New Budget Spends at Rockefeller-Era Pace
FISCALWATCH MEMO May 17, 2006
By E.J. McMahon

By one key measure, New York's newly enacted budget calls for the biggest state spending increase in 33 years—without even including legislative additions blocked on constitutional grounds by Governor George Pataki.

The State Funds portion of the budget-consisting of all spending financed by state taxes, fees and other non-federal revenues—will reach $77.3 billion in 2006-07, up from $69.5 billion in 2005-06, according to data from the Division of the Budget (DOB) Enacted Budget Report.[1]

Using inflation-adjusted dollars[2], the rise in State Funds equates to 8.3 percent. This represents the fastest rate of growth in state-funded spending since a 10 percent real increase in 1973-74, in the last budget adopted during the 15-year tenure of Governor Nelson Rockefeller. The long-term trend in state-funded spending is illustrated in the chart below.

Change in State Funds Spending In Constant Dollars, Fiscal Years Ending 1972-2007

Sources: State funds spending from Division of the Budget (DOB); figures for 1972-1982 are author's estimates derived from cash-basis financial reports of the state comptroller; inflation adjustment based on U.S. Bureau of Labor Statistics (BLS) Consumer Price Index for all northeastern consumers and DOB projection for 2007.

With no inflation adjustment, the 2006-07 State Funds spending increase is 11.3 percent—the biggest nominal jump in spending since 1984-85, Mario Cuomo's second year as governor. The 2006-07 budget means the total enacted State Funds spending increase for Pataki's final four-year term as governor will come to at least 31 percent. Adjusting for inflation, this represents the largest spending increase over any four-year period since Cuomo's first term, in the mid-1980s.[3]

Pataki's budget and post-budget vetoes

In his final Executive Budget, Pataki had called for a 2006-07 State Funds spending increase of just under $5 billion, or 7.1 percent-the second largest spending hike he has proposed since 1995.[4]

In early April, the governor vetoed $2.1 billion in line items added to the budget by the Legislature. Of that amount, $600 million has been restored through legislative veto overrides and is thus included in the spending increase reflected in the Enacted Budget Report. Another $1.5 billion in legislative spending additions (not counting federal matching funds) remain in limbo due to Pataki's claim that the Legislature framed their appropriations bill in an unconstitutional manner.[5]

If all the disputed spending is ultimately restored to the budget, either through court action or a negotiated agreement, the 2006-07 State Funds spending increase could end up exceeding 10 percent after inflation.[6]

Where is the money going?

The following table shows how the added State Funds spending is distributed, by category.

Compared to the State Funds growth in Pataki's Executive Budget, the net legislative spending additions in the enacted 2006-07 budget come to $2.4 billion. More than three-quarters of the added spending is concentrated in three areas: school aid, which is $841 million higher than the governor proposed; higher education, which is $756 million higher; and Medicaid, which is $230 million higher.

Most of the increase in Medicaid spending is due to the added costs the state will assume under the 2005 law capping growth in county and New York City shares of Medicaid spending at 3.5 percent a year. Medicaid spending will increase by another $1.1 billion, including federal funds, if the health industry and its allies succeed in a threatened court battle to overturn Pataki's blockage of this spending on constitutional grounds.

The school aid increase includes $420 million in "sound, basic education" aid for New York City. This is more than $5 billion short of the added city school spending recommended by a state Supreme Court justice as a result of the Campaign for Fiscal Equity lawsuit, which is now once again in appellate courts.

Significantly, the State Funds spending total does not include $1.8 billion in new capital funding for New York City school construction, which is to be financed with state Dormitory Authority bonds underwritten by state revenues. DOB's report says this program must be treated as "off-budget," because the legislation creating the program stipulated that construction costs would be paid directly out of bond proceeds and not passed through the state budget.[7]

Why does it matter?

Less than five years after the 9/11 attack and a bear market on Wall Street promoted the biggest two-year drop in New York State revenue since the Great Depression, the state is once again spending like there is no tomorrow. The state budget gap for 2007-08 is now projected at $3.7 billion, growing to $4.3 billion the following year.

By historical standards, these are not among the largest shortfalls the state has had to tackle; for example, Pataki in 1995 inherited a $5 billion gap on a much smaller revenue base. However, even a mild cyclical downturn in the state and national economies-something not expected by most prognosticators, but always possible—would be enough to puncture many of budgetary assumptions and greatly increase the size of the budget shortfall.

The disturbing bottom line: even in a strong economy, with $1.8 billion in surplus funds reserved to help balance future budgets, the state's recurring spending commitments will exceed recurring revenues by billions of dollars annually for the foreseeable future.

Notes

1. The official State Funds spending estimates of $69.7 for 2005-06 and $77.1 billion for 2006-07 have been adjusted here to reflect the pre-payment of $200 million in state transit aid in the earlier year. Most discussion and media reporting of the budget tends on the "All Funds" category, which will total $112 billion in 2006-07, up 8 percent from the previous year. This includes the State Funds spending of $77 billion plus roughly $35 billion in federal aid for programs such as Medicaid, welfare and highway construction. However, the larger total can be misleading indicator of growth trends, because of fluctuations in the timing of federal reimbursements. For example, 2005-06, All-Funds spending was a full $2 billion lower than projected; and roughly two-thirds of this amount was due to Medicaid. State Funds-a category that Pataki's DOB accounting reforms have made much more transparent-provides a better picture of year-to-year growth in expenditures that must be paid for through the state's own financial resources. And even this measure is imperfect; for example, the 2006-07 total is swollen by $450 million on a one-year basis due to technical differences between the state and New York City over the timing of City University of New York expense reimbursements.
2. Inflation based on the Consumer Price Index for all northeastern consumers, as reported by the Bureau of Labor Statistics at http://www.bls.gov. Inflation for fiscal 2007 based on DOB-forecasted CPI growth of 3 percent.
3. Inflation-adjusted, the State Funds increase for fiscal years ending in 2003-2007 will be 18 percent - highest since 1982-86, when real spending rose 20 percent.
4. A comparison of Pataki's proposed spending increases can be found in the FiscalWatch Memo at http://www.nyfiscalwatch.com/html/fwm_2006-01.html. The 2006-07 rate of spending growth cited in that memo, posted in January, was a preliminary estimate subsequently updated in the Empire Center's February report, Taxing and Spending in the Empire State: Overview of the 2006-07 Executive Budget, which is posted at http://www.empirecenter.org/reports/2006/02/taxing_and_spen.php.
5. The Governor asserts that the Legislature drafted appropriations bills in violation of constitutional guidelines affirmed in the state Court of Appeals' 2004 decision in Silver v. Pataki. The court said the Legislature cannot change the wording of the governor's appropriations bills or alter the terms and provisions of the governor's spending proposals, as Pataki claims was done in bills expanding the STAR property tax relief program and Medicaid, among other areas.
6. None of the new spending totals included $1.8 billion in capital bonding for school construction in New York City. That bill, packed with massive K-12 education spending additions not vetoed by Pataki, stipulated that construction would be financed directly by bond proceeds without passing through the budget. The capital projects will be counted as state debt and tallied in the state financial plan based on Generally Accepted Accounting Principles (GAAP).
7. However, the bond program will be counted as an expenditure in financial statements prepared under Generally Accepted Accounting Principles (GAAP).

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