22. Streamline purchasing and back office functions

 

Governor Paterson's 2009-10 Executive Budget proposed some sharing of services by agencies, but the Legislature approved no significant changes in administrative operations. A 2007 paper by the Citizens Budget Commission (CBC) described the opportunity as follows:

 

Government procurement processes have typically been cumbersome and costly. State guidelines could be reviewed and revamped to aid agencies in purchasing necessary goods and services more efficiently. Printing and other back office administrative functions could be consolidated to eliminate duplicative functions. For example, collections and cash management of various state funds now performed by more than one State agency could be brought together in one agency. Human resources support performed by internal offices in State agencies could be centralized. To cut payroll expenses State employees and firms that have contracts with State governments could be required to have direct deposit to minimize the costs associated with processing paper checks.

CBC suggested the savings would come to 2 percent of state operations costs. After adjusting for other state operations reductions suggested in this report, that would come to about $324 million by 2012-13.

 

23. Across-the-board adjustment in economic development

 

Excluding capital projects, the state's General Fund spends about $183 million on the operations and local grants of New York's four major business service and economic development grant-making agencies: the Department of Agriculture and Markets, Department of Economic Development, the Empire State Development Corp. and the Science and Technology Foundation. A strong case can be made that economic development grants and loans are a form of corporate welfare that has no place in the state budget even in good times. As argued in Section 5 of this report, the best economic development policy is one geared to producing low taxes and avoiding needless and costly regulations.

 

New York's much-criticized Empire Zone program is scheduled to expire in June 2010; in its place, the governor and Legislature should be focusing on comprehensively addressing obstacles to growth and investment throughout the state. However, the state also needs to live up to the economic development commitments it has already made; with other jurisdictions seeking to attract businesses from New York, the state cannot simply abandon the field. A cut of 20 percent in this area would yield a savings of $36 million a year.

 

24. Scale back State Police through attrition

 

The Division of State Police has added more than 1,000 employees, mostly uniformed troopers, since 1999-2000. Roughly 400 State Police employees have been assigned to the five-year-old Operation IMPACT program, which assigns state troopers and investigators to 17 high-crime urban areas outside New York City. However, the New York City Police Department has shown that crime prevention is not a mere matter of increased headcount; the city's crime rate has dropped 40 percent since 2002, a period in which the number of city cops was reduced by 3,400, or roughly 8 percent, despite the NYPD's added anti-terrorism responsibilities. Reducing the State Police force strength by attrition to the 1999-2000 headcount over the next three years—while making greater use of the latest digital technology to replace troopers monitoring reduced-speed zones, for example—would save $30 million in 2010-11, growing to $90 million by 2012-13.

 

25. Eliminate public broadcasting subsidies

 

The state's annual appropriation of $9.4 million in subsidies to public broadcasting is a vestige of a bygone era in communications. Government meetings increasingly are available on live webcasts, and the "educational" function that was an original justification for state support of public television has been overtaken by technology; instructional audio and video, for use by individuals or in classrooms, can now be shared online or through DVDs or other digital media. At this point, fans of commercial-free or limited-commercial public broadcasting should be expected to pay for it themselves.

 

26. Eliminate Amtrak subsidy

 

The state provides an annual subsidy of $5 million for Amtrak's Adirondack Montrealer train, or about $45 per rider as of 2008.[60] Meanwhile, private sector bus companies and airlines serve the same New York-Albany-Montreal corridor with no state subsidy. The subsidy should be repealed.

 

27. State Workforce Savings

 

Freeze state employee wages
Unlike most other fiscally troubled states, New York has yet to demand sacrifices from its unionized state employees. State workers received an average 3 percent increase in base salaries on April 1, 2009, and continue to receive longevity increases as well. Base pay in the fourth and final year of most current state employee union contracts will rise by another 4 percent on April 1, 2010, the start of a fiscal year during which the inflation rate is projected at 1.8 percent. The Governor and Legislature should invoke their powers to declare a financial emergency and suspend those pay hikes until the budget is permanently and sustainably balanced, for an annual savings of $328 million in 2010-11, growing to $882 million by 2012-13.[61] (See Section III on page 39 for more on the salary freeze proposal.)

 

State Employee 40-hour work week
Unlike most public-sector employees, who work a 40-hour week, the majority of New York State employees have a 37.5 hour weekly schedule. CBC estimated that expanding the work week would yield productivity savings worth $227 million a year. This would require collective bargaining to take effect with the next contract cycle in April 2010, so no savings can be budgeted from the change until 2010-11, at the earliest.

