“This budget is not only a good budget, but a completely new paradigm – something that will make a difference in everyone’s lives.”

Governor Eliot Spitzer Jan. 31, 2007

Governor Spitzer’s proposed $120.6 billion budget called for state-funded spending growth of 7.8 percent — three times the rate of inflation — while raising business taxes by roughly a half-billion dollars. The budget also included a significant expansion of state-subsidized school property tax breaks for homeowners, to be phased in over three years.

The budget’s growth was in line with the heavy-spending trend established during former Governor Pataki’s last term, and Spitzer’s property tax initiative builts on Pataki’s 10-year-old STAR (School Tax Relief) program.

So what was “new” in the new governor’s “completely new paradigm”? It boiled down to important changes in these key areas:

HEALTH CARE – The governor proposed a series of cost-containment measures in a bid to curb the state-funded 2007-08 Medicaid spending increase from a projected $1.7 billion (14 percent) to just $268 million (2 percent). In doing so, he picked a fight with some of Albany’s most powerful interest groups — but unlike his predecessor, he didn’t back down as soon as his adversaries began attacking him in TV and radio ad campaigns.

Many of Spitzer’s cost-containment proposals, such as freezing hospital and nursing home reimbursement rates, had been unsuccessfully sought by Pataki. Others, such as a restructuring of graduate medical education and worker training subsidies for hospitals, represent a more significant departure from past policy. In general, the new governor sought to fundamentally alter the focus of health care policy in New York from subsidizing hospitals and other institutions to putting “patients first.” Spitzer’s paradigm shift on health care is potentially significant.

EDUCATION – Spitzer called for a four-year, $7 billion expansion of state aid to public schools, starting with a hefty $1.4 billion aid increase in 2007-08. While acknowledging that New York already leads the nation in per-pupil spending, the governor emphasized he wants stronger accountability measures to ensure that additional education dollars produce better results. Going well beyond the amount suggested in the state Court of Appeals’ ruling in the Campaign for Fiscal Equity lawsuit, Spitzer also wants to shift more money to New York City and to other districts serving poor populations. He supports raising the charter school cap and creating a small tax break for private school tuition.

Pataki expressed some generally similar aims but never proposed such a large multi-year hike in school aid. (In fact, both Pataki and former Governor Mario Cuomo called for inflation-adjusted cuts in school aid in their first budget proposals.)

Unfortunately, the positive paradigms in Spitzer’s budget were combined with these negatives and shortcomings:

  • No reform of rules governing costly guaranteed pensions, retirement benefits and collective bargaining rights for public employees.
  • No new broad-based state tax cuts.
  • No long-term property tax reduction — just a few years of temporary stabilization, for homeowners only, in the form of added STAR.
  • Higher taxes on banks and corporations, with much of the impact concentrated in New York City.
  • Authorization of $300 million in bonded slush funds for “economic development” – and seed money pointing to a 2008 election-year bond referendum for a poorly documented stem cell research initiative.
  • A partial retreat from privatization of services and a net 2,500-employee increase in the state workforce.
  • Large new multi-year spending commitments, especially on education and STAR, leading to projected budget shortfalls that mushroom from $2.4 billion in 2008-09 to over $7 billion in 2010-11.

Counting Where It Counts

Total spending by New York’s state government is measured three ways in the annual state budget:

  • All-Funds consists of spending financed by all revenue sources, including most federal aid.
  • The State Funds budget excludes federally reimbursed spending but includes virtually all spending financed by the state’s own taxes, fees, fines, university tuition, bond proceeds, Lottery receipts and other revenues.
  • The General Fund includes spending finances by state tax, fee and fine revenue that is not dedicated for some specific purpose.

While All-Funds (including federal grants) provides the broadest measure of the New York State budget, the taxing and spending priorities of New York’s elected leaders are best reflected in the part of the budget they most directly control-the part supported by state taxes, state fees and other state revenues such as Lottery proceeds and tuition, all of which are set in Albany.

For years, the General Fund was widely viewed as the best budget barometer for this purpose. However, over the past 20 years, the state has shifted more and more spending obligations to dedicated funds supported by state “special revenues,” diminishing the General Fund’s value as a true measure of what’s being done with the taxpayers’ money.

The charts that follow focus mainly on the more inclusive State Funds budget, which includes a growing share of what used to be considered general fund tax receipts, as well as miscellaneous fees, fines and other revenue on which the state became increasingly reliant during former Governor Pataki’s 12 years in office.

Proposed Changes in Spending, by Major Fund

(millions of dollars)

changebyfund-7452832

As shown, Spitzer’s first budget would boost spending faster than inflation by any of the three “fund” measures. The bellwether State Funds category would rise by fully three times the projected 2.6 percent rate of inflation

Where State Funds Come From

where-from-5332340

The largest source of State Funds receipts is the personal income tax — which, in turn, accounts for 60 percent of total state tax revenues excluding fees, fines and other sources. The Miscellaneous category includes Lottery receipts as well as bond proceeds and surplus funds reserved from prior years. The relatively small share of revenue produced by the sales and use tax reflects New York’s relatively low 4 percent statewide sales tax rate. New York City and county governments impose their own rates of at least 4 percent on top of this — leaving consumers to pay a total sales tax that typically ranges from 8 to over 9 percent, depending on locality.

