Given the Legislature’s strong resistance to cutting education and Medicaid spending, the conventional wisdom in Albany is that a big, broad-based state tax increase is inevitable next year—despite Governor George Pataki’s opposition to “job killing” tax hikes.

But there is another choice. Instead of imposing higher taxes on a struggling economy, legislators should consider more ways to save money.

Not counting federal aid, the Governor is proposing a $59 billion budget next year—essentially the same amount the state will end up spending in fiscal 2003-04. In other words, there is no shortage of savings targets.

What follows might be described as eight steps to saving $1 billion in 2003-04, and more in the future. This is by no means intended to be a thorough or exhaustive list, but it illustrates the range of opportunities that continue to exist as the budget clock ticks on into a new fiscal year.

1. Reduce the state payroll

At last count the state had about 225,000 full-time equivalent employees, including 186,000 in executive branch agencies most controlled directly by the Governor. Roughly 5,000 positions have been eliminated since 2001, largely through attrition and early retirement incentives, and Pataki’s budget would drop another 5,000 in the next year. However, given the severity of the state’s financial crisis, still deeper reductions are both necessary and justified.

Although Pataki significantly reduced state government employment during his first two years in office, his administration has yet to conduct a thorough, top-to-bottom functional review of state operations to identify ways of boosting productivity by providing the same level of service with fewer people. For example, as of last summer, some major administrative agencies continued to employ as many or more people than they did 20 years ago.[1]

Reducing the payroll by an additional 15,000 positions, beyond what the Governor has proposed, would save just over $700 million a year, based on a highly conservative estimate assuming many of the targeted jobs would be at the lower end of the pay scale.[2]  This budget-cutting exercise should not be limited to the Executive Branch of state government:

• as of 2002, the 61 state senators and 150 Assembly members had a staff of 3,805 people, or roughly 18 for each legislator—easily the largest of any state, according to the National Conference of State Legislators. Cutting the legislative staff budget by 40 percent would save New York $73 million a year.[3]
• the state Judiciary has received extraordinarily favorable treatment under Pataki—a budget increase of over a half-billion dollars, or 58 percent since 1995, reflecting the hiring of an additional 2,000 court employees. The court system should be asked to tighten its belt; a 50 percent rollback of new court hiring since 1995 would save $135 million.[4]

To ease the transition out of government employment for affected workers, the state should dedicate a portion of non-recurring revenues (such as tobacco securitization proceeds) to finance the kind of generous, large-scale severance program implemented by private corporations that have downsized their payrolls in order to become more competitive. State employees whose positions are targeted for elimination might, for example, be offered one week’s salary per year of service up to a maximum of 20 weeks, plus up to six months of paid benefits coverage after leaving the payroll.[5]

Subtracting onetime severance costs[6], net savings from such a staff reduction program are estimated at $550 million for 2003-04, growing to over $700 millionin recurring savings when fully implemented.

2. Revisit previously proposed Medicaid cuts

During his first term, which began in 1995, Pataki proposed eliminating several of the most costly services classified as “optional” under the federal Medicaid program, including dentistry and optometry. He also proposed eliminating non-emergency transportation, private duty nursing, and limiting outpatient mental health to 30 visits, each requiring a $3 patient co-pay. Enacting these proposals in 2003-04 would save the state at least $200 million a year; moreover, they would generate roughly equal savings for county governments and New York City, which share in financing Medicaid.[7]

3. Rein-in HCRA Expenses

The vast expansion of the Health Care Reform Act (HCRA) enacted in early 2002 adjusted Medicaid reimbursement levels in a way that required hospitals, nursing homes and home care agencies to provide nearly $1 billion in targeted pay raises (under the guise of “retention and recruitment” funding) for health care workers represented by politically influential unions. The state share of this spending was financed by significant new revenues including a 35 percent increase in cigarette taxes and proceeds from the conversion of Empire Blue Cross into a for-profit company. However, the program also effectively boosted health care spending obligations through Medicaid rates partially payable by New York City and county governments, which do not share in state HCRA revenues.

