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SUMMARY OF THE GOVERNOR'S PROPOSED 2004-2005 BUDGET

Prepared by the staff of The Business Council
January 23, 2004

Overview

Governor Pataki proposes 2004-05 budget.
Plan would help manufacturers, raise some taxes, while restraining Medicaid, other spending.

Governor Pataki proposed a 2004-05 Executive Budget that would phase in a corporate tax reduction for manufacturers whose operations are concentrated in New York, while raising the minimum tax for some corporations and eliminating some Medicaid services to reduce costs.

Legislation accompanying the Executive Budget would base New York's corporate tax for manufacturers entirely on the proportion of a company's sales in the state. Replacing current law which bases the tax partly on employment and capital investment in New York, the change would encourage manufacturing employment in the state. The change, strongly supported by The Business Council, would be phased in over five years.

An increase in the state's minimum tax on corporations would take effect immediately, generating $40 million in the coming fiscal year. Businesses that generate no profit would pay on a sliding scale, up to $10,000 for a firm with payroll of $25 million or more.

Other tax increases include $183 million in higher assessments on hospitals, which could be reflected in employers' health-insurance costs.

The budget would create or increase numerous fees, including charges on banks, retail food stores, establishments with air-emission permits, and transporters with divisible-load permits.

The $99.8 billion Executive Budget would increase spending from taxes and other non-federal revenue by 2.2 percent. Adjusted for accounting changes over the past year, the spending increase is 5.5 percent. The Governor's Budget Division estimates inflation for calendar 2004 at 1.8 percent.

The Governor proposed restrictions on state-funded purchases of prescription drugs, including a "preferred" list of approved pharmaceuticals. Other cost-cutting changes to Medicaid would eliminate dental and some other treatments for adults. The state and local governments would each save hundreds of millions of dollars under the proposals.

The state government would take over localities' share of nursing-home and other long-term care costs under Medicaid. The Executive Budget would make that change contingent on measures to reduce costs, including an increase in the tax on nursing homes and steps to encourage family financial support for long-term care.

Governor Pataki proposed several steps to restrain school property-tax increases. Districts would be required to report three-year comparisons of spending and inflation. The Governor renewed his call for a statutory cap on school spending increases.

The budget would provide $10 million to extend Power for Jobs contracts through March 31, 2005, for businesses whose benefits would expire in the coming fiscal year.

The Governor proposed several measures to relieve costly mandates on localities, including repealing the Wicks Law and reforming binding-arbitration requirements on municipalities.

His press release and Executive Budget documents are available at www.budget.ny.gov

Following are the specific budget summaries by issue area:

Taxation

Alcoholic Beverage Taxes

Bank Tax

Cigarette and Tobacco Taxes

Corporation and Utility Taxes

Corporation Franchise Tax

Insurance Tax

Motor Fuel Tax

Personal Income Tax

Petroleum Business Tax

Sales and Use Tax

Lottery

Education

Higher Education

Economic Development

Single Sales Factor Allocation for Manufacturers: The budget proposes to require manufacturers subject to the Article 9-A corporate franchise tax to allocate their New York taxable income based on their percentage of sales within the state. The "single sales factor" approach would be phased in over five years, with sales accounting for 60 percent of the allocation formula in 2005, rising by 10 percent each year, to 100 percent for 2009. The budget proposes to use the definition of manufacturers currently set forth in Section 210.12(b)(i)(A) and (C), which includes the production of tangible goods R&D activities, and agriculture. This is projected to reduce net tax collections by $40 million annually, once fully implemented.

Power for Jobs: The New York Power Authority is authorized to finance the cost of the current Power for Jobs program during Fiscal '05. In addition, NYPA is authorized to finance a new "electricity savings rebate" program that will, in effect, extend Power for Jobs savings for those phase four and five program participants whose PfJ contracts will expire prior to March 31, 2005. Eligibility criteria for these "rebates"will be the same as those under the PfJ program, and only current PfJ recipients are eligible to apply. Costs for FY '05 are projected at $100 million for Power for Jobs contracts, and another $10 million for the rebate program.

Empire Zones: The Executive Budget proposes significant changes the Empire Zone Program, including:

Regional Economic Growth Program: The budget proposes a new $250 million program to fund economic development projects statewide, with a focus on projects that would produce significant regional development benefits. The program would be supported by UDC bonds.

JOBS NOW/EDF: The JOBS NOW and the Empire Development Fund, the state's two general development funds, will be fully funded at $32 million each. This funding was not approved as part of the FY '04 budget.

Biotech Tax Benefit Transfer Program: The budget proposes that "qualified biotechnology companies" be allowed to sell their unusable net operating loss carry forwards to other business income taxpayers (Articles 9, 9-A, 32 and 33). Qualified firms must have its principle operations in state; and have less than 225 employees, with at least 75 percent of them in-state. The program is authorized for up to 10 years, with a $10 million per year cap on allowable transfers.

