A “Day One” View of the Budget Proposal

Thanks to a sick child that resulted in an early morning return from work, I’ve had a chance to spend a couple of hours going over the budget documents presented by Governor Spitzer -- in one case before computer problems made the full five-year plan inaccessible. There is much to like, including a simplification of the school funding formula that if enacted might make it more difficult for the rest of the state to slash New York City’s share of state education funding in the next recession, and a slowdown in Medicaid growth focused in several areas where New York’s spending has been most egregious. There is more emphasis on the health needs of children, and the need for a turnaround in declining upstate cities.

What is striking about the budget proposal, however, is not how much it proposes to change but how much remains the same. It appears that Governor Pataki’s policies, including those I didn’t think much of, are permanent after all. And given that this is the proposal against which concessions will be made, it clearly establishes Governor Spitzer as a fiscal incrementalist. Which I suppose might have been expected, given that during the campaign he more or less said he would keep the existing pattern as a baseline and shift priorities by managing change over time (see Ben's post the Delta of Spitzer in one of his former blogs).

The only question is whether this budget will be his one and only increment before the same old interests reassert themselves. Those interests certainly cannot say that Governor Spitzer is forcing upon them the kind of gut-wrenching losses their power has foisted upon less fortunate interests in the past, when their funding increased even as resources decreased.

Governor Spitzer will not eliminate Pataki’s Health Care Reform Act and STAR program. The former will be extended (though modified), and the latter expanded. With STAR growing, there will be no change in New York City’s share of state education funding, regardless of any elimination of features in the existing school aid formula that discriminate against the city. It will remain a 37% share for New York City, according to the state budget briefing book, about its share of public school students and the same as in Pataki’s last budget. That said, if these figures are correct this does represent a change: New York City’s share of state education funding had always been below its share of public school students, and equaled just 35.4% of total state public school funding (for 36.6% of the students) in the FY 2005 data that was just released.

Still, with a higher share of New York City’s children in private and parochial schools, in part due to the historically bad public schools here, New York City residents will end up paying more in taxes for education funding making a round trip via Albany than for funds raised locally. Despite its large share of disadvantaged children, the city will continue to subsidize the rest of the state in education. When it comes to New York City’s needs, I’ve described the alternative attitudes in the rest of the state as “don’t deserve it, don’t need it, don’t have it.” With the city’s economy up, we are apparently in the “don’t need it” phase. What should have been said, and what wasn’t said, is that after doing much to hurt the New York City schools for a long time, the rest of the state will be contributing nothing to help them. Less than nothing -- city residents will pay extra in taxes for their own schools via Albany, with the difference redistributed elsewhere.

Meanwhile, Governor Spitzer seems determined to crack down on high spending on Medicaid -- which is concentrated in New York City. The keys here are a reduction in subsidies for teaching hospitals (often, as it turns out, for doctors who are not actually where), an end to the automatic increase in payment rates for certain medical services (which might allow the other states, and other competing funding priorities in New York State, to gradually catch up), and an elimination of stand alone housekeeping services for personal care, a step in reigning in the unlimited provision of services that are nice to have for seniors who may not need them. I applaud these steps. Total Medicaid spending is proposed to be increased by just 1.7%, less than inflation, this year.

But excessive levels of unnecessary Medicaid spending in New York City, the data implies, have in the past been traded for excessive levels of education spending in the rest of the state. Here, unfortunately, the Governor failed to say the unsayable. True, he did say that statewide spending on education is very high -- the very argument that Governor Pataki used to say that New York City’s spending should be kept down. That point sort of contradicts the need for “historic” increases in state funding for education over four years, which the Governor has proposed. And he pointed out that results in New York and other cities are poor. But what he didn’t say, and this is crucial, is that spending in New York City, adjusted for the cost of living, has historically been low, while spending everywhere else in the state has been off the charts. So, like Pataki (once he had finished slashing NYC school aid in the mid-1990s), Governor Spitzer proposes to increase education funding everywhere, keeping the shares what they were.

More of the city’s funding will be called “school aid,” and more of the funding for high-spending districts will be called “STAR,” but there is no mechanism in place to make the distinction real, at least none that I can see. While there is tough talk about “accountability” for educational results in New York City, there is no “accountability” for excess spending elsewhere. Thus, school districts in the rest of the state are not required to use their increased state aid to reduce property taxes, rather than to keep the school spending and teacher pay gap as it is, no matter how high New York City’s public school spending and teacher pay rise. Remember, that is what happened with the existing STAR system.