As a first step in what should be a multi-year effort to get control of HCRA’s increasingly murky finances, the program should be thoroughly audited and over a half-billion dollars in HCRA expenditures should be redirected through the state budget where they can be subjected to full legislative and public oversight. In the meantime, two immediate steps for saving money on health care would include:

a. Repeal Senate and Assembly HCRA programs, saving $17 million.[8]

b. Eliminate the “Healthy New York” program of subsidized health insurance for eligible small businesses, saving $79 million[9], and accomplish the same goal at no cost by exempting private insurers from costly state insurance mandates and regulations for small-group and sole proprietor coverages.

The savings from HCRA-related cuts, assuming related revenues are shifted to the regular state budget, would total $96 million.

4. Scale back unnecessary Capital Financing

The Governor’s budget calls for issuing nearly $3.3 billion in new state-supported bonds in 2003-04.  Much of this total will be devoted to traditional infrastructure requirements—new and rehabilitated highways and bridges.

However, the budget also includes $528 million in new bonds for economic development purposes. Some of this money will finance what can best be described as capital pork—”civic facilities” ranging from parking garages to sports arenas to convention centers and other downtown redevelopment schemes reminiscent of the failed urban renewal policies of the 1960s.

The bulk of the new borrowing would be allocated for the Centers of Excellence, Empire Opportunity Fund, Gen*NY*Sis and RESTORE programs, through which the Governor, Senate and Assembly dole out state grants and loans to universities and businesses in various high-tech fields. These programs effectively put the state in the venture capitalism business—using taxpayers’ money, with the inevitable overlay of regional political influences and preferences.

In addition, the Governor is seeking $125 million in bonding for the Environmental Protection Fund. Although a detailed breakout is not provided, it appears from budget documents that at least half the fund will be devoted to non-essential projects such as open space acquisition, recycling, farmland preservation, and preservation of historic barns.

Dropping $590 million in economic development, environmental and recreation projects from next year’s capital plan would save at least $47 million a year in annual debt service expenses.[10]

5. Reduce arts grants and eliminate public broadcasting subsidies

New York State has long been a national leader in spending tax money on the arts. Reducing the 2003-04 state Council on the Arts budget to the current 50-state average of $1.22[11] per capita would save $21 million. Eliminating state subsidies to “educational” television and radio would save an additional $11 million, bringing the net total savings in this category to $32 million.

6. Eliminate rent regulation

New York’s existing rent regulations are administered by a state agency, the Division of Housing and Community Renewal. While payments from New York City finance a portion of this work, allowing the rent regulation laws to expire on schedule June 15 will save the state’s taxpayers $3 million a year.

7. Empty the pork barrel

The state is planning to carry over $75 million into the new fiscal year from the community projects fund, which supports low-priority “member item” spending for purposes ranging from economic development grants to little league fields. This entire fund should not be spent as planned, but saved to help prevent tax increases.

8. Repeal the Wicks Law

The state’s Wicks Law 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 both Governor Pataki and his predecessor, Mario Cuomo—range from 10 percent to 30 percent of project costs.[12] 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 2001-01.

Immediate repeal of Wicks would translate into at least $105 million in savings on state building aid to school districts alone.[13] Several million dollars in additional annual debt service savings would flow from reductions in debt service costs on bonded state construction and renovation projects.

The total net savings from implementing the items listed above would be $1.1 billion in 2003-04, growing to $1.25 billion in 2004-05.

More needs to be done

Given the projected state budget gaps of nearly $3 billion in 2004-05 and over $4 billion in 2005-06, these measures necessarily represent just a first step in permanently reducing the budget to affordable levels.  For example, New York has the highest per-capita Medicaid costs in the nation, spending more on the program than California and Texas combined. However, independent studies also have documented wide regional disparities in per-capita Medicaid spending within the state.[14] A systematic utilization review to determine the reasons for these disparities could yield both significant additional savings and improvement in patient care—without cutting services. Reducing New York’s per-recipient Medicaid spending to just double the rest-of-nation average, from its current level of 2.5 times the level in other states, would save well over $1 billion for the state and nearly as much for New York City and county governments.