 

Require early retirees to pay a higher share of health care costs
Employees who are eligible for state pensions and retire at the end of at least 10 years on the state payroll can remain in the state health insurance plan for the rest of their lives, at a premium cost no higher than those charged to active employees (10 percent for individual coverage and 25 percent for family coverage). Retirees can also apply unused sick days to buy-down their premium costs. As a result, for most retirees, continued taxpayer-subsidized health insurance coverage is available at a steep discount or even free of charge—a perk virtually unheard of in the private sector. Retired employees who are younger than 65 and thus ineligible for federal Medicare coverage account for one-half the state's total retiree health care costs.[62] Billing early retirees for one-third of premium costs now covered by taxpayers would save $207 million in 2010-11, rising to $242 million a year by 2012-13.[63]

 

Require state retirees to pay Medicare Part B premiums
All retirees over 65 are eligible for the federal Medicare program, which charges a modest premium of $96.40 a month for individuals with incomes under $85,000 a year. Although retired state workers already receive more generous health benefits and guaranteed pension incomes than the vast majority of their private sector counterparts, New York is one of only six states that also reimburses a portion of its retirees' Part B premiums. Requiring retirees to pay this cost themselves would save state taxpayers at least $134 million a year.[64]

 

Modify state employee contributions for family health care
CBC has estimated the state could save $75 million by realigning its employee premiums for family coverage to match those of most public employers. However, this change would also be subject to collective bargaining, and thus no budget savings would appear until 2010-11 at the earliest.

 

28. Revenue actions

 

Collect taxes on Indian sales to non-Indians
The state has not exercised its right to collect taxes on retail sales to non-Indians by businesses on Indian lands, including the tribes' thriving cigarette trade. Convenience store operators say New York is losing $1 billion in taxes on cigarettes alone, while the Division of the Budget says the correct figure for lost cigarette tax revenues is more likely less than $100 million.[65] Other state officials have suggested the figure for cigarettes may be $220 million, before adjustments for likely non-compliance.[66] Including gasoline and other sales, it seems reasonable to estimate that $200 million might actually be generated by collecting taxes on Indian sales to non-Indians in New York.

 

Repeal unwarranted tax credits
The state could save at least $64 million next year, and $108 million by 2012-13, by eliminating tax credits that are economically inefficient or inequitable, as explained in further detail in Section V beginning on page 48.

 

29. Moratorium on open-space land purchases

 

Senate Republicans have estimated the state could save $29 million annually by suspending the plan to expand its already extensive holdings of public land in areas such as the Adirondack and Catskill parks.

 

30. Pension reform and amortization

 

New York State and its local governments provide their employees with constitutionally guaranteed pensions based on workers' peak salaries and career longevity. This defined benefit (DB) system requires government employers to contribute annually to retirement funds to cover future pension payments. Employer contributions as a percentage of payroll vary depending on actuarial assumptions and market fluctuations. Earnings during bull markets reduce employer contributions, while losses during bear markets can force governments to drastically increase contributions. Since market crashes usually coincide with recessions, DB pension plans force governments to spend more when they are least able to afford it—which, for the second time in a decade, is about to happen in New York.

 

As illustrated in Figure 3 on the next page, the state's annual employee pension contribution is poised to skyrocket over the next three years—and probably beyond as well. This is a delayed but inevitable result of substantial losses by the state pension fund in the falling stock market of 2007-08. While market conditions have improved, the extent of the losses over the past several years was such that the pension fund will be under-funded by tens of billions of dollars for years to come.

 

 

To reduce projected pension contribution increases, Governor Paterson, Comptroller Thomas DiNapoli and legislative leaders have sought to enact a bill allowing state and local government employers to "amortize" a potentially large portion of their pension contributions over six years, starting in 2011.[67] Contributions for state pension system at the end of the period (2015-16) would have been capped at 14.5 percent of salaries for civilian employees and 22.5 percent of salaries for members of Police and Fire System, compared to the 2009-10 rates of 7.3 percent and 15.3 percent respectively.

 

 

Where the actuarial formula calls for contributions exceeding the cap, the excess amounts would have been funded by a series of 10-year loans from the pension system, pushing pension obligations for the first half of the next decade all the way out to 2026—by which time, it is hopefully assumed, financial markets will have rebounded strongly enough to drag required contributions back to their "norm" of about 11 percent for civilian employees. Interest on delayed payments would have been set at roughly half the pension fund's 8 percent target rate of return on investments.

 

The proposal was based on the assumption that the pension fund's investment returns over the next 20 years will replicate its 1988-2008 experience, which included the strongest bull markets in history. However, it's equally likely the stock market will endure 1970s-style "lost decade" of sharp ups and downs, leaving taxpayers to shoulder contribution rates in the 20 to 30 percent range for many more years. In that case, the multiyear borrowing authorized by the comptroller's plan would only make the funding problem worse as time went on.

 

So is there a fiscally responsible way to moderate the impact of looming increases in pension contributions for state and local government?

 

The answer is to recognize that the December 2009 enactment of "Tier 5," while a step backwards to a less generous and costly pension system, was not the kind of fundamental reform the retirement system needs. Amortization of scheduled pension contributions, which merely shifts the burden to future taxpayers, can be financially justified only on the condition that the DB pension system is closed to new members. This at least puts some boundary on potential losses from the current system. Newly hired civilian workers should be enrolled in a defined-contribution plan, which is the only sure way to permanently stabilize future retirement costs at a lower cost to the taxpayers in the long run. There's a proven model at hand: the defined-contribution retirement-savings programs that already cover tens of thousands of State University and City University employees.