Small Business

Environment

Fees

The Executive Budget contains several, relatively minor fee proposals

Air Permits: For non-Title V facilities

For Title V air emission fees, the current $45 per ton cap remains, but a new minimum fee of $1,250 is imposed on all Title V permits holders.

These changes are expected to generate $1.8 million in additional revenues.

Stormwater Management: Stormwater permits for construction activities would increase from a flat $50 per permit, to $50 per acre of land disturbed by the construction project, plus $300 for each "future impervious acre" that will result from the construction project. Annual revenue increase: $7 million

PBS Registration fees: Provisions of law requiring the deposit of petroleum bulk storage facility registration fees into the state Oil Spill Account would be made permanent. While the fee language itself is permanent, the statutory language directing these revenues to the Oil Spill Fund is set to expire on April 1, 2004. The fee remains at between $100 to $500 per five year registration cycle, depending on the capacity of the storage facility.

Tires: Last year's $2.50 fee on the sale of new motor vehicle tires is being extended to apply to motorcycles and ATVs as well. Net increases of $300,000.

Spending

State Operations: The operational budget for the Department of Environmental Conservation is proposed at $420 million, an increase of nearly $14 million from the current year. Most of the increase is due to new spending in the environmental remediation program. Net DEC staff positions will increase slightly, to 3,345, with an additional 70 staff positions in DEC and other state agencies related to brownfield program implementation.

Superfund/Brownfields: $135 million is appropriated to finance state superfund and brownfield programs and related agency expenditures.

Environmental Protection Fund: $125 million is appropriated from the Environmental Protection Fund. The EPF receives revenues from the state real property transfer tax, and is used for a wide range of projects including state land purchases, local solid waste management projects, historic preservation projects, and others. The budget is proposing to broaden the category of eligible uses to include Hudson River natural resource damage assessments, "environmental justice" projects, and others.

Waste Tire Fund: $18 million is appropriated for the abatement of illegal waste tire piles, and the development of markets for waste tires.

Energy

Power for Jobs Rebate Program: The Budget will provide $10 million for a rebate program to extend contracts through March 31, 2005 for businesses whose benefits will expire in State fiscal year 2004-05. Funding provided through the New York Power Authority (NYPA).

Increased Nuclear Power Fees: Increase fees paid by operators of nuclear power reactors to fund enhanced State and local emergency preparedness. This bill increases the fee paid by nuclear electric generating facility operators to support local and State radiological emergency preparedness activities. This bill increases the fee paid by nuclear electric generating facility operators from $550,000 to $950,0000.

Transportation

General Funding Levels: $1.65 billion of new highway construction projects. Represents the same level of Department of Transportation (DOT) construction contracts as in 2003-04, although it does represent a technical reduction of $100 million in appropriation authority due to the expiration of a one-time, unfunded legislative addition made in 2003-04.

Transit systems will receive $1.7 billion of operating aid in 2004-05. Preserves the appropriation levels of State aid provided in 2003-04. More than $1.5 billion of that amount would be appropriated to the MTA, exceeding last year's level by $46 million.

CHIPs and Marchiselli local transportation programs. Authorizes the 2004-05 CHIPs and Marchiselli local capital highway assistance programs. The authorization continues capital funding for $23.9 million of CHIPs aid that was shifted from operating aid to capital aid in 2002-03.

Divisible Load Permits: The budget includes a proposal to add more divisible load permits. This has been a top priority for The Business Council's Transportation Committee and is a key issue for the trucking, shipping, dairy/farming, forest product, petroleum and construction industries. The shipping, trucking and construction industries have created greater demand for overweight truck permits than the current statutory limit of 17,000 permits. This bill increases the annual divisible load permit authorization to 21,000 effective immediately, with graduated increases up to 25,000 beginning January 1, 2006 through January 1, 2009. Also, the bill amends subdivision 15 of section 385 of the Vehicle and Traffic Law to add a new permit fee for seven axle vehicles; increases the number of annual divisible load permits authorized by the Department of Transportation; requires new safety equipment and axle configurations; and modifies restrictions on crossing weight-posted bridges. Enactment of this legislation equates to $2.25 million of revenues associated with increased permit issuances and fine levels.

Delay implementation of the State Hazmat Fingerprinting Program to address Federal requirements: This bill changes the effective date for requiring criminal history background checks on commercial drivers that transport hazardous materials (the State Hazmat Fingerprinting Program) to ensure that the State Program is in compliance with the Federal Transportation Security Administration's impending regulations on hazmat background checks (the Federal Hazmat Program). The bill also clarifies that any conflicting or duplicative provisions of the State Program will be superseded by the Federal regulations. This bill revises the implementation date of the State Hazmat Fingerprinting Program to avoid conflict with, or duplication of, Federal regulations that are expected by November 2004.