Renewing a privatization drive that appeared to lose steam near the end of Governor Pataki’s first term, the state could also gain from pursuing more opportunities to transfer more assets to non-government ownership or management. Candidates for privatization would include the State Insurance Fund, the Battery Park City and Roosevelt Island real estate developments in Manhattan, more than two dozen golf courses, various toll bridges and sections of highway, and untold amounts of surplus acreage around state facilities.  Pataki has taken one promising step in this direction in his latest budget, submitting legislation that would allow the conversion of three State University hospitals to the private sector.

Additional tax dollars could be saved by seeking competitive bids from private firms for many administrative functions now carried out by state agencies, such as human resources and payroll management. Opening New York City transit bus routes up for competitive bids—as has been done, for example, in the entire London system—would ultimately save at least $340 million a year in transit operating subsidies, according to a recent Manhattan Institute study.[15]

No time for business as usual

To be sure, most of these ideas and others like them would be dead on arrival in Albany in any normal budget year, if only because legislators are temperamentally and politically adverse to cutting spending on anything if they can help it.

But with New York State facing a $11.5 billion budget gap—and future shortfalls as far as the eye can see—it is time for the Senate and Assembly to start deciding making difficult choices. The alternative, as Pataki has forcefully stated in opposing broad-based tax hikes, will be to risk destroying private sector jobs and doing more damage to New York’s still-shaky economy.

Originally Published: FISCALWATCH MEMO

Notes

1. In mid-1983, the state Department of Social Services (DSS), Department of Health, and Division for Youth (DFY) employed 13,486 people. As of July 2002, the Department of Health (which assumed most of DSS’ former Medicaid administration responsibilities), the Office of Temporary Disability Services (which assumed DSS’ welfare administration function), and the Office of Children and Families (which assumed DFY’s institutional responsibilities for youthful offenders) employed about 13,000 people. Both figures are full-time equivalent (FTE) headcounts based on periodic payroll reports from the State Comptroller’s Office.
2. The average salary for all state employees in 2002 was about $50,000, plus an average benefit load of 34 percent.  The savings estimates presented here assume an average salary of $35,000.
3. Estimate based on average biweekly salary of $1,377 for all legislative employees other than elected members, as derived by figures reported by the state Comptroller’s office as of June 2002, plus average benefit load of 34 percent. A 40 percent reduction would match the legislative staff cut that California voters mandated as part of their term limits law in 1990.
4. The average weighted biweekly salary for judiciary employees is higher than the government-wide figure, but includes more highly paid elected and appointed judgeships established by statute, which would not be eliminated under this proposal.
5. The details of such a plan would be subject to negotiation with the state’s public employee unions, whose contracts expire on March 31.
6. Setting aside $150 million for this purpose in 2003-04 would finance an average severance package of $10,000 per worker.
7. Internal estimates from New York City and county government sources.
8. These are discretionary grants controlled by the legislative leadership. Estimate derived from figures in Appendix 3 of the state comptroller’s analysis of the 2003-04 executive budget.
9. Expense information for Health New York is taken from Appendix 3 of state comptroller’s budget analysis.
10. Capital spending figures from 2003-04 New York State Executive Budget, p. 318. Debt service cost estimate assumes long-term bonds issued at current prevailing interest rates.
11. Per-capita estimate by National Assembly of State Arts Agencies. In 2003, the association predicts that state arts agency funding nationwide will decline further, to $1.22 per capita.
12. The lower estimate was made by the Citizens Budget Commission in 1996 and the higher estimate by the Governor’s Budget Division in 1987.
13. This estimate assumes that Wicks-affected school construction costs in the recessionary environment of the past two years dropped 50 percent below the 2001 level cited by the state Association of School Business Officers, and that allowing districts to use general contractors will save 10 percent on average.
14. John W. Rodat, “The Geography of Medicaid Spending,” Signalhealth, LLC, unpublished paper updating research work documented by the author in the early 1990s, including “Policy of Delusion,” by John W. Rodat, Edwin Crawford and Warren G. Billings, Empire State Report, November 1990, and “One Policy, 58 Results: Variation in Hospitalization Rates of Medicaid Clients in New York State,” September 1990, New York State Association of Counties and State Communities Aid Association.
15. E.S. Savas and E.J. McMahon, “Competitive Contracting of Bus Service: A Better deal for Riders and Taxpayers,” Manhattan Institute Center for Civic Innovation, Civic Report No. 30, November 2002.