 

Pension fund borrowing should be authorized only one year at a time, which would force the governor and Legislature to annually confront the costs that are being shifted to future taxpayers, and would allow the state to decide to raise the cap on contributions in years when revenues recover sufficiently to make that possible. The payback period should be limited to between five and seven years, with employers required to pay the same 8 percent interest rate that the fund needs to earn on its investments. The same conditions would be a prerequisite for amortization of local government and school district pension costs. Local governments might be given the option of assigning new employees to the SUNY defined-contribution plan; employers that choose to continue enrolling new hires in the traditional system would not have the option of deferring the impending increases in contributions for the DB system.

 

Under these conditions, we estimate that an amortization plan capping the state pension contribution rate at the projected 2010-11 level of 12.2 percent or one-half of the actuarial rate, whichever is higher, would generate net "savings" of $500 million in 2011-12 and about $850 million in 2012-13.[68] We should reiterate that this is not truly a savings, but a shift of pension costs from the next few years to later years. But again, it should be emphasized that such a shift is justifiable if—and only if—the state takes permanent steps to limit its now open-ended pension risks and costs by closing the traditional DB system.

 

Transportation - Getting More Bang for the Buck

 

The state has increasingly relied on off-General Fund sources to finance its transportation budget. In fact, the General Fund share of 2009-10 Department of Transportation (DOT) appropriations came to just over $100 million, or barely 2 percent of the $4.6 billion total state-funded budget for the agency. The rest was mainly classified as capital spending supported by the Dedicated Highway and Bridge Trust Fund, which in turn is financed by fuel taxes, highway use taxes and by motor vehicle fees. The vast majority of that fund now is consumed by debt service on past borrowing. General Fund baseline spending for DOT, in contrast to nearly every other major state program area, is projected to decrease over the next three years.

 

While transportation is a primary obligation of state government, the infrastructure share of the budget has been dwindling, as Lt. Governor Ravitch recently observed. "If you really think about our state and our country, the underfunding of infrastructure is a very, very serious problem," he said.[69] The late 2009 closure of the Champlain Bridge connecting Northern New York and Vermont has become a symbol of New York State's failure to tend to basic infrastructure.

 

But a lack of money is not the primary problem here. In fact, New York State's transportation spending is extremely inefficient by national standards. New York State highway and bridge conditions are among the most poorly rated in the nation, yet its spending per mile is among the highest.[70] From a cost-benefit standpoint, the overall performance of New York State's highway system ranked an abysmal 45 out of 50 states, according to the Reason Foundation's 18th Annual Report on State Highway Systems. New York is one of 10 states whose road conditions worsened over the past five years, despite high spending, the report said.

 

Why do New Yorkers get such a paltry return on their transportation investment, both operating and capital?

 

A definitive answer to that question is beyond the scope of this report, but the costly contracting and procurement laws described in Section III are no doubt a big part of the answer. The staffing levels and work rules of DOT and the Thruway Authority also should be closely scrutinized and compared with those of transportation agencies in other states. Last but not least, New York needs to clearly articulate goals and priorities for infrastructure spending. While the Champlain Bridge was rusting into obsolescence, recent state transportation capital plans have included millions for local amenities like bicycle and pedestrian paths. Infrastructure development and operation, in particular, is a prime candidate for more competitive contracting and public-private partnerships, as explained below.

 

Privatization, Partnerships and Outsourcing

 

New York can (a) raise sorely needed one-shot cash to help finance its transition to more sustainable budgets, (b) realize recurring savings through increased productivity and avoided costs, and (c) tap the innovation and expertise of the private sector to undertake complex infrastructure projects by:

 

• selling government-owned assets and enterprises to the private sector,
• exploring the use of public-private partnerships to develop and maintain major infrastructure projects, and
• promoting competitive contracting of government services.

 

This section provides examples of potentially valuable initiatives to be pursued in these areas. Based on the experiences around the country, it also recommends how they should be approached.

 

Asset sales

 

Starting in 1995, a Privatization Commission appointed by then-Governor Pataki successfully pursued a series of asset divestiture deals involving high-profile government assets such as Stewart Airport (leased to a private operator but since sold to the Port Authority), New York Coliseum, surplus psychiatric facilities, the 14th Street Armory and the World Trade Center. Direct revenues from these sales were later estimated at $163 million. However, the state's asset privatization campaign for the most part had petered out by 2001, leaving some promising stones unturned.

 

The governor can restart this effort by exploring possible sales, including auctions, negotiated sales, management or employee buyouts, and placement with investors. The nature of the sale determines which method is best. Asset sales must be handled carefully and usually take a year or more to complete. Here are some recommendations on the right way to approach such transactions:

 

• Direct a special executive branch unit, like Pataki's commission, to identify opportunities. Any group like this is going to generate bureaucratic and political heat; to succeed, it requires top-level staff with transaction experience, a commitment to privatization, and unwavering support from agency heads and state policy makers, especially the governor.
• Provide a financial incentive for agencies to turn physical capital into financial capital: Some agencies are disinclined to sell nonproductive assets, fearing that any savings will only reduce their budget. The easiest way to rectify this situation is to let the agency keep a share of the money earned from the sale, rather than having all proceeds revert to the General Fund. Another option is to agree to not reduce an agency's budget by the full amount of the operating savings generated.
• Adopt a capital charge system: Most agencies have little incentive to extract the greatest value from the use of their assets because the capital cost of land, buildings, and other assets is not reflected in their budgets. This can be rectified by assessing a "cost of capital" charge on all assets. A capital charge essentially applies an interest rate to all capital, creating an actual cost for using capital. The charge creates an incentive to balance a capital expenditure against its usefulness in achieving the agency's goals because suddenly, the once-invisible costs of land and buildings become very real to agencies that find themselves charged for their use.

