State Sliding Slippery Slope
To More Deficit Financing;
Spitzer Sees Medicaid Flaws

Henry J. Stern
Thursday, October 18, 2007

Governor Spitzer was the principal speaker yesterday morning at a Citizens Budget Commission forum dealing with the state budget and health care costs. He spoke well and forcefully about problems that will require joint efforts to resolve.

CBC showed charts indicating that although this year's budget was balanced, they foresaw increasing gaps in the out years (Fiscal 2008 et seq.).  There are three classic ways to close budget gaps: 1) increasing receipts, usually by tax hikes or great prosperity 2) reducing expenditures, which means cutting the budget, and 3) borrowing money, which inceases state debt and, consequently, the debt service which the state must pay each year for interest.

One can also do what Enron did, borrow money outside the budget by using state authorities in order to submit a cleaner, balanced budget, without regard to how much debt the state and its related agencies will have to service and eventually redeem or perpetuate.

Last year the remarkable boom in both Wall Street and real estate balanced both the city and state budgets, bringing results evocative of the 2000 dot.com bubble. Recent events, including subprime lending defaults, consequent writedowns and Wall Street layoffs, indicate that the bonanza enjoyed in 2006-07 is unlikely to be repeated in 2007-08.  This means there will be less money in the state coffers to offset expenditures, which the state budget adopted March 31cheerfully increased by 7 per cent, more than twice the rate of inflation.

We have been preaching fiscal restraint for the city and state of New York for more than four years. You can go to the website to see our predictions of shortfalls and warnings of peril.  Unfortunately, the pressure of politics causes both legislators and executives to spend more than they receive in taxes. They do this to placate the interest groups that endorse candidates and contribute to campaigns.

Divided state political leadership enables the unions and sometimes the corporations to play one house against another.   The state leaders have never been more divided than they appear to be today, in the tenth month of the Spitzer administration.   The governor says this is because of his struggle for reform, which ruffles those who profit from the status quo.  He sees conflict is inevitable when there is a major effort to secure change, and the reason there was less conflict in the past is because prior public officials were content to leave conditions essentially as they were, with a Republican Senate and Democratic House. Any legislation or appropriation had to be based on compromise, which minimizes reform.

It is widely believed that the new governor's belligerent style and occasional overstatements are responsible for the current deadlock, but even assuming the governor had been as sweet as honey pie, it would be difficult to know how much more legislative business would have been accomplished, and what the price would be in pounds of pork.  We learned that, in politics, not only does not everything you hear turn out to be true, but a great deal of untruth, if not theft, privilege, self-indulgence and abuse of power, is part of the process.

Don't shoot the messenger, but that's the way it is.  The continued practice of spending more money each year than the state takes in has increased our public debt to over $50 billion. (Not to worry, the feds now exceed $8 trillion.) In addition, there is over $45 billion in debt, maybe more, incurred by the 700 public authorities that make up the fourth, most secretive, branch of state government. If the economic picture worsens, the budgets of state agencies will be impacted seriously, which translates into reduction of services.

The largest single item in the state budget is Medicaid, whose cost, coming from all three levels of government, exceeds $44 billion in New York.   Medicaid is a federal program , enacted in 1965 as part of LBJ's Great Society, which provides health services, home care and nursing care to people who are supposed to be poor..  The states contribute a large share of the cost, under an old formula in which New York State pays 50%, while some Southern states pay as little as 22%.  According to this year's state budget, New York’s share amounts to just over half the total cost, about $24.6 billion. 

New York is unique in charging a large fraction of its share to the cities and counties of the state, which for many localities is an enormous financial burden.  In addition, the state sets standards for the supply of services, using its power to mandate costs on the cities and counties, who have no authority to set conditions for the expenditure of their tax funds.

  The formula has begun to change as the state now assumes some of local government's cost burden, particularly with regard to long term care.  In the FY 2007 enacted budget, local government's share stands at 15% of the total, approximately $7.1 billion, while Albany pays about $17.5 billion.

Governor Spitzer is determined to reduce these costs, and basically to see to it that money goes to poor people rather than to large hospitals, particularly teaching hospitals. Of course, the hospitals use most of the money they get to ,,treat patients, but some goes for medical education, administration and other programs.  It is this money that the governor would particularly like to redistribute, focusing instead on primary care and preventive care

.His program is staunchly opposed by an alliance of hospitals and their unions, which launched an advertising campaign last year at budget time accusing him of denying care to poor children. Eventually, the matter was compromised by the legislature when the FY 2008 budget was adopted. Look for the struggle to be renewed this spring.

What impact the current impaired relationship between the governor and the legislature will have on the budget process remains to be seen. Hopefully, things will be better by spring, when the major budget decisions will be made. Unfortunately, any weakness or division on the part of public officials weakens their influence, and emboldens those who, for reasons of their own, some possibly legitimate, have designs on the strained state treasury.

The steamroller will have to smooth a rough road. It will require considerable skill as well as brute force. Well, he ran for the job.