New York State’s decision to roll the dice on more Indian casinos, video gaming and Powerball is ultimately expected to pump another $1 billion into the state treasury annually, but the inevitable court challenge may delay that payoff for several years. In the meantime, the state clearly faces a very real downturn in its economy and revenues.

The key question is just how steep the decline will be – and whether it can be managed in Albany without massive new federal aid or tax increases. Aside from the state’s historic expansion of gambling, Gov. George Pataki and the Legislature are still sending mixed signals on the issue.

In mid-October, Pataki announced a hiring freeze and other steps that he said would reduce state spending by at least $3 billion in response to a severe drop in projected revenues since Sept. 11. Just a week later, however, the governor and legislative leaders agreed to spend another $500 million on school aid, grants to non-profit groups and economic development programs over the next two years.

So far, only a small portion of the supplemental budget is directly targeted to recovery and rebuilding in lower Manhattan. More, in fact, is earmarked for what looks a lot like traditional legislative pork.

All this comes on top of a “bare-bones” state budget that hiked spending from the state’s own revenue sources by $3.8 billion, or 7 percent, over last year. That brings the total state-funds budget growth to 31 percent since 1998.

Despite the added spending, New York was actually in stronger financial condition than most states before Sept. 11, thanks largely to an accumulated surplus that Pataki estimated at $3.6 billion, although legislative analysts said it was much larger. Soon after the World Trade Center attack, Pataki’s Division of the Budget estimated that state revenues would fall by $1 billion or less in the current state fiscal year. But a few weeks later, as he prepared to seek a huge infusion of disaster relief aid from Washington, the governor issued a revised estimate that revenues will drop over the next 18 months by a total of $3 billion to $9 billion.

The worst-case scenario was the basis for Pataki’s request for unrestricted operating aid from the federal government, which has met with a decidedly cool reception from both Congress and the Bush administration. The impact of the disaster on New York State revenues undoubtedly will be large, but $9 billion still sounds high in light of other economic and fiscal damage assessments.

By the governor’s own accounting, nearly half the state’s potential revenue loss will be due to a general, post-Sept. 11 economic slowdown not confined to New York – and thus difficult to justify as grounds for a federal bailout. And even if the worst-case budget scenario plays out, it needs to be kept in context.

Deduct the state’s accumulated surplus, and the fiscal problem is proportionately equivalent to the one the current governor inherited from Gov. Mario Cuomo in 1995. While Pataki closed his first big budget gap by simultaneously cutting spending and cutting taxes, he’s sounding a much different tune this time around. He won’t rule out layoffs, but he won’t rule out tax increases, either, especially if more federal aid is not forthcoming.

The governor’s handling of the attack’s impact on state government contrasts strongly with Mayor Rudolph Giuliani’s stance in New York City, which has obviously been affected even more directly. Announcing his own plans to close a $1.5 billion budget gap, the mayor said it would be “dumb, stupid, idiotic and moronic” to think of raising city taxes. Indeed, he suggested that more tax cuts should be pursued.

Of course, Giuliani is about to leave office, while Pataki is expected to run again in 2002. And unfortunately, thanks largely to a steady expansion of health-care subsidies and school aid over the past few years, the New York State budget now is virtually programmed to grow at more than twice the rate of inflation every year. Anything less than that tends to produce the sort of executive-legislative deadlock that’s become an annual fact of life in the state capital.

Nonetheless, it is possible to tame the Albany spending monster – as Pataki showed his first two years in office, when the budget actually shrank in nominal as well as real terms.

In a crisis environment unlike anything they’ve ever faced, state officials have yet to fully abandon budgetary business as usual. If their response to Sept. 11 turns out to be a mix of gimmicks, gambling and tax hikes, the recovery will be very long in coming.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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