 

Once the right process is in place, privatization opportunities include:

 

State Insurance Fund—Nationally, the largest state privatizations over the past decade have involved the sale of state-run workers' compensation funds such as New York's State Insurance Fund (SIF), a self-supporting off-budget agency staffed by state employees. The pioneer in this movement was Michigan, which sold its Accident Fund in 1993 through a public auction process to Blue Cross/Blue Shield of Michigan for $255 million. Several years later, Nevada followed Michigan's lead. It privatized its state-run workers' compensation insurance fund and opened the market to private insurers. Governor Arnold Schwarzenegger recently proposed the $1 billion sale of a portion of California's State Compensation Insurance Fund.[71] The value of New York's SIF, which is roughly half the size of the total California fund, will depend on a number of technical accounting issues and statutory considerations. But at the very least, these issues need to be painstakingly studied.

 

Off-Track Betting—There are six regional OTB corporations (Capital District, Catskill, Nassau, NYC, Suffolk, and Western New York). On a collective basis, these quasi-government corporations were profitable for years, even after paying pari-mutuel taxes and surcharge taxes. Despite the recent bankruptcy of New York City's OTB Corp.,[72] privatization of New York's regional OTB corporations could draw significant investor interest from local and international gaming concerns. The success of the Connecticut's OTB privatization in the 1990s provides a positive precedent. The collective value of OTB operations in the past has been estimated about $400 million, which would be shared among sponsoring localities.[73]

 

State University Properties and Operations—SUNY has a large number of potentially valuable properties, including the College of Optometry building on 42nd Street in midtown Manhattan, sprawling campus properties in downstate suburbs, a massive historic landmark headquarters in Albany, and three teaching hospitals (SUNY Downstate Medical Center in Brooklyn, Stony Brook University Hospital and Upstate Medical in Syracuse). By allowing the university to retain the proceeds of the sale or long-term lease of such properties, the SUNY flexibility policy recommended in this report would give the university system a strong incentive to pursue these opportunities. This also has been recommended by the Governor's Commission on Asset Maximization.

 

Ski Areas—The state owns three ski areas—Bellayre in the Catskills, and Whiteface and Gore Mountain in the Adirondacks—which compete to a degree with private operators. The Belleayre ski slope in particular, located with a few hours' drive of the New York City metropolitan area market, would be a prime candidate for a long-term lease to a private operator.

 

Golf Courses—The state Office of Parks and Recreation owns 27 golf courses around the state and could replenish its capital budget by selling or leasing more of these courses to private operators. In some cases, state land now devoted solely to golf might have higher economic value as multi-use developments.

 

Battery Park City - New York City, which will face added budget stress from inevitable cuts in state aid over the next several years, has a legal right to acquire this lower Manhattan development from the state Battery Park City Authority for a single dollar. A leading authority board member has said the city could then sell the Battery Park City commercial leases for $2 billion, or a profit of $1 billion after paying off the debt on the project.[74]

 

Roosevelt Island Operating Corp. - The state government built this middle-income housing complex in the East River and continues to own and operate it. The corporation valued its net assets, including the elevated tram connecting the island to Manhattan, at about $78 million as of 2009.

 

Public-Private Partnerships (PPPs)

 

PPPs have increasingly been seen as an option for state and local governments, particularly in the transportation and transit infrastructure arena. Under a PPP, a government entity transfers some aspect or aspects of a responsibility traditionally performed by the public sector to a private-sector partner under a well-defined, long-term contract. Some such transactions involve an up-front payment from the private-sector partner to the public-sector entity. In return, the private-sector partner receives rights to a future revenue stream—such as monies from toll collection—over a defined time frame. Other PPP structures involve a private-sector pledge to provide a service, such as operating and maintaining a free road or a subset of bus lines, in return for a regular payment from the government entity. In general, the government retains ownership of any physical infrastructure asset.

 

Governor Paterson's Commission on Asset Maximization last year recommended 27 potential PPP projects including school construction and renovation in Syracuse and Yonkers; wind power on the Great Lakes; and bridge construction and renovation, most notably the Tappan Zee Bridge over the Hudson.

