Good morning, Senator Krueger, and thank you for this opportunity to testify before your task force today.

My name is Edmund J. McMahon, and I am senior fellow for tax and budgetary studies at the Manhattan Institute for Policy Research. The Institute is a non-partisan, non-profit think tank, based in New York City, whose mission is to develop and disseminate ideas that foster greater economic choice, opportunity and individual responsibility.

Because the state and city budgets are the primary focus of my work, I’ll confine my prepared remarks this morning to some of the budget reform issues highlighted in your hearing notice.

The failure of the New York State Legislature to adopt an on-time budget throughout most of the past two decades is evidence of a breakdown in fiscal and political discipline that should deeply trouble all New Yorkers. As many observers have noted, chronically late budgets contribute to the state’s abysmally low credit rating. They also wreak havoc on cash flow and financial planning for local governments, contractors, and other entities downstream of the state budget, particularly school districts.

But delay is only part of the problem. Even allowing for the degree of backroom bargaining that is part of the lawmaking process in every democracy, New York State’s budget negotiations have been marked by excessive secretiveness on the part of all the principal participants.

Any effort to improve the budget-making process needs to zero-in on these two issues: timeliness and transparency.

Timeliness

Late budgets have become so routine here in Albany that it’s tempting to throw up our hands and conclude that nothing will change the situation. Somehow, we must find a way to inject a new sense of urgency into this process-but that will require eliminating the business-as-usual atmosphere that has come to permeate the Senate and Assembly chambers even when a budget is months behind schedule.

Senator Krueger’s bill (S.4682) requiring the Legislature to meet daily in the absence of a budget is a good start. But if you really want to shake things up, you need to go a step further: Pass a constitutional amendment providing that when a fiscal year begins without a budget, nolegislation other than budget bills shall be introduced, voted upon, debated, moved to the floor or taken up in committee in either house.

In other words, prior to final adoption of a budget after a new fiscal year has started, all unrelated activity-including votes on one-house bills and routine commemorative resolutions-shall come to a halt.

The prospect of hanging around the Capitol with nothing to do but vote on budget bills should provide legislators with a strong new incentive to actually get moving on the budget. It certainly couldn’t be any less effective than the 1998 law withholding members’ salaries in the absence of a budget, which has proven to be almost completely ineffective.

Some legislators over the years have blamed late budgets in part on New York’s unique April 1-March 31 fiscal year, on the theory that 8-10 weeks just isn’t enough time for the Senate and Assembly to do its work.

In fact, a degree of institutionalized procrastination seems to have crept into the legislature’s budget process. Until this year’s cash flow crisis forced the matter, it had been a while since there was any perceptible sense of urgency surrounding the budget before late March, if not April or even May. Recall that one of the latest budgets in history was enacted on July 13, 1996-a full eight months after Governor Pataki had taken the unprecedented step of presenting the Executive Budget more than a full month early, in December 1995.

By itself, a fiscal year that starts later might only assure that we have budgets that are late later.

Nonetheless, the fiscal year should be changed-if only because it would allow the additional time necessary for a more open and truly deliberative legislative process to unfold, and because it would also give all parties a look at the crucial spring tax settlement data, which aren’t available until the end of April. Most states have July 1 fiscal year starts. For New York, the next-best alternative would be appear to be a June 1 start. Assuming a corresponding change in the statewide school budget vote date, this would allow plenty of time for downstream entities to adjust to legislative changes in the governor’s proposal.

Differing revenue forecasts have been another source of delay in the budget process. However, current reform proposals that attempt to somehow “fix” the revenue forecasting conundrum all seem to have the same flaw-they give the state comptroller the final say on revenue numbers in case a consensus is not reached between the Governor and the Legislature.

I would suggest that is contrary to both the letter and spirit of Article VII of the state constitution to inject the comptroller into budget-making. The comptroller’s role has always been, and should remain, primarily ministerial when it comes to the budget. The state’s chief auditor and accounts manager should be a scorekeeper, not a player in the budgeting process – and make no mistake, when you are actually determining the revenue number, you are playing in a very big way.

The historic thrust of New York’s 75-year-old Executive Budget law, as embodied in Article VII, is to give the Governor full responsibility for presenting the budget, and to make the Governor primarily accountable for the end result. Revenue forecasting as we know it today, while more complex and elaborate than Al Smith and the other framers of the law could have envisioned, clearly is integral to the budget preparation process.

