Within Our MeansIn the next two months, Gov. Andrew Cuomo and the Legislature will have to make very difficult decisions about how to close a $10 billion budget deficit — which state offices to shutter, which services and aid to cut, which employees to lay off and which taxes to raise. There are no easy fixes left.
Mr. Cuomo has vowed to balance the budget without borrowing or using any of the accounting gimmicks that helped dig New York into this hole. That’s good news.
But we are skeptical of his no-new-taxes pledge and his promise to let a surcharge on high earners expire. Extending that one tax until the end of 2012 would add an estimated $2 billion to the budget in the coming fiscal year and $4 billion the following year.
Without additional revenue, all of the $10 billion will have to come from spending cuts — a reduction of more than 10 percent for the state’s projected $92.3 billion operating budget. Half of that goes to schools and Medicaid and other health care. So the state’s most vulnerable citizens — the poor, the sick, the elderly and schoolchildren — will inevitably bear the largest burden.
Is there room to cut? Yes. New York spends more per pupil on education and more per enrollee on Medicaid than nearly any other state. Salaries and benefits for state employees outstrip the private sector.
In some cases, such as parts of the Medicaid program, the services are better and would be worth the investment in easier times. In too many cases, those higher costs are the result of Albany’s profligacy and its eagerness to reward unions and other special interests.
New York also ranks at or near the top of various surveys of tax burdens. The tax system needs to be reviewed, but there is no way to deal with the budget crises — near-term and long-term — without higher taxes.
We need to live within our means. The challenge is to find ways to cut spending equitably and limit the disruption to essential services and the damage to the state’s future. Living within our means also requires finding equitable sources of additional revenue.
Mr. Cuomo’s budget for fiscal year 2011-12 is due Tuesday. The Legislature must approve a final budget by April 1. That is not a lot of time. Politicians and voters need to use it well, carefully reviewing and debating policy decisions. Here are some of the issues to consider:
THE NUMBERS New York State has a frustratingly opaque budgeting process, but as of November, the state budget office was predicting a breakdown that includes: $24 billion for health care, mainly Medicaid; $23 billion for K-12 education; $17 billion for state employee salaries and benefits; $6.5 billion for local government grants; and $3.4 billion for welfare and other social services.
Mr. Cuomo wants to streamline government and we will certainly hear a lot more about reducing waste, fraud and abuse. These are admirable goals, but there is no way to find $10 billion in savings without making significant cuts from the biggest-ticket items.
MEDICAID New York’s Medicaid program— the joint state-federal health insurance for the poor — is expected to spend far more than any other state’s, including the programs in California and Texas, which have much larger populations.
In part that is due to the high cost of medical care around New York City. But New York’s eligibility terms and benefits are some of the most generous in the nation. It ranks near the top in providing “optional benefits,” such as dental coverage and long-term care. And it spends more than any other state per enrollee on care for the elderly and disabled.
Any cuts must try to minimize harm to patients and communities. Unfortunately, cuts in Medicaid could be almost three times as painful as other cuts: if Albany cuts $2 billion, local governments automatically cut at least $750 million and New York will lose $2.75 billion in federal funds, for a total reduction of $5.5 billion.
The best place to look for savings is in programs for the elderly and the disabled; as a quarter of the enrollees, they receive almost three-quarters of total Medicaid spending. Some is acute care in hospitals, but a lot is long-term care in nursing homes, clinics and at home, where spending is rising rapidly.
The state may need to restrict allowed home visits, placing an even greater burden on families. More long-term care patients must be moved into managed care plans. To save money right now, Albany will likely have to cut the reimbursement rates to hospitals and other institutions. It will need to focus on well-paid providers, without endangering safety-net hospitals.
New York could get some additional help next year from Washington if it is aggressive about applying for demonstration grants to test cost-saving approaches under the health care reform law. If they work, they could also bring lasting improvements to the program.
EDUCATION New York’s average per pupil cost of more than $15,000 is well above the national average of about $11,000. In student achievement, the state trails Massachusetts and Maryland, which spend significantly less. That means New York has two challenges: it must address the quality of instruction and the high costs.
Mr. Cuomo and the Legislature must first acknowledge the historical inequity of education financing — and guarantee that the poorest districts will feel the least pain. For decades, Albany has starved poor school districts while lavishing money on wealthy districts.
Under a court ruling, Albany in 2007 adopted a new, needs-based funding formula intended to distribute an additional $7 billion over several years to poor and chronically underfinanced districts. The money was distributed for two years, frozen in the third year and cut significantly last year.