Allow localities to assess a fee up to $5 on vehicle insurance policies: This bill allows localities to impose a fee of up to $5 on vehicle insurance policies to fund local public safety needs.Currently, New York State imposes a $5 fee on each insured vehicle to fund the State Police Motor Vehicle Law Enforcement Account and the Motor Vehicle Theft and Insurance Fraud Prevention Fund.

Authorize the Division of Criminal Justice Services (DCJS) to implement automated photo-monitoring at work zones: This bill authorizes the DCJS to establish a program for photo-monitoring enforcement of speeding in work zones. This bill adds a new section to the Vehicle and Traffic Law (VTL) authorizing the DCJS to implement a program utilizing remote control photo-monitoring equipment for the purpose of imposing a $100 fine on the registered owners of vehicles which speed in work zones. Adjudication of documented infractions will be conducted in a manner similar to parking violations. Also, amends the VTL to permit the Department of Motor Vehicles to deny renewal and/or suspend the registration of owners who repeatedly violate the speed limit in a work zone or refuse to pay the fine.

Alternative Fuels Vehicle Tax Credit: Extend the Alternative Fuels Vehicle Program for one year. This bill: (a) extends, for one year, existing income and corporation tax credits and sales tax exemptions for alternative fuel vehicles; (b) clarifies that "qualified hybrid vehicles" do not qualify for the "clean-fuel vehicle" or "clean-fuel vehicle refueling property" credits; and simplifies the sales tax exemption provided for "qualified hybrid vehicles" by fixing the "incremental cost" for such vehicles at $3,000. Provides $10 million in tax benefits.

Construction

Education Aid and Construction: The existing open-ended building aid program would be replaced with a priority-based system, applied to all projects approved by the State Education Department after February 1, 2004; The building aid formula would be modified to include a simplified reimbursement method that provides realistic allowances for construction costs and student-based space needs; and Centralized technical expertise and assistance would be available to school districts from the Dormitory Authority of the State of New York (DASNY), to provide advisory services on efficient construction practices and designs.

Wicks Law exemptions: Repeal of multiple bidding requirements for the State, municipalities, school districts and public authorities (Wicks Law). Exemption from Wicks law's mandated use of multiple contractors in new school construction under sections 2 through 72 and sections 91 through 93 of the Public Protection and General Government Article VII bill. CUNY Wick's exemption is in Education and Labor Article VII bill. This will give local governments the option of bidding separate contracts or awarding a single contract to a general contractor.

Increase various worker protection and labor standards fees: This bill increases various worker protection and labor standards fees to generate $1.6 million in additional revenue needed to maintain Department of Labor worker protection and labor standards programs at current levels. (asbestos, boilers, certain inspections, day of rest requirements, etc.).

Telecommunications

Labor & Human Resources

The state Labor Department has almost 85% of its workforce financed by federal grants. There are three unemployment Insurance Telephone Claim Centers and eight employment service regional offices that oversee employment services staff at 103 locations throughout the State. Overall employment levels will remain at 4,138 full time equivalent positions in 2004-05. The all funds appropriation will be reduced from $6,150,502,000 to $5,774,487,000, a reduction of $376,015,000.

The Division of Human Rights, charged with investigating and resolving complaints of illegal discrimination, promoting human rights awareness through education and acting as a resource in the prevention and elimination of discrimination, will see a decrease of $355,000 in their all funds appropriations in 2004-05. It will take them from $18,224,000 to $17,869,000. In 2004-05, the Office of Temporary and Disability Assistance will assume partial responsibility for basic administrative functions of the Division such as personnel and finance, saving an estimated $280,000. Full time equivalent positions will be reduced from 205 to 203.

The Office for Advocate for Persons with Disabilities will reduce its full time equivalent positions from16 to 15. APD will utilize $2.6 million in new federal funds to create a revolving loan fund to assist persons with disabilities to purchase equipment that will enable them to telework from home. This will increase the all funds appropriation from $1,593,000 to $4,275,000. The Office for Advocate promotes the inclusion of persons with disabilities in all aspects of community life.

Health

Medicaid

The Executive Budget recommendations related to Medicaid will save the State $801 million in 2004-05. Other cost containment and reform measures will, upon full implementation, reduce the annual cost of the Elderly Pharmaceutical Insurance Coverage (EPIC) and Early Intervention (EI) programs by $100 million and $75 million, respectively. These Medicaid and other measures will also produce $234 million in savings for New York City and the counties next year.

