New York State in Fiscal Quagmire
Expenses Top Revenues, Debt Rises
Costs Shoved onto Counties, Cities
By Herny J. Stern
November 17, 2003
Today Arnold Schwarzenegger is being inaugurated as Governor of California, beneficiary of a public uprising at the way the state was being run by Gray Davis. Arnold's first actions have been promising; avoiding the media for the five-week transition period, so as not to create headlines while he was forming an administration, and appointing qualified professionals, including Donna Arduin, a former New York State budget director, as California's new budget director. There are many elitists who scorn him because of his prior professions, and because he is a Republican, but I am hopeful that he will be able to deal with California's unsolved problems. We should watch the Golden State carefully, however, before amending the Constitution.
The huge deficit in California should not divert us from the fiscal disaster impending in New York State. At a Citizens Budget Commission conference last week in Palisades, New York (the southeast corner of Rockland County), the theme was the State, how it overspends, how it has increased debt by using public authorities to borrow billions of dollars (Attorney General Eliot Spitzer said these extra-budgetary entities evoked Enron economics), how the State uses one-shots to reduce structural deficits, etc. It was pointed out that, unlike the City's, the State budget does not follow GAAP (generally accepted accounting principles).
Former Governor Hugh L. Carey gave the keynote speech Thursday evening, and he was in rare form, summarizing the state's financial condition and recalling how he had saved New York City from bankruptcy in 1975 by shared sacrifice, with business, labor and government working together to help the city out of the first fiscal crisis. There was little co-operation in the spasm of 1991, which led to massive layoffs of city employees. Now the state is in a similar position, facing increasing debt and demand for expenditures.
The debt that New York State has incurred now exceeds 38 billion dollars, the highest total for any state. California is second and New York City is third, the City owing more money than 48 of the 50 states. This debt requires billions of dollars to be paid each year in interest, making it more difficult to balance the budget. The sale of tobacco bonds, secured by future payments by the tobacco companies as part of the settlement of a nationwide lawsuit, was used to balance this year's state budget.
The overspending by the State is the fault of both the Governor and the Legislature. In 2002, running for re-election, Governor Pataki reached agreement with Dennis Rivera, head of the Hospital Workers Union, for substantial raises for health and hospital employees, which the state helped to finance. He paid long-overdue aid to the city so it could give increases to Randi Weingarten's UFT. In turn, he received the endorsement of both union leaders, creating a climate in which his re-election was inevitable. New York's deteriorating financial situation was kept under wraps during the campaign, and when Comptroller Carl McCall, Democratic candidate for governor, pointed out the fiscal consequences of the Governor's generosity, he was denounced by the union leaders, and remained essentially silent on fiscal issues thereafter.
In fairness, one cannot blame Rivera or Weingarten for these agreements; they were acting in the interest of their membership. And the tradition of exchanging votes for favors is not new. What is remarkable here is the enormous cost of these transactions; it was cheaper a century ago when people were bought off as individuals, not en masse.
The State, which operates in a chilly, isolated place called Albany, has always received less media attention in New York City than city government. State government is less accessible, less interesting, and does not affect our lives as directly as city services do. But the state does impose taxes, and a high tax climate leads to the loss both of businesses and people who can afford to pay the taxes. The cities and counties impose taxes as well, which are 72% higher than the national average. Local taxes are higher because the State requires localities to pay 25% of the $16 billion and growing Medicaid costs (the state pays 25%, the federal government 50%, the least the Feds pay to any state). It is human nature and economic sense to try to avoid the taxman, especially if the money he demands is more than his colleagues in neighboring states require from their industries and their inhabitants.
The state legislature has for years been in the habit of enacting pension increases, enhancements and sweeteners, including bills creating presumptions that particular diseases are job related and therefore merit disability pensions. These backdoor burdens are imposed by legislators pliant to union (i.e., contributors) demands for benefits that the unions failed to achieve in collective bargaining. These increases cost counties and cities hundreds of millions of dollars, but they are classic unfunded mandates, the state paying not a penny.
This column is too long as it is, and, among other issues, we have not discussed the reasons for the spiraling cost of Medicaid, the largest single factor destabilizing state, county and city budgets.
But tomorrow is another day.
Henry J. Stern is the director of NYCivic.