The Legislature’s Spurious Budget Reform
FISCALWATCH MEMO UPDATED September 22, 2005

After failing to adopt a state budget on time for 20 consecutive years, legislative leaders in Albany are congratulating themselves for passing what they insist is a significant set of "budget reform" measures.

Budget de-form would be more like it.

If enacted, the constitutional and statutory changes sought by the Senate and Assembly would mark a fundamental shift of power in the state Capitol. For the first time since the late 1920s, New York's Legislature would ultimately have the upper hand in budget disputes with the governor. The result would be less fiscal discipline, higher spending and higher taxes-all without improving the efficiency, transparency or accountability of the state's much-criticized budget process.

Key provisions

The changes favored by the Legislature are contained in a proposed constitutional amendment (S.1) and an accompanying "enabling" statute (S.2). Key provisions would:

  • automatically impose a contingency budget whenever the Legislature has not acted on the governor's budget bills before the start of a new fiscal year,
  • change the start of the fiscal year, from April 1 to May 1, and
  • require the annual state budget to include school aid appropriations for two years.

The statute also requires the governor to start the budget-making process a few weeks earlier, to give the Legislature access to the preparation of agency budget submissions, and to release more detailed information on cash disbursements and employee headcounts.

The changes in the statute won't take effect unless the constitutional amendment is approved in a statewide voter referendum. Such a referendum won't occur unless the Legislature passes the same amendment again next year. Governor George Pataki could veto the statute, subject to override by two-thirds majorities in both houses. However, Pataki is not empowered to veto proposed constitutional amendments passed by the Legislature.[1]

How it now works

The potential impact of the Legislature's proposed changes is best understood in light of the existing New York State Executive Budget law, rooted in Article 7 of the state Constitution. As its name implies, the law is designed to make the governor primarily responsible for shaping the annual state budget. Three provisions of Article 7 are particularly noteworthy in the current context:

  • The governor's appropriations bills and supporting statutes are introduced as submitted in both the Assembly and Senate, without need of legislative sponsorship.
  • The Legislature's ability to alter the governor's budget bills is tightly restricted. Legislators can "strike or reduce" proposed items of appropriation. They can also add to appropriations, "provided that such additions are stated separately and distinctly from the original items of the bill and refer each to a single object or purpose." The governor then has the power to veto these additions, subject to potential override by a two-thirds vote of each house of the legislature.
  • The Legislature cannot consider any other appropriation until all of the governor's bills have been "finally acted upon." This effectively allows the governor to frame the budget debate and forces the Legislature to deal with the budget on the governor's terms. When the fiscal year begins without a budget-as has been the case since 1984-the temporary biweekly spending bills necessary to keep the state government functioning must also originate with the governor, giving him further negotiating leverage with the Legislature.

Before these provisions took effect, the New York State budget was a messy stew of appropriations bills drawn up by legislative fiscal committee chairmen with little gubernatorial involvement or financial control. The Executive Budget amendments to the constitution were approved by New York voters in 1927 with the strong support of a bipartisan reform coalition spearheaded by then-Governor Alfred E. Smith, a Democrat frustrated by his limited ability to control and shape spending under the previous system.

Is New York about to turn back the clock?

Mounting legislative frustration

Almost from the moment the first Executive Budget was presented by Governor Franklin D. Roosevelt in 1929, the Legislature began pushing to expand its power to modify spending bills or get around other provisions of the law. But in a series of landmark cases over the past 75 years, the courts have usually sided with the governor by broadly interpreting executive budgeting power.

Two recent court cases have sharpened the Legislature's resentment of the governor's budget-making power and undoubtedly provided much of the motivation for the changes now proposed by Senate and Assembly leaders.

In Silver v. Pataki,[2] which stemmed from the 1998 budget adoption battle, the Appellate Division of state Supreme Court upheld a lower court ruling that said the Legislature overstepped its bounds when it amended three "non-appropriation" budget bills submitted by the governor in a way that modified his proposed appropriations. In Pataki v. Assembly,[3] the Appellate Division said legislators in 2001 had unconstitutionally substituted their own appropriation bills for the governor's proposals.

