You wouldn’t know it from the gubernatorial campaign commercials, but New York state is facing an enormous budget gap next year. By far the toughest challenge facing the winner of the Nov. 5 election will be to close that gap without derailing a still-wobbly state economy.

It’s a tall order, but it can be done. In fact, it was George Pataki – the fiscally conservative Gov. Pataki of 1995-98, that is – who showed how to do it.

With the state still feebly recovering from its worst recession in a half-century, Pataki faced a $5 billion shortfall in his first budget year. He responded by shrinking the state workforce, dramatically cutting Medicaid and welfare costs, encouraging privatization and initiating a series of major tax cuts that ultimately (according to the STAMP tax model) generated at least 117,000 new private-sector jobs.

Over the next few years, state revenues rose to new heights, even while the state tax burden (relative to personal income) dropped to its lowest average level in nearly 30 years.

But starting with his first re-election campaign in 1998, Pataki has reversed course, presiding over a sharp resurgence in state spending. When revenues nose-dived after the World Trade Center attack a year ago, the governor and Legislature plundered the state’s accumulated surplus and budgetary reserves so they could keep on spending in an election year, almost as if nothing had happened.

Next year, the bill comes due.

While the precise figure is anyone’s guess, the state budget gap for fiscal 2003-04 is likely to at least equal Pataki’s first-year fiscal headache, which amounted to 15 percent of the core (general fund) budget.

Relying heavily on new taxes to close this gap will only sap the state’s economic growth and competitiveness. That’s what happened the last time this approach was tried under Mario Cuomo in the early 1990s.

The right way to address this problem is by cutting spending, firmly ruling out new taxes, continuing scheduled tax cuts and, if at all possible, looking for new opportunities to further reduce the tax burden. Most of the steps necessary to accomplish these objectives could be lifted directly from Pataki’s 1995-96 budgetary game plan:

Freeze spending: The budget is currently on pace to grow by $2.5 billion to $3 billion next year. The obvious first order of business is to prevent these increases from happening.

Downsize the workforce: Reducing the executive payroll by at least 10 percent, or roughly 20,000 positions, would save $1.35 billion a year at current average salary and benefit levels. The Legislature’s 3,800-member staff, the largest in the nation, should also be deeply cut, along with the fast-growing staff budget of the state’s court system, for an additional savings of over $200 million.

Regain control of Medicaid: Medicaid spending was reduced in Pataki’s first term but is now rising at a 7.5 percent annual clip, thanks in part to the governor’s own efforts to expand publicly subsidized health-care programs.

There’s little hope of closing the next budget gap and controlling Medicaid costs in the future unless such expansions are halted and the focus of the Medicaid program is narrowed to providing basic health care to the truly needy. New York is now so far out of line with the rest of the country that reducing per-recipient costs to merely twice the average for all other states would save at least $1.25 billion a year.

Restrain and restructure school aid: State spending on K-12 education has risen $5 billion over the past eight years (not even counting Pataki’s hefty, $2.6 billion STAR school tax-relief subsidy). With money scarce, it’s more important than ever for the governor to fight to simplify the aid formulas and demand that New York’s lavishly funded public schools do more with less.

Eliminate non-essential borrowing: Pataki’s latest budget calls for huge jumps in capital bond financing over the next few years, including well over a half-billion dollars for dubious economic development projects and “civic facilities” from parking garages to sports arenas. Eliminating this growing category of capital pork and reducing all other capital borrowing by 25 percent would save $100 million in annual debt service costs.

Control collective bargaining: The immense size of the next budget gap should virtually ensure that the next round of contracts includes no pay increase for state employees, repeating the pay freeze instituted by Cuomo during the state’s fiscal crisis of the 1990s. Future pay hikes for state workers should be linked to the unions’ willingness to consider productivity improvements and real pay-for-performance incentives, as opposed to the “performance bonuses” now awarded routinely on the basis of longevity.

Pursue innovative contracting and privatization options: Although New York was a privatization leader early in Pataki’s tenure, it hasn’t begun to exhaust the possibilities for selling or leasing its assets to the private sector.

From a taxpayer’s perspective, this menu of budget-cutting options is a no-brainer. But in traditional Albany terms, reducing government spending entails a tremendous amount of sharp political and institutional “pain” – pain that the current governor was willing to endure to achieve his priorities and help bring about an economic resurgence in New York in the late 1990s.

Whoever wins the gubernatorial elections should heed the lesson of Pataki’s first-term gap-closing exercise: No pain, no gain.

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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