The answer to the consensus forecasting question is simple: Provide that the Governor’s revenue forecast shall be binding – period. (This is already the case with the Mayor’s Executive Budget revenue forecast in New York City, which helps explain why the mayor and the council have avoided prolonged delays in adopting a budget that is almost as large and every bit as complex as the state’s).

Of course, even if you change the fiscal year, eliminate the revenue forecasting disputes, and prohibit the Legislature from acting on other bills in the absence of a budget, there is still no way to guarantee that the budget will be done on time.

To minimize the uncertainties and instability created by chronic late budgets, the Constitution should be amended to provide that a “default budget”-basically an extension of the prior year’s budget – will take effect in the event a new budget is not in place at the start of a fiscal year. The default budget provision in the Majority’s Senate Bill 1, which passed this house at the beginning of the year, provides a good template for a default budget in two crucial respects: it stipulates that disbursements can in no case be higher than they were the previous year, and it provides the Governor with a mechanism for reducing expenditures if revenues are declining. However, this provision should further stipulate that the default budget cannot incorporate an extension of taxes or tax increases that were scheduled to sunset at the end of the prior tax year or fiscal year.

Transparency

As you know, the budget bills presented to the Legislature by the Governor essentially amount to an enormous mass of (supposedly) itemized appropriations voluminously couched in statutory language, with accompanying memoranda.

Of course, you can’t really make any overall sense of these numbers without looking at the state’s Financial Plan-the table of receipts and disbursements, organized by fund type, which is thoroughly detailed in the Executive Budget books. However, the financial plan summary customarily has not been publicly updated until after the Legislature votes on the budget. Projected disbursements and receipts for the two succeeding fiscal “out years” are presented only once annually-in the Executive Budget.

Before the budget’s adoption, there has been no routine, authoritative public disclosure of how much cash the Legislature is about to raise or spend, or how these numbers compare to those in the Governor’s original proposal. Nor are we told how the Legislature’s changes in the Governor’s budget will affect out-year disbursements-whether, for example, future budget gaps will grow to unmanageable levels as a result of spending restorations and additions.

 If anything, the negotiated final budget has gotten even more opaque in recent years. Legislative “member items” are now simply appropriated in lump sums-up to $200 million in 2003-04 – to be distributed at the discretion of the majority leaders subject to a memorandum that isn’t part of the bill. Moreover, most of the steadily growing, multi-billion-dollar Health Care Reform Act (HCRA) program has been shifted completely off-budget.

Reform priorities

Assuming a new fiscal year start of June 1, and drawing on reform proposals introduced by members of both parties in both houses, here are a series of reforms designed to ensure that the budget is not only more likely to be timely, but truly transparent:

• Require both houses to pass a budget resolution April 15.
• Require a 12-member general Conference Committee, aided by subject-area subcommittees-to iron out differences between the Senate and Assembly resolutions.
• Submit the written report and recommendations of the General Conference Committee to the Budget Division, including all the information necessary to prepare an updated financial plan and a plain-language summary report of the bills the legislature is about to produce. This report should include a Summary Financial Plan for each budgetary fund type-clearly demonstrating that overall disbursements and receipts will be balanced – and an updated forecast of out-year disbursements. And it should be available not just to the Legislature but to the general public at least 48 hours before the vote.
• Amend the Finance Law to eliminate the use of lump sum appropriations as a cloaking device for what amount to slush funds for the Governor and the leaders. The creation of off-budget accounts-of which the HCRA fund is an exceptionally outrageous example-should be outlawed, and those funds should return to legislative oversight.

Your hearing notice also asks about the advisability of establishing a non-partisan budget office modeled on the Congressional Budget Office. Such a system would eliminate a good deal of duplication of effort by the four existing fiscal committee staffs. As you know, non-partisan legislative budget offices exist in most other states. Based on my experience as director of the Assembly Minority Ways and Means staff, I believe there is no reason why a non-partisan budget office couldn’t work well in New York, especially if it is part and parcel of the broader changes I’ve just outlined.

In conclusion, the New York State budget process is ripe for reform, as your Task Force is suggesting. Over-ripe, in fact. But in dealing with this issue, legislators should avoid government’s all-too-common tendency to exalt process over results.

Unfortunately, procedural reforms alone will provide no assurance against state budgets that tax, borrow and spend excessively. That will take more fundamental, structural reforms, such as constitutional caps on spending and borrowing growth.

In the meantime, however, there is every reason to believe that a more timely and transparent budget adoption process will lead to improved accountability on the part of the Legislature, as well as the Governor. And that would represent real progress for which all new Yorkers could be thankful.