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January 19, 2010

Paterson’s budget: first takes

E.J. McMahon

A news release from Governor David Paterson claims he is proposing “significant spending reductions” in the 2010-11 Executive Budget he is releasing today.   If only it were true.

The net budget “reductions” sought by the governor consist largely of cuts in projected baseline growth–with the significant exception of school aid, which would decrease $1.1 billion (5 percent) below the actual level projected for 2009-10 school year.  Including local funds, assuming no local tax hikes, the cut effectively asks schools to get by on 2 percent less next year.

Yet, as a starting point for negotiations with a Legislature that will be bent on raising spending, Paterson hasn’t gone nearly far enough to curb spending in many areas.  In fact, the Executive Budget is similar in many respects to the 2009-10 plan he rolled out just over a year ago—which led, four months and billions in federal stimulus aid later, to a disastrous final product that made the state’s long-term structural budget imbalance even worse.

Last year’s Executive Budget was designed to close a $13.7 billion gap and to reduce the 2012-13 budget gap from nearly $20 billion to just $5.5 billion.  For 2010-11, he needs to close a gap of $7.4 billion, including $500 million deficit carried forward from 2009-10.   If adopted, this would leave the state facing a 2012-13 budget gap of $10.5 billion.

The major difference in his approach this year is on the revenue side.  Paterson’s 2009-10 budget proposal included a long list of nuisance taxes and fees totaling $4.1 billion; he and the Legislature ultimately agreed to $6.1 billion in tax and fee hikes, but substituted a $4 billion personal income tax hike on high earners for many of the proposed nuisance taxes and fees.

This year’s budget calls for about $1 billion in tax and fee hikes, which would come mainly from three sources:

  • a $465 million tax on the syrup used to make soft drinks;
  • a $210 million ($1 per pack) increase in cigarette taxes; and
  • $216 million in “assessments” on Medicaid providers.

As shown below, the proposed spending growth rates in two key categories–General Funds and State Funds–are virtually identical to Paterson’s opening bids in the 2009-10 budget process.  Although he is grappling with a severe fiscal crisis, Paterson has not come close to the benchmark of fiscal restraint set by former Governor George Pataki in the budget proposals he sent to the Legislature in his first two years in office.

Inflation was averaging closer to 3 percent when Pataki was governor, so his proposed cuts were somewhat larger in real terms than they appear in nominal terms.

The annual Executive Budget essentially sets a floor for negotiation with the Legislature, which inevitably seeks to “restore” and add funds to the governor’s proposal before enacting a budget.   The bigger the spending cuts proposed by a governor, the more the Legislature has to “buy back” on its way to a budget agreement.  In this case, unfortunately, Paterson has once again set the floor too high.

The following chart illustrates proposed and enacted growth in State Funds spending going back to Pataki’s first fiscal year as governor.

The one truly significant reform in the proposed 2010-11 budget is the added management flexibility for SUNY and CUNY.  As a result, the proposed $200 million cut in the higher education area would be a fair trade for the university systems, because they will be able to retain any revenue they raise from higher tuition, fees and other sources.

Otherwise, there is virtually no significant reform or local mandate relief in the budget.  The governor has not given school districts and local governments the tools they need to cope with austerity. The most glaring omission is any change to Taylor Law, which governs collective bargaining with public-sector unions.  Indeed, the governor is once again taking a meek approach to union issues in general.  For example, he hopes to save more than $200 million from actions including a freeze or deferral of a scheduled 4 percent pay hike for state workers, but he is not trying to force the unions into givebacks in areas where he might have the legal authority to do so.

The bottom line

Like any Executive Budget, Paterson’s 2010-11 proposal is a mix of the good, the bad and the ugly.  If the past is any guide, the governor will be harshly and unfairly criticized for seeking to curb spending growth in many areas, when the real problem is that he continues to spend too much.

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