Budget pluses and minuses

by E.J. McMahon |  | NY Torch

facesThe positives in New York’s FY 2018 budget make up a pretty short list—while the negatives are in some respects worse than usual. A quick and superficial initial rundown follows.

The negatives would include yet another $385 million expansion of the murky capital pork barrel fund known as the State and Municipal Facilities Program, as criticized in this space a few days ago.  In the same category would be a slew of other capital projects appropriations reflecting Governor Andrew Cuomo’s continued support of a failed strategy for trying to resuscitate the upstate economy, in particular, with large state “investments” to favored businesses and real estate developments.

Still in need of further analysis after getting remarkably little in-depth public study by the Legislature: the $2.5 billion Water Infrastructure Improvement Act. Stuff like this water bond used to be put before voters in New York. Since state courts have nullified New York’s unequivocal, plain-English constitutional prohibition on non-voter approved long-term debt, the governor and Legislature obviously figure, why bother?

Other negatives include:

  • an expanded itemized tax deduction for union dues, which is effectively a $35 million gratuity for an already privileged caste of (mostly government) workers, in this case mainly those drawing six-figure incomes;
  • a three-year, $1.26 billion extension of the nation’s most generous Film and TV Production credit, a huge giveaway to a highly profitable (but politically active) industry that is hardly likely to abandon New York if no longer paid by taxpayers; and, last but not least
  • Governor Cuomo’s mixed budget messaging, emphasizing the need for restraint in the face of a coming federal policy upheaval even while spotlighting offers of more free stuff and discounts for the middle class.

On the one hand, Cuomo sensibly noted the need “to make sure we do not overcommit ourselves financially.” But he also rolled out new spending programs with potentially significant out-year consequences, such as those cited above—and the governor’s favorite, “free” public university tuition. The college tuition program will be the subject of a post in this space tomorrow.

Some positives

1. The so-called “millionaire tax” is extended for two years, expiring at the end of calendar 2019, instead of the full three years originally proposed by Governor Cuomo. As first noted here, the governor’s own financial plan numbers had shown he wouldn’t need and couldn’t spend the $4 billion in revenue projected to be raised by the tax in fiscal 2021, the year in which a three-year extension would expire. In fact, he didn’t need the entire surtax for fiscal 2020, either—although the added spending in the final budget is likely to change the out-year numbers. Cuomo presumably thinks he’ll have little trouble extending the tax as needed in the future. But that could get a little more complicated if Congress and President Trump can get together on an income tax reform that eliminates the deductibility of state and local income tax at the highest income levels, which will make high-income payers more sensitive to higher state rates.

2. At the insistence of Senate Republicans, the final budget bill include some workers’ compensation reforms, a crucial job-creation priority identified in the Empire Center’s Checklist for Change. At the moment, the enacted changes fall short of the checklist objectives but appear at least marginally better than nothing from an employer’s perspective.  How much better is open to argument, requiring further analysis. The state’s 2007 workers’ comp reform, which promised big savings but ended up adding to workers’ comp bills, is a cautionary precedent.

3. Language inserted at the governor’s insistence will serve as a hedge against any steep federal aid loss resulting from changes to the Medicaid program. Specifically, in the event that any federal statutory or regulatory change through the 2018 federal fiscal year results in a state operating funds impact of at least $850 million, the Division of the Budget (DOB) will prepare a plan for proportionate spending reductions to cover the loss. The Legislature would have 90 days to substitute and pass (as a “concurrent resolution”) an alternative plan; if it does not do so, the DOB plan would be implemented. This is a more reasonable approach than the governor’s original budget language, which understandably alarmed the Legislature by giving him broad authority to start cutting the budget whenever he felt the situation warranted. Indeed, the Medicaid-related circuit-breaker provision in the FY 2018 bill could serve as a template for more permanent reform in this area in the future.

Missed opportunity

iceberg-webpageNew York State has an unfunded liability of $78 billion for continuing health insurance coverage of government retirees, classified as other post-employment benefits or OPEB. Cuomo’s Executive Budget included sensible proposals to begin chipping away at this massive iceberg by reducing Part B Medicare premium reimbursements for high-income state employees and by linking post-retirement premium subsidies to length of services.

These changes together would have saved a modest $26 million a year out of a roughly $1.4 billion annual expense, but at least pointed the way towards more needed further reforms to more meaningfully address the problem.

The Legislature predictably rejected both changes, and the governor made no apparent effort to fight back, raising the question of why he even bothered.  The only surviving element of his proposal in this general area was the creation of a Retiree Health Benefit Trust Fund—an accounting gesture rather than a fundamental solution, which will do nothing to actually reduce costs in the short term and little to control them in the long term. The state comptroller and the civil service commissioner will have joint custody of the fund, with the comptroller managing investments.

Much as in New York City, where a similar off-budget account was established more than a decade ago under then-Mayor Bloomberg, the new state fund seems likely to serve as little more than a pass-through for retiree benefits and a parking spot for budget surpluses. The fund will be in the generally off-budget “fiduciary” category, deposits into the fund will not require budget appropriations, and expenditures (solely to cover retiree insurance premiums) will be made directly out of the fund. This raises a question of whether the Budget Division will use this as another device to artificially depress spending totals.

A better model for permanently restructuring retiree health benefits, and removing future liabilities from the state’s books, would be to (a) segregate and reduce commitments to vested employees, and (b) shift future benefits to employee-controlled Retiree Medical Trusts, as explained in this Empire Center report.

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- E.J. McMahon is the Research Director at the Empire Center for Public Policy.