Earlier this year—in the midst of pleading for a bailout—Governor Cuomo’s FY 2022 Executive Budget planned for at least $6 billion in new federal funding. He wanted $15 billion. The final package includes $12.6 billion in unrestricted funding for the state.
That only delays a significant problem. The COVID-19 funding is temporary,i and there will be a bigger state budget hole to fill when it is gone.
Addressing that deficit will require especially close scrutiny of two spending categories: aid for local school districts and the state’s Medicaid health insurance program for the low-income and disabled. As Cuomo has acknowledged, half of every dollar New York state government collects in taxes and fees is spent on these two programs.
As state lawmakers and the governor negotiate a spending plan, it would be wise to consider just how much of a national outlier New York is with respect to how much both programs cost. New York has the country’s highest per-pupil K-12 spending and highest per-capita Medicaid spending.
Both programs dwarf other categories of state spending. In the next fiscal year, New York is expected to spend $27.3 billionii on state government’s portion of Medicaid and $26.7 billioniii on school aid.
Medicaid and school aid are notable not only for their size, but also for how fast they’ve grown in recent years.
The consumer price index (CPI) climbed 14 percent between April 2011, as Cuomo’s first spending plan was implemented, and April 2019, the last fiscal year before COVID began. In that same eight-year period, school aid climbed 41 percent, or almost three times as fast as inflation. The state has benefited from additional federal Medicaid funding as overall spending grew 40 percent, but the state’s portion of total costs has also outpaced inflation, rising almost 26 percent.
Bringing these costs in line with national norms wouldn’t just relieve pressure on the state budget. Lower K-12 and Medicaid costs could translate into lower local property and sales taxes—not to mention reduced costs for the federal government.
As the state works its way out of the worst economic collapse since the Great Depression, Governor Cuomo and state lawmakers should enact substantive reforms—described below—with an eye toward not just controlling the growth of costs but reducing them.
School aid is the largest part of the New York state budget, federal funds excluded. It accounts for 26 cents of every dollar the state plans to spend in fiscal 2022.
New York’s school districts get about 39 percentiv of their funds through state aid, with most of the remainder coming from local taxes (mainly property taxes).
New York’s overall spending was 91 percent above the national averagev in 2017-18 (the most recent federal data), as districts averaged $24,040 per pupil.
New York school spending defies national norms most in the largest category, “instructional salaries and benefits,” in which expenditures exceed the national average by 118 percent.
Spending has continued growing as enrollment has droppedvi over the past decade. New York public schools last year enrolled fewer studentsvii than at any point since the early 1990s.
School districts face a significant structural obstacle to making their operations more efficient. Virtually every K-12 teacher and many if not most other district employees are covered by union contracts.
To put the size and growth of New York’s school spending in context:
- New York school districts would have all together spent $18.1 billion less during the 2017-18 school year if they had matched Massachusetts’ per-pupil spending level. They would have spent $29.8 billion less if they had matched California’s level.
- Cutting New York’s school aid by 20 percent ($5.4 billion) would still leave school aid larger than it was just six years ago during fiscal 2015, when it was $21.7 billion.
- If the state’s school aid had grown at no more than the rate of inflation since Governor Cuomo’s first budget for fiscal 2012, New York would have spent $5.4 billion less on school aid in the current fiscal year.
What state lawmakers can do about it:
- The most immediate step for controlling K-12 costs is a temporary public-sector pay freeze.viii This would save at least $415 million per year for school districts outside New York City, and at least $1.9 billion in total across all state and local government entities.
- Special educationix accounts for about one-quarter of all school spending. New York’s one-size-fits-all formula used for reimbursing school districts should be re-evaluated to align state aid with the severity of students’ disabilities, and lawmakers should consider creating scholarships to connect students with schools that can better meet their needs.
- Many school districts are working under expired union contracts but remain on the hook for experienced-based pay raises. Cash-strapped Schenectady schools, for instance, gave raises averaging 3 percentx to its teachers this summer despite their contract having expired and the district pursuing layoffs. Reforming the Triborough Amendment, which keeps every provision of an expired union contract in force until a new one is signed, would put school superintendents on a more even footing in negotiations. That would help them restructure contracts and avoid layoffs.
- School districts participate in the state’s archaic defined-benefit pension system. Placing new school employees in a defined-contribution system, styled after SUNY’s popular Optional Retirement Plan,xi would reduce costs and phase out a major source of uncertainty in local school finances.