Legislators have been further aggravated since 1999 by a provision withholding their pay whenever they fail to take "final action" on the governor's budget bills before the start of a new fiscal year. To be sure, they passed this law themselves-but only under duress, as one of Pataki's conditions for signing into law their last pay hike.

The Legislature's Poison Pill

As outlined in S.1 and S.2, the automatic contingency budget would essentially consist of the prior year's appropriations, with cash disbursements capped at prior year levels. However, there are several significant exceptions to the disbursement cap, including welfare payments, state employee health benefit and pension costs, and debt service. In cases where a budget deadlock persisted into the second fiscal quarter, increased spending on these items would force governors to make significant cuts in all other areas.

Proponents of this change argue that the contingency budget represents an unpleasant option that no governor or legislator would want to live with for very long. But in the proposed constitutional amendment, the Legislature gave itself a huge escape clause: the power to amend the contingency budget twice, with a single "multiple appropriation bill" and a supplemental appropriation bill-neither of which would originate with the governor.

This, in itself, would mark a significant departure from the Article 7 provision requiring the Legislature to act on the governor's bills before taking up any other appropriations. But the amendment goes even further by stipulating that a contingency budget "shall constitute … final action" on the governor's bills. Indeed, it flatly prohibits the Legislature from acting on the governor's bills after a new fiscal year begins.[4] From any governor's standpoint, the "final action" clause in the proposed amendment is a real poison pill; if enacted, it would mean the Legislature could effectively kill any executive budget merely by doing nothing.

By deliberately waiting until the clock strikes midnight on the first day of the fiscal year, Senate and Assembly leaders could put themselves in a position to amend the contingency budget immediately with appropriations of their own design. For all intents and purposes, the Governor would then be on the outside of the budget process looking in. He would retain the freedom to veto line items in the Legislature's contingency bill amendments[5], but a united Senate and Assembly could override him, as both houses did last year.

The "final action" provision also accomplishes something else of great importance to senators and assembly-members: it effectively repeals the law withholding legislators' pay in the absence of a new adopted budget.

Automatic school aid hikes?

Legislators assert that two-year school aid appropriations, another key feature of their proposed budget changes, are necessary to provide more financial certainty and predictability to school districts outside New York City, most of which are required to submit their budgets to voters in early May. However, appropriating school aid two years at a time will deprive the Governor of significant negotiating leverage and is likely to result in significantly higher school aid spending.

No governor can hope to control spending without controlling school aid, which comprises nearly one-third of state tax-supported general fund spending. Legislators, on the other hand, are constantly pushing for large increases in school aid, for obvious reasons. Education spending is politically popular. Outside New York City, increased state aid to public schools is promoted by legislators as a way of holding down property taxes. And, last but not least, higher school aid is also a perennial top priority of the state's politically powerful teachers unions.

New York State's school aid formula drives funding to schools based on characteristics such as enrollment, property values and eligibility for special program categories. Left on statutory autopilot, the formula would invariably require annual spending increases at a much faster pace than any governor is willing to live with.

Under the current system of annual appropriations, the formula is essentially moot for the coming year in the absence of a new appropriation. Pataki, like his predecessors, annually proposes school aid formula changes designed to yield spending totals and distributions more in line with his priorities. Legislators alter these proposals in the context of settling the entire budget. Any additional appropriations are subject to a gubernatorial veto.

Two-year school aid appropriations will give legislative leaders a new ace in the hole in annual budget negotiations. The formula-driven school aid increase for the coming year will always be backed up by the "live" second-year appropriation contained in the previously adopted budget.

Legislative leaders and the Governor still have the power to reduce school aid at any time. However, in emphasizing the increased certainty that two-year appropriations will supposedly provide, the Legislature has all but promised school superintendents and school boards that they will be able to count on receiving at least the originally budgeted amount for every year. This will compound the political difficulty of trying to control school aid spending, even when the state is facing budget gaps.

The stakes will grow even higher once the formula is adapted to the demands of the Court of Appeals decision in the Campaign for Fiscal Equity (CFE) school financing case. CFE could drive billions of dollars more into the formula over the next several years.