State to takeover local government's long-term care costs: The budget advances initiatives to reform and restructure the long-term care system. These reforms will permit the State to assume the full cost of long-term care over a ten-year period, providing fiscal relief to New York City and county governments. When combined with proposed Medicaid cost containment initiatives, the cumulative five-year savings to local governments will be approximately $3.2 billion. Upon full implementation, the annual savings to local governments from the State takeover will exceed $1.8 billion. The proposed State takeover is contingent upon the enactment of a series of measures recommended in the Budget to achieve long-term care savings, including closing eligibility loopholes, increasing revenue from non-State sources and implementing other targeted initiatives.

Closes existing eligibility loopholes: Legislation is proposed to close existing Medicaid loopholes that allow individuals to refuse to contribute any of their income and assets towards the cost of health care for a spouse. Other rules regarding eligibility will also be tightened.

More long-term care insurance options: To reduce the reliance on Medicaid financing, the budget expands long-term care insurance options. New York's Partnership Program, a public/private mechanism to stimulate the investment of private insurance dollars in the long-term care system, will be modified to offer more flexible benefit packages. In addition, a State-funded reinsurance mechanism is recommended to make long-term care coverage more affordable. Finally, a public education campaign will be undertaken to inform "baby boomers" about both private and public long term care insurance options.

Promotes access to appropriate and cost-efficient services: The Budget proposes legislation to authorize the Commissioner of Health to conduct demonstration projects that promote the delivery of cost-effective and high quality long-term care services through the use of technology and innovative approaches for service delivery.

Updates nursing home rates: Currently, the nursing home reimbursement rates use 1993 data for labor costs, which account for approximately 80 percent of a nursing home's costs. The budget proposes to update these costs to reflect 2001 data, which will provide a financial benefit to more than 280 facilities. At the same time, a "hold harmless" provision will ensure that no facility loses money. This update will be contingent upon savings achieved through the elimination of two nursing home rate adjustments that are no longer appropriate.

Recommends financing changes: The Budget re-establishes a 0.7 percent non-reimbursable assessment on hospital and home care revenues and also increases the assessment on nursing home receipts from 5 percent to 6 percent.

Preferred drug program: The 2004-05 Executive Budget would establish a Preferred Drug Program for prescription drugs in Medicaid. Certain drugs, such as anti-retrovirals, atypical anti-psychotics, anti-depressants and anti-rejection drugs, would be "carved-out" by the Preferred Drug Program. The Department of Health's Pharmacy and Therapeutics Committee, which includes clinicians, practitioners and pharmacists, will recommend the list of preferred drugs. A similar program would be implemented for EPIC in 2006-07.

New medicare discount drug card: In the wake of new Federal funding for prescription drugs, the State's EPIC recipients will be provided with incentives to access the new Medicare Discount Drug Card. Under this initiative, EPIC fees would be waived for those low-income individuals who qualify for the annual $600 Discount Card subsidy. This would both reduce costs for seniors and produce savings for EPIC.

The Budget also recommends modest increases in co-payments for Medicaid participants. Co-payments -- unchanged since 1995 -- will be increased by 50 cents for generic drugs and $1 for brand name drugs. Individuals in managed care would be required to make the same increased co-payments.

Family Health Plus: Building on the Senate Medicaid Task Force's recommendations, the Family Health Plus (FHP) program will be restructured to: require co-payments on pharmaceuticals, doctor visits and hospital stays; eliminate vision and dental services; and close eligibility loopholes to prevent the inappropriate use of the program. As a result, FHP costs will be controlled and the program will more closely resemble the health insurance benefit that is provided by private sector health plans.

Child Health Plus: Consistent with the Senate Medicaid Task Force's recommendation, children ages 6 to 19 in families with incomes between 100 and 133 percent of the Federal Poverty Level (FPL) will be transferred from Medicaid to Child Health Plus (CHP). Not only is CHP less costly to the State, it is generally the preferred choice of coverage for families.

Other Medicaid changes: A utilization and case management system will be established, in conjunction with the counties, for high-cost Medicaid recipients who access substance abuse, mental health and developmental disability services.

Restructuring the early intervention program: Since its inception in 1992, the Early Intervention Program (EI) has provided services, such as speech and physical therapy, to hundreds of thousands of infants and children with developmental delays and disabilities, at no cost to their families regardless of their incomes.

The exploding growth in State EI costs -- projected to reach $277 million in 2004-05 -- threatens the ability of the State and counties to maintain services to the children who need them most.

New York State and local governments spend an average of $10,000 per child participating in EI -- compared to an average of less than $5,000 per child spent in other states.

To address the escalating cost of this program, the 2004-05 Executive Budget recommends a series of reform measures to ensure that the EI program is affordable, effective and accountable. Collectively, these measures will save the State and counties $75 million each when fully implemented:

Measures to increase the health insurance reimbursement of medical services provided through EI are proposed. Currently, private health insurance plans reimburse approximately one percent of EI costs.

Consumer

Workers' Compensation

Financial Services

Insurance