This year, the wealthiest school districts should bear much of the burden, and poor districts should be protected as much as possible.
Last year’s cuts cost New York City about $440 million in education funds. The Ilion school district, in upstate Herkimer County, is another that has been long neglected, and last year’s loss of about $450,000 in state aid hit particularly hard. The district had to lay off 3 of its 145 teachers and did not replace two others who retired. The superintendent worries that he might have to lay off as many as 10 additional teachers this year.
Ilion is doing many of the right things to cut costs. It buys office and payroll services from a consortium and is exploring a merger with three other districts. Even the most ambitious savings pale when compared with the burden of salaries and benefits, which make up about 75 percent of Ilion’s costs.
Ilion’s problems are deeper than those of many other districts, but the underlying choices are the same. Savings can be found through streamlining and other creative reforms. But with 75 percent of all local education budgets going to pay for teachers’ salaries and benefits, that is where much of the money will have to be found.
The unions may have to accept a salary freeze, and even then layoffs may be inevitable. (Last year, the state lost 9,000 of its 220,000 teachers due to the budget cuts.) Teachers will have to agree to pay more into their pensions and health insurance plans, and to raise the retirement age to 65.
Governor Cuomo’s call for a 2 percent cap on property taxes will make a bad situation even worse. It would make it impossible for districts — unless voters overrode the cap — to raise more local school aid at the very time that the state is cutting its contribution. The Legislature should reject the idea.
PERSONNEL Mr. Cuomo’s proposed salary freeze for many of the state’s 236,000 workers could save at least $200 million next year. Unions are resisting. Freezes are a painful fact of life across the private sector these days. And, thanks to their powerful unions, state workers have gotten raises worth more than 13 percent since 2007.
New York will never get its fiscal house in order unless it deals with employees’ extremely generous benefits. By 2013, the average total compensation — salary, pension contribution and health insurance contribution — for a state employee will be $102,000.
While private-sector workers pay about 20 percent of the cost of individual health insurance coverage on average, state employees contribute only 10 percent.
Pension benefits are even more out of line. Until 2009, most employees contributed 3 percent to their pensions, but only for the first decade of employment. In 2009 lawmakers required new employees to contribute 3 percent every year, but that contribution is still less than half of what most other states require. New York also has lower retirement ages and higher disability rates than most states and is one of only three in the country to count overtime in calculating pension benefits.
The state must insist on higher contributions by all its workers to pensions and health insurance, a lower ceiling on the amount of overtime counted in pension calculations and wage increases in line with those in the economy at large.
REVENUES In his State of the State address, Governor Cuomo said that New York has “the worst business tax climate in the nation, period.” That was a reference to New York’s last-place position in a tally by one research group, the Tax Foundation. Other tallies yield different results. Even using that ranking, it’s hard to prove that businesses in New York are at a huge competitive disadvantage, especially since neighboring New Jersey ranked 48 and Connecticut ranked 47, while South Dakota and Alaska were first and second.
More important, taxes generally rank behind education, infrastructure and other criteria when businesses decide where to locate. Trying to balance the budget solely with cuts — in education and essential services — will make New York even less attractive.
With the economy still struggling this is not the time to impose major new taxes. There are some that can bring in a good chunk of revenue, without doing damage.
As we said, New York would get an estimated $2 billion of additional revenue in the upcoming fiscal year if it extended the personal income tax surcharge that applies to couples making more than $300,000 and individuals making over $200,000. (A couple with two school-age children and taxable income of $350,000 would pay $3,500 more. A couple making $1 million, with two children and typical deductions, would pay about $20,500 more.)
Wealthy families got a generous break from Washington with the extension of the Bush-era tax cuts. Mr. Cuomo should extend New York’s surcharge for two more years. Mr. Cuomo and the Legislature should also be looking for other sources of revenue. A penny-per-ounce tax on sugary sodas could raise an estimated $465 million in the first fiscal year. This is a no-brainer.
The governor also needs to order a systematic review of nearly $29 billion in state tax credits and other breaks. Some are necessary to encourage investment and development, but others stay on the books year after year without any analysis of their value. Why, for example, do sellers of precious metal bullion and coins get a tax break that cost the state $185 million in 2010? Doing away with about 5 percent of these deals would bring in nearly $1.5 billion.
None of these choices will be easy. Governor Cuomo has set up several commissions to recommend ways to cut costs and streamline government. We hope the process will promote an honest, transparent debate. New York can’t go on this way any longer.