E.J. McMahon says the Empire State’s persistent budget gap is caused by overspending

Approaching what could turn out to be yet another stalemate with the Legislature, Governor Pataki says the last four years have been “the worst … since the Great Depression” for New York State’s finances.

You wouldn’t know it from looking at the state budget, though. Since the end of the 2001 fiscal year, state funds spending has risen 18%. That’s a growth rate of one and a half times inflation – despite the fiscal fallout from a national recession, a nasty Wall Street bear market, and the destruction of the World Trade Center.

Not withstanding the governor’s frequent allusions to the 1930s, the state’s latest budgetary travails aren’t completely unprecedented. Indeed, there are some striking similarities between the early 2000s and the early 1990s. There’s also one big difference: State spending is growing faster during the latest recovery cycle.

As shown in the chart above, New York’s “state funds” budget (excluding federal grants) rose by 12% in nominal terms during the four state fiscal years starting with the 1990-91 national recession. This amounted to a 5% decrease after adjusting for the inflation rate during that period.

During and after the latest recession, by comparison, actual and estimated state funds spending has risen 18%. This is a 6% increase after adjusting for inflation.

If the budget’s growth since fiscal 2001 had been held to the same level as the fiscal 1990-94 period, the state would now be spending $3.4 billion less – equivalent to most of the projected budget gap the state needs to close for fiscal 2006.

While state-funded Medicaid costs have risen 38% during the last four years, state Medicaid expenses grew at an even faster rate of 59% during the analogous period of the early 1990s, when Mario Cuomo was governor.

So, Medicaid aside, why has the total state funds budget increase been so much bigger in more recent years?

The answer, in part, can be found in the largest single state-funded category of the budget – education. Since fiscal 2001, state to local public schools aid has increased nearly 13%, nearly twice the rate of fiscal 1990 through 1994. Contributing to the increase in education-related spending has been the phase-in of Mr. Pataki’s STAR school property tax rebate program, which was not fully implemented until fiscal 2002.

Another difference between the early 1990s and 2000s has been the extent to which the state budgets for those periods have relied on reductions in the state payroll.

Mr. Cuomo added 30,000 positions to the state workforce and granted unions significant pay hikes during his first eight years in office. But once New York’s economy began to lag, he reversed course and cut 18,000 state jobs through a combination of layoffs and attrition. He also forced employees to absorb $135 million in wage deferrals.

Mr. Pataki, by contrast, relied on attrition to slash the workforce he inherited from Mr. Cuomo by 20,000 positions during his first 18 months in office, but has shielded state employees from feeling the brunt of more recent fiscal pressures. Without any layoffs, Mr. Pataki has eliminated another 2,000 positions since the end of fiscal 2001. However, the state government headcount is scheduled to rise slightly under the governor’s budget for fiscal 2006.

Although state workers in the most recent post-recession period went a year without a pay raise, as they also did under Mr. Cuomo in the early 1990s, they have not lost money to furloughs or payroll lags. And state workers’ base salaries have risen slightly faster during the most recent four years – roughly 9% from April 2001 through the next scheduled hike in April 2005,compared to 8.2% between 1990 and 1994.

New York State’s key fiscal turning of recent years came two years ago, after Mr. Pataki presented a fiscal 2004 budget designed to hold the line on overall state spending while substantially reducing projected out-year deficits. Overriding the governor’s vetoes, Senate Republicans and Assembly Democrats agreed to add or restore $2.2 billion in state funds spending, financed in part by large temporary increases in personal income tax and sales tax rates. Those tax increases are supposed to expire this year – although some legislators have joined labor unions in pushing for their extension.

Mr. Cuomo had his own veto fight with the Legislature in 1991, when he rejected $1 billion in spending additions to his budget. Faced with a potential override, however, he negotiated an agreement to raise taxes and restore many of the vetoed spending items.

While Mr. Cuomo had virtually no cushion to fall back on after his spending spree in the late 1980s, Mr. Pataki was able to build up a surplus of over $3 billion even while allowing spending to increase at a healthy pace from 1998 through 2001. But he then vacuumed the state’s reserves so the budget could keep growing even while the economy was shrinking, starting in the fall of 2001. Even renewed growth in tax revenues since 2003 hasn’t been enough to close future budget gaps projected at between $2.5 billion and $5 billion.

Left unchecked, the state funds budget is on track to grow by another 23% over the next three years, if further cuts are not made. The Legislature, however, wants to spend even more.

This calls to mind a final, fundamental similarity between the early 1990s and early 2000s: Now, as then, the underlying problem is not a lack of revenue but an excess of spending. The chronic budget gaps of the late Cuomo era weren’t finally closed until Mr. Pataki reduced spending (and cut taxes to spur the economy) during his first three years in office. The current problem can only be permanently fixed with a similar approach.