 

Unfortunately, as required by Paterson in his original executive order setting up the body, the Commission has significantly undercut the potential gains from PPPs in New York by insisting that all such deals include blanket "protections" for monopolistic labor unions, even in upstate regions where the construction sector is dominated by nonunion firms. The commission says PPP projects should promote project-labor agreements (PLAs) negotiated with organized labor. It also says that completed projects or transactions shifting state assets to the private sector should not just guarantee job security for current government workers but serve to expand unionized public-sector employment.[75]

 

Labor issues aside, the governor and Legislature will need to assess the payback from potential PPPs on a case-by-case basis, particularly when a project entails a complex, long-term contract. State officials need to evaluate whether higher borrowing costs for a private-sector partner are outweighed by the efficiencies that private developers and operators can bring to the table.

 

State officials seeking a quick fiscal fix from PPPs also need to understand that fluctuating private-market conditions will have an impact on the feasibility of such partnerships. Earlier in this decade, high-profile privatizations such as the Chicago Skyway and Indiana toll road privatizations may have given a skewed view of the PPP world. In retrospect, the transactions were evidence of a global credit bubble that allowed the private-sector partners to think that they could borrow at abnormally low rates over the life of the lease. Such deals may not be available on the same terms for New York.[76]

 

Competitive Contracting

 

The benefits of opening public services to private competition-in terms of cost savings and quality—are potentially enormous, as governors and mayors across the country have demonstrated. Despite Governor Pataki's early advocacy, however, competitive contracting has not taken root as the preferred approach to providing public services in New York. To the contrary: under Governors Spitzer and now Paterson, the state has reverted to "in-sourcing" jobs for transportation engineers and, most recently, information technology specialists.[77] These changes were advocated by state employee unions based on simplistic comparisons of hourly wages for state workers and private consultants. But the comparisons did not differentiate among different types of projects, did not attempt to measure productivity and did not evaluate the procedures used to select outside consultants. In fact, it could be true that state employees are less expensive in some cases while outside contractors are less expensive in others, or that one or the other is the most cost-effective choice in all cases. But at the moment, the state has no accounting procedures or evaluation process in place to definitely answer the question in any circumstance.

 

The process for weighing potential benefits from competitive outsourcing should be overhauled. This would begin with the Governor issuing an executive order establishing a new oversight body, the Empire Competition Council, as a vehicle for instituting competitive contracting as the standard way of doing business for every level of government in New York. The Council would include representatives from both the executive and legislative branches of state government, the state comptroller's office, and local governments. Public employee unions and the business community would be invited to designate observers on the panel.

 

With staff support from the Division of the Budget, the Council would conduct an annual inventory of all services and activities provided by New York State agencies and public authorities, as well as common activities of local governments. This would allow public authorities to distinguish between inherently governmental functions and potential commercial activities. The Council would also develop accounting models for determining the fully allocated and unit costs of commercial activities, since productive competition between suppliers depends on accurate and rigorous cost comparisons. Finally, the Council would establish priorities for competitive outsourcing of services and manage competitions between in-house workers and private firms to provide services. Budgets should be concentrated to give agency managers the strongest possible incentives to participate fully in the competition process.

 

Competition is ultimately aimed at getting better results for the taxpayer's money. To bolster this initiative, New York should also create a permanent Sunset Review Commission to recommend ways the government can cut costs, reduce waste, and improve efficiency and service levels. Specifically, the Commission would review 20 percent of state programs each year, assess the importance of each agency functions and recommend the elimination or consolidation of unneeded or outdated programs.

 

Given the dimensions of the state's current fiscal crisis, this is an optimal time to allow private providers to challenge New York's entrenched public-sector monopolies. For example, New York currently spends more than $3 billion in state funds on highway maintenance, bus transit subsidies, mental health facilities, motor vehicles record-keeping, human resources management, prisons, and welfare and Medicaid administration. In just these areas, efficiency gains at the low end of the 5 to 50 percent range (gains typically attributed to competitive sourcing) could translate into annual savings totaling hundreds of millions of dollars. The savings potential is even larger when viewed in the context of the more than $100 billion in total annual operating expenses of New York's state and local governments. By establishing an effective, permanent institutional framework for competitive sourcing, the state can provide much-needed practical guidance to counties, municipalities and public schools as well.

 

III. A FRAMEWORK FOR REFORM

 

State budget cuts and savings are only part of the cure for what ails New York. The cost of government in the Empire State is unaffordable and unsustainably high at every level. Reining in these costs requires fundamental reform of the rules and regulations that shape the way government does business on the state, local and school district level. This section begins by focusing on the immediate priority of controlling public-sector wages, then moves on to summarize other changes necessary.

 

Freeze Public-Sector Salaries

 

New York's fiscal crisis is in danger of becoming as severe an emergency as the New York City fiscal crisis of the mid 1970s, which prompted passage of the 1975 Emergency Financial Control Act and of later measures to remedy near-bankruptcies in Yonkers, Buffalo and Nassau County.

 

Taking their lead from the approach to prior local fiscal crises, the governor and Legislature should formally declare a statewide fiscal emergency, including an immediate statutory freeze on all public-employee salaries and wages at every level of state government. The freeze would cover both contractual pay hikes and the automatic step raises many employees get just for staying on the payroll another year. The freeze would expire in three years—if, and only if, the state has been able to balance its budget in the meantime.