Where State Funds Go

where-go-9291355

Nearly half of all State Funds spending goes to various forms of local assistance, of which School Aid and STAR property tax subsidies make up the largest share. Medicaid payments (excluding federal reimbursements and the local share) now come close to rivaling the total budget for all state agency operations.

Proposed and Enacted State Budget Hikes Since 1995

proposed-enacted-1427533

As further explained in this NYFiscalWatch Memo, Spitzer’s proposed State Funds spending increase was larger than all but one of the spending hikes proposed by Pataki. Given the Legislature’s proclivity for adding spending to the Executive Budget, the high “floor” established by Spitzer virtually ensured an even larger final product.

Spending Growth by Area

growth-by-area-7760404

Increased school aid and STAR subsidies accounted for more than one-third of the total proposed State Funds spending in Spitzer’s budget. The “All Other” category shown above consists mainly of bonded capital spending on “economic development” programs.

On- and “Off-Budget” Spending

on-off-budget-1816334

In recent years, the Legislature and Pataki had agreed to spend a growing share of capital funds directly from the proceeds of bonds issued by public authorities — technically circumventing state budget funds. When this “off-budget” spending (detailed above) is counted along with the official cash totals, the State Funds spending hike in Spitzer’s proposed budget rises to 9 percent.

Projected Budget Gaps

projected-budget-gaps-9522331

Assuming all of Spitzer’s proposals were adopted with no further changes by the Legislature, the governor projected that expenditures will be on track to exceed revenues by $2.4 billion in 2008-09, including a projected shortfall in the Health Care Reform Act (HCRA) financed plan. Unless the gap is filled with recurring revenue increases or expenditure reductions, the gap (including HCRA) will grow to over $5 billion by 2009-10, and to $7.6 billion by 2010-11. As Comptroller Thomas DiNapoli noted in his budget report, spending is headed up at an “unsustainable” pace.

Projected Spending Growth Scenarios

future-spend-scenarios-8998952

Even if the gaps are closed entirely by reducing projected expenditures, the budget’s baseline will rise at twice the rate of inflation over the next four years, as illustrated by the blue line in the chart above. Two-thirds of this growth would consist of Spitzer’s proposed $10 billion increase in school aid and STAR subsidies during the period.

State Aid to Public Schools Since 1983

state-aid-to-public-schools-5103876

In the 25 years leading up to Spitzer’s first budget, total state aid to public schools has more than quadrupled, as shown above. The 2006-07 aid hike of $1.8 billion was an all-time record.

Actual and Projected Annual School Aid Increases, 1995-2011

annual-schoolaid-increases-4325038

In percentage terms, the school aid hikes proposed by Spitzer will exceed all but three of the annual increases enacted under Pataki since 1995. If enacted as proposed by the new governor, these increases would represent the fastest four-year growth in school aid since the mid-1980s.

Proposed Medicaid Budget Savings

healthcare-savings-breakdown-3319103

On a State Funds basis, Spitzer’s proposals to freeze and restructure reimbursement rates for hospitals and nursing homes represented about $450 million out of his $1.45 billion cost-containment plan, as shown above. Another large category of changes doesn’t involve cutting spending but boosting revenues, through higher federal reimbursements or increased fees and “assessments” on health care providers.

Proposed Changes in Taxes, Fees and Fines

tax-changes-1862867

Spitzer called for two narrowly targeted state tax cuts. One proposal would allow parents to deduct up to $1,000 in private or public school tuition costs — yielding up to $68.50 per child in savings for those eligible. The other change increases the state’s tax credit for investments in low-income housing construction.

The governor also sought to raise a total of $786 million in fiscal 2007-08, and $1.4 billion the following year, through a combination of business tax increases he has characterized as “loophole closers”; new or added fees and fines; and renewal of existing “assessments” on hospitals and nursing homes. The largest of the business tax changes will raise taxes for large corporations by requiring them to report more income from out-of-state subsidiaries. But as this op-ed article explains, “The governor could have made a more credible case for his corporate tax change-and kept his no-tax-increase promise-if he had proposed an offsetting tax rate cut.”

**UPDATE: As budget negotiations headed into their final week, the governor reportedly was considering a compromise that would include some offsetting tax rate cuts.

The governor’s health care budget included a $75 million increase in the “covered lives assessment” — which is effectively a tax on employer-provided health insurance, designed to generate revenue for graduate medical education subsidies for hospitals. The assessment, which differs by region, was also raised repeatedly under Pataki.