The bottom line: no matter what the governor proposes, the contingency budget would always incorporate the second year of the school aid appropriations approved by the Legislature, subject to the prior-year disbursement cap. The Legislature could thwart any governor's attempt to change the formula simply by waiting until the start of a new fiscal year, when the contingency budget would automatically kick in. School aid for the new fiscal year would be both automatic and veto-proof, even if (as was the case in 2003) revenues are dropping and the governor needs to close a huge budget gap.

Real reform

The most frequently cited a problem with the state budget is that it is chronically late. But lateness is ultimately a failure of the legislative process, not the executive budget law. After all-as the 2003 budget battle showed-a united and sufficiently motivated Legislature can dispense with the governor's budget bills and override his vetoes in fairly short order. For the most part, late budgets since 1984 have reflected deliberate strategic choices by the Legislature.

The proposed changes would guard against late budgets by providing for the automatic enactment of an emergency budget-which is not too different from the prevailing situation. The one-month delay in the start of the fiscal year also is insignificant.

However, while the proposed amendment would significantly strengthen the Legislature at the governor's expense, neither the amendment nor the statute would do anything to improve the transparency or accountability of the Legislature's current budget-making process. Key decisions would continue to be made behind closed doors, with no allowance for public scrutiny and no new mileposts for legislative action.

Given the shortcomings and risks described above, how could the proposed changes be amended to turn it into an effective, positive reform? Here are a few basic steps:

  • Provide for a contingency budget but allow no exceptions to prior year spending limits and preserve the executive's prerogatives by (a) eliminating the provision that would make a contingency budget tantamount to final action on the governor's bill, and (b) giving the governor the sole authority to propose changes to the contingency budget in order to keep within limits. The idea is to force the Legislature to act in response to what the governor has proposed.
  • Set up a timetable requiring the Senate and Assembly to pass separate budget resolutions at least 10 weeks in advance of the fiscal year deadline, detailing their respective responses to every line item of governor's budget, followed immediately by the organization of conference committees to hammer out differences between the two houses.
  • Change the fiscal year to July 1 and require budget adoption by June 15.
  • Require the Legislature and the budget staff to issue a detailed financial plan summarizing all changes they intend to make in the governor's budget.
  • Require that the final budget be balanced, subject to certification by both DOB and the comptroller.

As noted, the two-year appropriations of school aid carve out an enormous preference for what is already the biggest single item in the state-funded budget. But there is something to be said for bi-annual budgeting as a general proposition. At the very least, it would cut the number of late budgets in half and may be worthy of consideration for that reason alone.

Most discussion of state budget reform has focused on process without much consideration of improving results. To that end, two constitutional reforms are desperately needed: Cap the annual growth in state funds spending at the rate of inflation plus population growth, creating exceptions only for shifts of funding responsibility from the local to the state level. Tightly cap debt and restrict the issuance of bonds without voter approval, prohibit the use of public authorities as backdoor borrowing vehicles, and ban exotic new bonding schemes such as the state law stretching out and refinancing New York City's 1970s-era Municipal Assistance Corp. (MAC) debt for 30 more years.

Back to the drawing board

The proposed changes to the budget process are less about "reform," real or imagined, than they are about opening a new front in a battle that the Legislature has been unable to win in state courts. Legislative leaders may, in fact, have a legitimate grievance with Pataki over the format of the bills and the governor's exploitation of Article 7 ambiguities to effectively re-shape law without the Legislature's consent. However, these highly complex and technical points need to be addressed openly and honestly, with full opportunity for public comment-which was completely lacking from the process that produced S.1 and S.2.

In the meantime, given the Legislature's spending proclivities and aversion to any form of sunshine, the proposed changes stand as a prescription for even looser fiscal practices in state government-the last thing New York needs.

Notes

  1. Although numbered in the same system as other legislation, proposed constitutional amendments are framed as concurrent resolutions of the Senate and Assembly, which are never subject to gubernatorial approval.
  2. 96 NY2d 532 (2001)
  3. 2004 NYSlipOp 02980, decided April 22, 2004
  4. See lines 50-53 on page 2 of the print version of S.1.
  5. See lines 14-15 on page 3 of the print version of S.1.

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