 

Federal courts have twice upheld state-mandated wage freezes for public employees in New York. The most recent case came in 2006, when the US Second Circuit Court of Appeals ruled a freeze of Buffalo teacher salaries was "reasonable and necessary" despite the "substantial impairment" of the teachers' contract.[78]

 

In that case, the union argued that the city could have avoided the freeze by raising taxes or cutting services. But the court said, "We find no need to second-guess the wisdom of picking the wage freeze over other policy alternatives, especially those that appear more Draconian, such as further layoffs or elimination of essential services."[79]

 

The state government now faces similarly dire choices but on a much larger scale. After all, it has already dipped deeply into the revenue well. The 2009-10 budget included tax and fee increases of $8 million, including $1.75 billion on a regional basis to bail out the Metropolitan Transportation Authority. Yet the state still isn't even close to a sustainably balanced budget. The actions necessary to close next year's gap inevitably will have significant consequences for local governments dependent on state aid, especially New York City and local school districts elsewhere in the state.

 

State, local government and school district savings from a pay freeze would total roughly $1.6 billion in 2010-11 fiscal years, growing to over $2 billion a year by 2013.[80] The greatest relief would be felt by school districts, which on average have three-quarters of their budgets tied up in salary and benefit costs that have been rising by an average of 5 percent a year. A salary freeze would save school districts (including New York City's) more than $1 billion in 2010-11, lessening the impact of aid cuts that would otherwise result in significant staff reductions.

 

Holding the line on salaries is just a first step. State officials in New York also need to overhaul public pensions, negotiate less expensive health insurance for government employees and clear away laws that prevent local officials from doing the same. But in the short term, a freeze will provide much-needed breathing room for implementing essential reforms, especially in health care, which will take several years to generate significant recurring savings.

 

Above all, a freeze can be justified on grounds of basic fairness. Government employees throughout New York have continued to receive pay increases at a time when many private-sector workers saw their wages frozen or reduced (assuming they didn't lose their jobs altogether). Given the problem's size, a freeze can't completely prevent layoffs, but it's a way of preserving jobs and public services that would otherwise be jeopardized.

 

Balance the Labor Bargaining Table

 

New York's Taylor Law was enacted to promote orderly resolution of labor-management disputes in state and local government. Unions were given the right to organize and collect dues from the vast majority of state and local government employees, in exchange for the outlawing of public employee union strikes.

 

While strikes are now rare and most contract disputes are settled without third party involvement, New Yorkers have paid a steep price for labor peace. Over the past 40 years, the number of state and local government jobs has grown at more than twice the rate of private-sector employment in New York, and the average pay of state and local government workers is higher than that of private-sector workers in most regions of New York.[81]

 

A 2007 report by the Empire Center reviewed the background of the Taylor Law and highlighted Taylor Law provisions and precedents in need of reform. The most important were:

 

• Compulsory "interest arbitration" for police and firefighters, which has tended to drive up salaries for uniformed services while hindering creative approaches to improving efficiency and reducing costs. The primary issue in binding arbitration should be a more rigorous standard of "ability to pay" on the part of the affected community, and the option of "last-best-offer" arbitration should be introduced.
• The Triborough Amendment, which has perpetuated generous pay arrangements, especially for teachers. The law should be repealed outright or amended to prevent longevity increases in an expired contract from continuing in the absence of a new contract. This was among the reforms supported by the Governor's Commission on Real Property Tax Relief (see below).
• State Public Employment Relations Board (PERB) rulings on "mandatory items of negotiation" that restrict the ability of government employers to pursue subcontracting of services and other cost-saving alternatives. These rulings need to overturned by statute to reaffirm management flexibility to consider competitive contracting.

 

Unfortunately, this is yet another area in which the governor and Legislature recently have moved in the wrong direction. The recently enacted Tier 5 pension bill (Chapter 504 of 2009) permanently extends what amounts to a prohibition on efforts by school districts to reduce the growing cost of health insurance benefits for their retirees. Unions representing state, county and municipal employees are already pressing for similar guarantees. Retiree health obligations for state and local government represent a massive unfunded liability for every level of government, exceeding $100 billion for the state and New York City alone.[82] To cope with economic and financial pressure, government managers need more flexibility, not less, to come up with equitable and imaginative ways of preserving affordable services while reducing expenses.

 

Address the High Cost and Number of Local Governments

Two commissions appointed by former Governor Eliot Spitzer reported back to Governor Paterson last year with scores of solid, detailed recommendations for relieving property taxes and improving the affordability of local governments.

A cap on school property tax levies was the key recommendation of the Commission on Real Property Tax Relief, chaired by former Nassau County Executive Thomas Suozzi.[83] The Suozzi Commission's report also recommended several other reforms, including uniform statewide property assessment standards administered at the county level, regional collective bargaining of teacher contracts, and a thorough cost evaluation of state mandates on local governments (but not a flat prohibition on unfunded mandates).