Share of NY State Income Tax Paid by Wealthiest 1%

tax-share-top-one-6857806

Personal income taxes paid by the wealthiest 1 percent of filers — just 70,000 households — now account for well over one-third of all revenues raised by the state’s largest tax. The heavier dependence on the narrow pinnacle of the tax base means the state more vulnerable to economic downturns affecting capital gains and corporate bonus income — as reflected by the dip in the upper-income share between 2000 and 2002, which was responsible for almost all of the state’s revenue losses in the same period.

The “Middle Class STAR” Initiative

One of the biggest new initiatives in Governor Spitzer’s proposed budget was a major expansion of School Tax Relief (STAR) property tax exemptions for homeowners, ultimately adding $2.5 billion a year to what was a $3.4 billion program as of 2006-07.

The governor said his plan would “target property tax relief to the people and families who need it most: middle class New Yorkers, who bear the brunt of soaring property taxes and have the least ability to pay them.”

Spitzer’s plan would increase existing STAR exemptions by up to 80 percent starting in 2007, and by 100 percent in 2010, on a means-tested basis. Homeowners whose incomes don’t exceed the middle-class limit, defined $60,000 upstate and $80,000 downstate, would get the full increase. Savings would average of $565 on a statewide basis. But the subsidy would be lower for homeowners with higher incomes, phasing down to 30 percent of the current STAR break for homeowners with incomes exceeding twice the “middle class” maximum-or up to $120,0000 upstate and $160,000 downstate. No added STAR benefit would be available to with incomes above $235,000.

The Governor’s definition of “middle-class” was set comfortably above the statewide median household income, which was $46,659 as of 2004-05, according to Census Bureau estimates. But the median for all households (including renters) invariably falls below income for homeowners-and the cutoff level for full STAR benefits is lower than the median homeowner income in 12 counties.

The following table shows the median income of homeowners in 2005, the income limit for full benefits under Spitzer’s expanded STAR program, and the-income adjusted STAR savings for homeowners at the median income level in affected counties:

Muddling the “Middle”

 muddledmid-6206337

As shown in the table, in the first year of the expanded STAR program, a median-income homeowner in Westchester will receive $199 less than the full STAR savings available to homeowners who fall within the income limits. The reduction in full STAR benefits for median-income homeowners in other counties ranges from $22 in Ulster to $95 in Rockland County.

The income limits will rise in line with average wages. However, the disparity between the Middle Class STAR income limit and median homeowner incomes could grow in some areas, especially Long Island and the lower Hudson Valley, where the income required to comfortably afford a new home is already above the median.

Following the approach already used to determine eligibility for Enhanced STAR for seniors, the governor’s budget bill memo says eligibility for Middle Class STAR “will be based upon the income of the primary owners, and of any primary owners’ spouses.”

But what about an unmarried couple, living in a home owned by one of the partners, with a combined income far above the “middle-class” limit? The answer is that they could still qualify for a full Middle Class STAR tax break — based on the owner’s income alone.

Consider, for example, two Suffolk County couples-one married, the other unmarried-living next door to each other in identical homes. Both couples earn combined incomes of $160,000. However, the home in which the unmarried couple lives is owned by one of the partners, who earns less than the $80,000 required to qualify for the maximum additional savings.

In that case, the married couple’s additional Middle Class STAR tax break would be limited to 30 percent of the current Basic STAR break, leaving the couple with total STAR savings of $1,240. But the unmarried homeowners would see their current STAR break double, to $1,908, over the next three years. They would stand to lose a $668 property tax benefit by marrying.

Even some households earning over $235,000 could remain eligible for some Middle Class STAR break — as long as the owner of record earns less than the income cutoff point and is not married to the home’s other principal occupant.

The income disparities in Spitzer’s plan are the inevitable result of applying an income test to a tax based on property values. The attempt to target new tax benefits based on “need,” without requiring homeowners to share sensitive personal financial information with local assessors, yields predictably inexact and inequitable results.

Spitzer’s Middle Class STAR would replace a new property tax rebate program created by the Legislature just a year ago. Senate Republicans proposed tripling the rebate program in a manner that would not discriminate based on income and thus would be easier to administer.

Estimated and Projected State-Funded Debt

state-funded-debt-7333765

State debt tripled during the Cuomo Administration (1983-95) and nearly doubled under Governor Pataki. Total state-funded debt is projected to grow by another $10 billion, or 20 percent, over the next four years, before leveling off in 2011-12. The state comptroller’s office has estimated that only half of the outstanding state-funded debt was used to finance capital assets, such as highway and building construction. Nearly one-quarter went for “non-capital asset” uses, and slightly over 25 percent was related to bonds floated to make up for past budget shortfalls of the state and New York City.

The impact on debt service — principal and interest payments on state borrowing — is shown in the chart below. After increasing by only $200 million in 2007-08, debt service is projected to rise by an average of over $400 million a year over the following four years.

Estimated and Projected State-Supported Debt Service

state-supported-debtservice-1303530

About the Author

Tim Hoefer

Tim Hoefer is president & CEO of the Empire Center for Public Policy.

Read more by Tim Hoefer

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