- The Legislature should eliminate the state-imposed obstacles school districts face to delivering services more efficiently through shared servicesxii and private vendors.
- Teacher tenure laws should be reformed to allow principals to dismiss ineffective teachers, not just those guilty of obvious malfeasance. The New York City absent teacher reserve-“a pool of teachers without permanent classroom assignments who nevertheless continue to receive full pay”xiii– cost taxpayers an estimated $136 million during the 2018-19 school year.
New York’s Medicaid program provides healthcare coverage for the low-income and disabled. The federal government picks up just over half the cost, with the remainder divided between the state government, counties and New York City.
The most recent federal data show New York’s per capita Medicaid spending, at $3,869, was more than doublexiv the national average during the federal fiscal year that ended September 2018.
The state’s high Medicaid costs are driven in large part by factors under Albany’s control, including expansive eligibility standards, a broad menu of benefits and large discretionary payments to providers.
Because its rules and standards were already so generous, the design of New York’s Medicaid program was relatively unaffected by the Medicaid expansion that was part of the Affordable Care Act. Still, publicity associated with the ACA – along with a federal mandate to obtain coverage – drove a sharp increase in New York’s enrollment.xv
The rolls stood at 4.7 million when Governor Cuomo took office in 2011 and climbed above 6 million after the ACA took full effect in 2014. Enrollment hovered between 6 million and 6.2 million for most of the past five years, and surged to 6.9 million after the COVID-19 pandemic began in 2020. In 2018, 48.4 percentxvi of New York births were paid for by Medicaid.
The financial impact of that enrollment growth was initially moderated by the Medicaid “redesign” Cuomo implemented during his first term. Per-recipient costs dipped to a recent low of just under $9,000 in 2014. Over the next four years, however, per-recipient costs surged to a new high of $12,553, the fourth-highest rate in the U.S. as of 2018.
One state policy choice that contributed to rising Medicaid costs was the state’s minimum wage increase, which took effect on Dec. 31, 2016. In 2020, the state’s share of minimum-wage-related Medicaid spending was $1.5 billion, three times what state officials originally forecast.xvii
Another cost driver was rapid growth of home-based “personal care,” which provides non-medical services such as bathing, feeding and housekeeping to elderly and disabled Medicaid recipients. New York’s spending on this costly optional benefit accounted for 40 percent of the national total in 2016 – and that amount doubledxviii over the next four years to more than $11 billion, half of which came from state coffers.
Substantial opportunities for savings exist in rightsizing New York’s Medicaid program:
- If New York reduced its per-recipient spending to the national average, it would save approximately $24 billion per year – $13 billion for the federal government, $8 billion for the state government, $2 billion for New York City and $1 billion for the other 57 counties.
- If New York reduced its per-capita spending to the national average, it would save approximately $40 billion per year – $22 billion for the federal government, $14 billion for the state government, $3 billion for New York City and $1 billion for the counties.
- New York’s Medicaid program could save over $4 billion per year just by reducing its personal care spending to the per-capita average, which is near California’s spending level.
What state lawmakers can do about it:
- Central to Cuomo’s 2011 reforms was the Medicaid “global cap,” which limits spending on the program based on the medical inflation rate and empowers the health commissioner to make unilateral cuts when the cap is exceeded. The system has since been weakened by loopholes, bookkeeping maneuvers and a breakdown in reporting and enforcement. The cap should be tightened and strengthened to help restore fiscal discipline.
- The continued steep increase in personal care – on top of a spending level that was already an extreme outlier – strongly suggests that this costly benefit is being overused and abused. Reducing per capita spending on personal care to the level of the second-highest state, Massachusetts, would save Medicaid approximately $7 billion, half of which would accrue to the state.
- Eliminating subsidy for physician malpractice insurance – which effectively boosts the incomes of a generally high-income group – would save the state $127 million a year.
- Multiple state and federal audits have shown that New York’s Medicaid rolls include significant numbers of recipients who are ineligible for the program on financial grounds. Tighter screening could save the state hundreds of millions per year.