 

The Commission on Local Government Efficiency and Competitiveness, chaired by former Lt. Gov. Stan Lundine, issued 30 recommendations designed to promote the goals implied by its title.[84] Key recommendations included:

 

• centralization of some functions at the county level
• greater flexibility for local and county governments to share services
• reducing the number of elective offices
• improving local finance data for better benchmarking

 

Both commissions recommended minimum employee contributions to health insurance and reform of public construction and procurement laws. One key Lundine Commission goal was achieved when Governor Paterson signed a measure (Chapter 74 of 2009) modernizing the state Home Rule Law to make it easier to streamline town, villages and special districts. The bill, which had been spearheaded by Attorney General Andrew Cuomo, does not force change on a top-down basis. Rather, it creates a mechanism for local taxpayers to initiate referenda to bring about consolidations, mergers and shared-service arrangements between towns and villages.

 

Further changes came in December with the enactment of a mandate reform bill (Chapter 494 of 2009) that increases the bid threshold on public works contracts, reduces the number of municipalities required to form cooperative health plan, and eases restriction on shared services arrangements. The most significant change will eliminate double recoveries by plantiffs in tort actions against local governments by giving municipal defendants the same right as private defendants to offset jury awards with income from collateral sources.

 

These were positive steps, but much more needs to be done. For example, tort claims against local governments, like those against the state, should be tried in the non-jury Court of Claims to guard against excessive jury awards. Moreover, the state's procurement laws remain outmoded and needlessly costly, according to many local officials; for example, New York is the only state that does not allow local governments to piggyback on procurement contracts bid by governments in other areas of the country or to participate in national purchasing cooperatives overseen by the federal Government Services Administration. The governor could broaden local government procurement opportunities by issuing an administrative order to that effect to the state Office of General Services.[85]

 

Albany legislative tradition would treat the Suozzi Commission and Lundine Commission recommendations for government consolidation, mandate relief as non-budget matters. However, cost-saving reforms for local governments should be addressed within the context of the state's multi-year financial plan as part of the comprehensive approach needed to dig out of the fiscal crisis in New York.

 

Curb contracting costs

 

Municipal officials, contractors, financial experts and design consultants agree that New York's laws governing public construction only add unnecessarily to the cost, complexity and time to completion for many projects.

 

The biggest problems are these:

 

• New York mandates that prevailing union wages be paid to workers on public construction projects; this adds 28 percent to total project costs upstate and 76 percent to project costs in downstate, according to a study by the Center for Governmental Research. Nonetheless, Governor Paterson is now pushing to extend prevailing wage requirements to projects funded by industrial development agencies.[86]
• The state Wicks Law—unique to New York—requires most public building construction projects to use multiple contractors, which is more time-consuming and costly than the prevalent private sector practice of using general contractors. Estimates of the savings to be realized from repeal of the law, which has been repeatedly proposed by governors since Mario Cuomo, range from 10 percent to 30 percent of project costs. Based on the low side of that scale, the state Association of School Business Officers said Wicks added $370 million to school construction costs in New York as of 2000-01. A recent "reform" of the Wicks Law raised the threshold triggering multiple contractor requirements—but only to levels that municipal officials say are so low they barely affect any projects.[87] The new law also further tilts bid competitions towards unionized firms—which will have the inevitable result of raising costs-by mandating that contractors have a pre-approved apprenticeship program in place for three years before bidding on significant big ticket projects.
• Project-labor agreement (PLAs) between project sponsors and labor unions have been increasingly encouraged by the state under an executive order signed by Governor Pataki in 1997. Their use has been further expanded under Governors Spitzer and Paterson. Like prevailing wage mandates and the Wicks Law, PLAs tend to drive up bids on public construction projects by steering contracts to unionized firms and encumbering projects with conditions and rules favorable to unions. For example, a study by the Beacon Hill Institute found that PLAs added 20 percent to school construction costs in New York.[88]
• New York currently prohibits both PPPs and "design build" contracting, an approach successfully used on major projects in other states, in which one firm both designs and builds the finished product.[89] Exceptions to these prohibitions have been made or proposed only in cases where project sponsors are willing to commit themselves to PLAs and other costly labor concessions.

 

Repealing these mandates would make it possible for the state, local governments and school districts to stretch their capital construction dollars much further. A more efficient and productive investment in capital infrastructure will yield both short-term benefits, in the form of added employment, and long-term gains from stronger capacity for economic growth in the future.

 

IV. BETTER BUDGET-MAKING

 

New York's 80-year-old Executive Budget law, rooted in Article VII of the state Constitution, has stood the test of time in many respects. But some glaring holes in the law have become more and more evident over the past couple of decades. As a result, the severity of New York State's latest fiscal crisis has been compounded by a lack of budgetary discipline, transparency and accountability.
Specifically:

 

• There are no constitutionally binding limits on state spending or debt.
• The Legislature is not presented with and does not generate an updated four-year financial plan at the time it votes on appropriations, revenue bills and supporting legislation.
• The governor lacks permanent constitutional authority to take the steps he deems necessary to maintain a balanced budget during the fiscal year, even in the face of what he deems a cash-flow crisis.
• The current fiscal calendar is poorly aligned to revenue collection and spending patterns.

