.  And, at some point, plugging the gap with tax increases will chase some geese away and strangle the rest.  We cannot continue to increase spending by increasing the level of taxation.  In the immortal words of economist Herbert Stein, “If something cannot go on forever, it will stop.”

Can we act before New York State confronts a crisis like that experienced by New York City in the 1970s?  In 1975, the credit markets shut down for New York City.  Like New York City at that time, the State of New York borrows money routinely. If the credit markets were to conclude that the state was in danger of defaulting on its debt, the state would face a cash flow crisis that would demand bold action.

The restoration of New York City’s finances took a very long time and significant assistance from the State of New York.  The Municipal Assistance Corporation (MAC) was founded to borrow on the city’s behalf, with the city’s sales tax revenue as security for the MAC debt. In addition, the state created the Emergency Financial Control Board to police the city’s finances and enforce sound financial practice.  New types of debt were created, each dedicated to a different revenue source.  Slowly, as a responsible and professional financial culture became established in New York City, the controls were loosened and the city regained its financial independence.  The last MAC bonds were retired in 2004.

Can New York State get its fiscal house in order before a federal bailout and federal oversight is our only salvation?  Frankly, I wonder.

What can be done?  Nearly a third of the state budget (if federal aid is included) goes to Medicaid. Another 19% goes to K-12 education. Servicing our considerable (and growing) debt takes another 4%. Local government costs are another piece of the puzzle-NYS has always been quick to shift the burden of government to the locals.  As an example, New York drives up the cost of local government by adopting policies that influence benefits for all public employees.

The forces opposing change are powerful. The teachers’ unions will oppose cutting education aid and changes to public employee benefits. Between them they have a substantial war chest-NYS United Teachers and the NYC United Federation of Teachers collect nearly $200 million in dues annually.  Health care workers and providers will oppose any cuts in Medicaid.  (I suspect that Harry and Louise-the faces of the ad campaign to scuttle Clinton era health care reform-have a condo in Manhattan and a summer place in the Finger Lakes!)  Public employee unions work together to oppose any changes in benefits like health care coverage.

Opponents to change can exercise their power through our dysfunctional political system.  As NYS legislators have to run for re-election every two years, they are always trolling for campaign funds.  In NYS, restrictions on campaign contributions are modest and enforcement is loose. Lobbyists are both effective and numerous. In NYS in 2003, lobbyists outnumbered legislators 24 to 1, twice the number in Illinois and Florida (which tied for second place).

Despite our economic woes, in the 2009-10 budget legislators scratched the itch to spend more. We know that this cannot go on forever.  Something’s gotta give!  This is the title of a conference, sponsored by the SUNY College at Brockport Department of Public Administration on May 19 (details at Join us!

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal May 15, 2009