- Now that the $15 minimum wage is fully effective in New York City and largely implemented elsewhere, Medicaid should cap its direct reimbursement of those costs at current levels. This would save approximately $244 million in the first year.
i McMahon, E.J. “Seeking Bigger Federal Handout, Cuomo Proposes Record Budget.” Empire Center for Public Policy, January 20, 2021. https://empirecenter.org/publications/pleading-poverty-seeking-bigger-federal-handout-cuomo-proposes-record-budget/.
ii ”FY 2022 Executive Budget Financial Plan.” New York State Department of Budget. Accessed February 9, 2021. https://www.budget.ny.gov/pubs/archive/fy22/ex/fp/fy22fp-ex.pdf#page=115
iii ”FY 2022 Executive Budget Financial Plan.” New York State Department of Budget. Accessed February 9, 2021. https://www.budget.ny.gov/pubs/archive/fy22/ex/fp/fy22fp-ex.pdf#page=108
iv Office of State Aid, ”2020-21 State Aid Handbook.” New York State Education Department. Accessed February 9, 2021. https://stateaid.nysed.gov/publications/handbooks/handbook_2020.pdf
v McMahon, E.J. “NY School Spending Hits New Record.” Empire Center for Public Policy, May 11, 2020. https://empirecenter.org/publications/ny-school-spending-hits-new-record/.
vi Kingsbury, Ian. “Historic Decline in NY Public School Enrollment?” Empire Center for Public Policy, March 11, 2021. https://empirecenter.org/publications/historic-decline-public-school-enrollment/ and
McMahon, E.J. “New York Public School Enrollment: Back to Early 1990s, and Still Falling.” Empire Center for Public Policy, June 3, 2019. https://empirecenter.org/publications/new-york-public-school-enrollment-back-to-early-1990s-and-still-falling/.
viii McMahon, E.J. “Freeze Public-Sector Pay. Now.” Empire Center for Public Policy, March 19, 2020. https://empirecenter.org/publications/freeze-public-sector-pay-now/.
ix Kingsbury, Ian. “Perverse Incentives, High Costs and Poor Outcomes.” Empire Center for Public Policy, November 25, 2020. https://empirecenter.org/publications/perverse-incentives-high-costs-and-poor-outcomes/.
x Girardin, Ken. “State Forces School Districts To Give Raises-And Layoffs.” Empire Center for Public Policy, September 9, 2020. https://empirecenter.org/publications/state-forces-school-raises-layoffs/.
xi McMahon, E.J. “Optimal Option.” Empire Center for Public Policy, February 16, 2012. https://empirecenter.org/publications/optimal-option/.
xii Wright, Michael. “Municipal Cooperation: Sharing Services in NY.” Empire Center for Public Policy, June 10, 2014. https://empirecenter.org/publications/municipal-cooperation-sharing-services-in-ny/.
xiii Champeny, Ana. “Absent Teacher Reserve Costs $136 Million and Needs Reform.” Citizens Budget Commission of New York, June 14, 2018. https://cbcny.org/research/absent-teacher-reserve-costs-136-million-and-needs-reform#:~:text=These%20raises%20also%20go%20to,continue%20to%20receive%20full%20pay.&text=Continuing%20to%20pay%20teachers%20in,million%20in%20this%20school%20year.
xiv Hammond, Bill. “New York Has Widened Its Lead in Per-Capita Spending on Medicaid.” Empire Center for Public Policy, July 31, 2020. https://empirecenter.org/publications/new-york-has-widened-its-lead-in-per-capita-spending-on-medicaid/.
xv Hammond, Bill. “New York’s Medicaid Enrollment Surges to an All-Time High.” Empire Center for Public Policy, July 29, 2020. https://empirecenter.org/publications/new-yorks-medicaid-enrollment-surges-to-an-all-time-high/.
xvi ”Medicaid’s Role in Financing Maternity Care.” Medicaid and CHIP Payment Access Commission. Accesssed Febraury 9, 2021. https://www.macpac.gov/wp-content/uploads/2020/01/Medicaid%E2%80%99s-Role-in-Financing-Maternity-Care.pdf
xvii Hammond, Bill. “Albany’s Self-Inflicted Medicaid Crisis.” Empire Center for Public Policy. City Journal, January 10, 2020. https://empirecenter.org/publications/albanys-self-inflicted-medicaid-crisis/.
xviii Hammond, Bill. “A Medicaid Benefit Doubles in 4 Years.” Empire Center for Public Policy, February 11, 2020. https://empirecenter.org/publications/medicaid-benefit-doubles-in-4-years/.