 

The flaws in the process were highlighted during New York's cash-flow crisis in the second half of 2009-10. Governor Paterson announced the state was facing a $3.2 billion deficit and proposed a Deficit Reduction Plan (DRP) to eliminate it. However, the Legislature ultimately produced a plan worth only $2.8 billion, most of it in the form of non-recurring "one-shot' savings that only made the 2010-11 gap larger. To avoid running out of cash at the end of the year, the governor took the unprecedented step of temporarily withholding $750 million in scheduled aid payments from school districts and other local governments. His power to act was immediately challenged in court on constitutional grounds by the statewide teachers' union and allied education groups.

 

Here are three statutory steps that would immediately address the most glaring shortcomings of the system:

 

1. Impose a binding "72-hour rule" requiring that key information about the budget be publicly available (including posting on the Internet) three days in advance of a final vote.[90] This information would include:
   a. an updated multi-year financial plan prepared by the Division of the Budget in consultation with the Legislature, and
   b. a joint report—in a uniform format for both houses-detailing the fiscal impact of changes to the governor's proposed appropriations and revenue bills.
2. Mandate budgetary balance according to Generally Accepted Accounting Principles (GAAP), which would disallow much of the timing-related gimmickry that can occur under New York's current (and atypical) cash-basis budgetary accounting.
3. Shift the start date of the fiscal year from April 1 to July 1, matching the norm for other states. Budget-makers would then have additional vital information on the April personal income tax settlement.

 

Other essential reforms require constitutional amendments. These would include the following:

 

• Impose a binding and airtight cap on state spending growth. This can best be accomplished by imitating the Tax Expenditure Limitation (TEL) laws implemented in states of Missouri, Washington and, most notably, Colorado. This approach effectively limits spending by capping the growth of revenues raised by the state, requiring that revenues in excess of inflation and population growth be refunded to taxpayers or deposited in a larger rainy day fund. A New York constitutional amendment adopting this approach was proposed in 2006 by then-Sen. Raymond Meier and Assemblyman Robin Schimminger but never emerged from committee in either house.[91]
• Require voter approval of all state debt, with important exceptions for (a) a small amount of state facility upgrade debt, and (b) borrowing supported by specific project revenue such as tolls, rents and transit fares. In contrast to current law, voters could be asked to approve more than one bond proposition in a single election.
• Shift to a two-year budgeting cycle with the main budget adoption occurring in odd-numbered (non-election) years.
• Mandate that the state budget be GAAP balanced at the time of its presentation and adoption, and that it be kept in balance on a quarterly basis throughout the fiscal biennium.
• Empower the governor under limited circumstances to make uniform across-the-board reductions in appropriations, with exceptions for services essential to health and safety, in the event the Legislature first refuses to act on a plan for completely closing deficits projected by the Budget Division during a biennium.

 

Constitutional amendments need voter approval and can only be placed on the ballot after approval by two separately elected Legislatures. Thus, the earliest these reforms could go before voters, assuming legislative approval in 2010 and 2011, would be November 2011.

 

Some of these changes need not wait until then, however. For example, the next elected Governor could-and should-effectively inaugurate a two-year budget in 2011 by presenting a complete set of two-year appropriations bills along with a financial plan reflecting their amounts on an annual basis. In the absence of a constitutional provision giving the governor the power to reduce expenditures in the face of legislative inaction, the state's future bond covenants could be rewritten to include a statement to the effect that failure to correct a projected budget shortfall within a 30-day period would constitute a default requiring immediate repayment of interest and principal.

 

Managing—and Budgeting—for Results   Many states (but not New York) implemented performance measurement and budgeting systems during the 1990s. The idea was to spell out the precise outcomes that each department or private vendor is expected to accomplish and at what cost. So, for example, rather than funding asphalt, trucks, and employee hours (inputs) or even funding a certain number of repaired potholes (outputs), legislatures would purchase smooth streets (outcomes). With a few exceptions, however, performance budgeting has not worked nearly as well in practice as in theory. One of the main stumbling blocks is a legislative reluctance to incorporate performance information into the budgeting process. This is unfortunate because, if done correctly, results-based budgeting and management can be a powerful tool for eliminating wasteful government spending. For example, as part of the Priorities of Government approach described on page 8, the state of Washington's budget office requires outcome descriptions to be added to each agency activity to better assess which programs' funding should be reduced or increased. Inspired in part by the New York City Police Department's "Compstat" program, Washington also has posted state agency performance reports online.[92] The Empire State could benefit from imitating this approach. As a leading independent budget analyst observed several years ago: [T]he State of New York does not regularly measure and report on the performance of its programs, a system known as managing for results. In other words, no one in charge knows where our money is making a difference and where it isn't. Every spending cut is basically a shot in the dark. Until the state evaluates the efficiency and effectiveness of its services, and does so seriously and regularly, it will never have adequate information to make these important decisions, let alone debate the issues.[93] If results-based budgeting is to be more than an academic exercise, there must be rewards for good performance and real consequences for poor performance. Programs that do not work should be reduced, eliminated, restructured, or consolidated into programs that do work.[94]

 

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