Not only is spending restraint not required of school districts elsewhere in the state, the Governor didn’t even use the bully pulpit to influence changes in that direction. What the Governor did propose is a commission to look into local government efficiencies. Any pressure on the rest of the state to reduce costs, pressure New York City has been under for more than 30 years, will wait for another day when a report is released. While it may not be fair to say there is no action on this front, therefore, it is fair to say such action will be slow in coming.

What about the “historic” increase in school aid for New York City over four years? Teh state budget assumes no recession during that time, and thus from my point of view, it represents a promise that it may not be possible to keep. What the city is getting is $697 million more in state funds this year, plus whatever STAR money comes our way, if the legislature doesn’t force the Governor to cut New York City’s share (perhaps in exchange for less Medicaid restraint). Then again, spending in New York City -- and elsewhere in the state -- is way up from the 1990s as it is.

What will happen in the next recession? What we have to answer that is history, and history says that when money is scarce, the rest of the state gets together and sacrifices New York City’s children. From FY1990 (the only past year where the city’s share of state school aid approximated its share of public school students) to FY1991, the city’s share of state school aid was cut from 36.2% to 33.5%. Later, Governor Pataki cut the city’s share from 33.2% in FY 1995 to 29.6% in FY 1996, in his first budget. And in the wake of 9/11, the city’s share of state education funding was cut from 35.8% in FY2002 to 34.2% in FY 2003, the first post-9/11 budget. There was also a big increase in income and sales taxes at that time.

As I said at the top, a simplified education funding plan might make it more difficult for the rest of the state to do this again, but it won’t be impossible. And if not that, if the continued pressure on the city’s parochial school system and improving public schools here retain more families in the city and more children in the public schools, will more state funding follow with the formula? Or will the formula be adjusted to keep the city's share from rising? You can bet that if the city’s share of the state’s public school children falls, funding will follow the formula down.

The state’s revenue forecast presents a booming, growing New York City and a stagnating, declining rest of the state -- including the Downstate Suburbs. But there is something missing from this picture -- the huge share of New York City residents who are out of the labor force and not working, and perhaps not employable. At the national labor force participation rate, New York City would have 434,000 more people working or looking for work. This high level of separation from the job market, not found elsewhere in the state, is in a city where the construction industry is calling immigration a key to the city’s future because if faces a shortage of locals qualified to do skilled and semi-skilled manual labor. This may be a consequence of a higher level of disability in the city. It may be a consequence of decades during which only half of NYC’s public school students completed high school in four years -- and most of those went to college.

Also missing from any document I saw is the word “pension.” This could be good news: the Governor didn’t propose to use all the additional school aid for New York City to allow teachers to retire at age 55, and the Mayor and teacher’s union had agreed (yes I’m still ticked off years later at thought that could occur). And yet while Medicaid spending growth has in fact slowed in recent years, education spending in the rest of the state, and pension contributions, have soared, contributing far more to recent property tax increases the Governor is focused on. Yet these other factors are not highlighted the way Medicaid spending, which is concentrated in New York City, is.

Also not addressed: the shift of the state’s tax burden to new businesses. Even if the STAR program enrichment is used for actual tax reduction, rather than to offset higher spending with no change in taxes, it won’t do anything for commercial property or apartment owners. That lack of benefit will continue to be passed on to business and residential tenants, including new businesses -- who typically don't get tax breaks. Nor is any fundamental restructuring of transportation finance included in the budget. The state parks department, for which the past 20 years has been much like the New York City’s parks department, absorbs another budget cut.

In summary, if this budget doesn’t get watered down and if it is just the first of a series of incremental steps, it could be described as good. But if this is it, then it isn’t a big deal after all, regardless of whatever you might hear from the opponents. Former Governor Pataki might have proposed the same thing in one of his better moments (if not when he had to decide whose ox to gore). Bigger changes may be coming in future years, gradually over time, but they didn’t arrive today. And while gradual adjustment may make economic sense, it may not be politically wise to expect it, as it just provides more time for powerful interests to reassert themselves. (Although if more state legislators followed Lt. Governor Patterson’s lead and “confessed and atoned,” which I read he did just before posting this, it might perhaps be more feasible).