ISSUE BRIEFING PAPER
Remember the last time Albany spent more than we can afford?
Let's not repeat the disaster years
Those who cannot remember the past, it's said, are doomed to repeat it. This year, pro-spending lobbyists are determined to make New Yorkers and their elected leaders forget the disastrous results, in the not-so-distant past, when Albany spent far beyond taxpayers' means.
As detailed in this briefing paper, those irresponsible spending increases led to:
- Cuts to education aid in the middle of the school year;
- SUNY and CUNY tuition increases;
- Dramatic reductions in the state workforce;
- Downgrading of the state's credit rating;
- And huge tax increases that, in turn, drove thousands of jobs away.
This year, Governor Pataki has pledged to resist the demands by hospitals, the education establishment and organized labor for a huge increase in spending on top of last year's three-times-inflation increase. We simply can't afford it, the Governor says. He's right.
Too much spending now could easily jeopardize the progress we've made in strengthening New York's economy, and state government, in recent years. Careful handling of this year's budget would protect much-needed tax reductions, assure further improvement in our competitive standing, and pave the way for new economic growth and new jobs. A spending binge, on the other hand, could risk the elimination of tax cuts for homeowners and businesses, erode Wall Street's growing confidence in Albany, and threaten the stability of programs that educate our children, provide health care for New Yorkers, and meet other needs.
A quick look at the bad old days
New York State government's last encounter with disaster offers numerous lessons for today and the future. Two such lessons are, simply, how quickly the storm can strike - and how long it can last.
At this time 11 years ago, in 1988, then-Governor Cuomo and the Legislature were finalizing a new budget. More than a decade after the economic and fiscal crisis of the mid-1970s, rosy times had returned to Albany. The stock market was booming, and businesses in the Empire State were creating hundreds of thousands of new jobs. The enacted fiscal plan for 1988-89 projected continued, healthy economic growth that would, in turn, produce comfortable increases in revenues and relatively little need for new social services spending - making it seem easy to balance the budget.
But within just a few weeks, even before the end of the legislative session, the Governor's Budget Division announced that faster-than-expected growth in Medicaid and other factors were creating a looming budget gap, estimated at $900 million. To balance the financial plan, the Legislature agreed to cut state jobs through attrition, and to raid an Infrastructure Trust Fund that had been created the previous year to pay for new housing and transportation projects. Governor Cuomo made additional, administrative cuts in mental health programs, SUNY and the state Education Department.
It was too little, too late to solve the problem. By November, the projected gap for the ongoing fiscal year had risen to $1.9 billion. And in January, the Budget Division projected an even bigger imbalance - $2.6 billion - for the ensuing year.
The gap was created not by falling revenues, but by out-of-control spending increases. For the entire FY 1988-89, despite the mid-year cutbacks, actual expenditures rose 9.4 percent from the previous year. And 1989-90 brought another above-inflation increase, totaling 7.4 percent.
More spending = more taxes
To pay for all that spending, the budget enacted in 1989 brought the first of what were to become annual, billion-dollar tax increases - significant contributors to the loss of hundreds of thousands of jobs. That first year, the new taxes included an increase in the alternative minimum tax on manufacturers and other businesses. Both manufacturing employment and industrial capital investment across the state plummeted in the wake of the tax increase. Other new taxes and fees that year hit marriage licenses, professional licenses and cigarettes.
With spending still growing by leaps and bounds, even big tax increases could not balance the budget. In November 1989, the Budget Division announced across-the-board reductions in state agency spending to avert another deficit.
And in early 1990, the cycle began again. Governor Cuomo recommended a budget that would drive state-funded spending up by 8.2 percent, and overall spending by 9.3 percent.
The enacted budget for 1990-91 was a bit less than the Governor's proposal. But it still proved more costly than New Yorkers could afford. Suffering its worst job losses since the Great Depression, the state saw total employment decline by more than 300,000 during calendar year 1990. Tax revenue was still growing at a healthy pace - but not enough to pay for the huge budget increase enacted in the spring. By December, it was obvious that spending had to be cut. Aid to public education was reduced, in the middle of the school year, by $190 million. State workers' pay was "lagged" another five days, effectively forcing employees to loan Albany an extra week's salary with no interest. The Deficit Reduction Package also included SUNY and CUNY tuition increases of $300.
After all the "cutting," and much sturm und drang, actual spending for the 1990-91 fiscal year ended with an increase of 9 percent.
Reaping the whirlwind
Certainly, the targeted spending cuts that became necessary during the disaster years of the late 1980s and early 1990s caused some "pain," to use the word that became a favorite of liberal lobbying groups and newspaper stories. School districts had to scramble to deal with a significant loss of revenue (although they still had the benefit of overall spending that's among the nation's highest). College students were forced to pay higher tuition (although SUNY and CUNY both are still among the best bargains in the country).
If the 1999-2000 budget includes another huge spending increase, there is the strong possibility that the beneficiaries of state spending would suffer again.
The real damage during the disaster years, though, was not on the spending side of the budget - but in the tax increases that were imposed to pay for ever-higher spending. The mistakes made from 1989 through 1993, let's not forget, included:
- Repeated postponement (and threatened cancellation) of tax cuts that had been promised to working New Yorkers. Back then, it was the personal income tax cuts enacted in 1987 and scheduled to take full effect in 1990. Those reductions ultimately took place through Governor Pataki's 1995 tax-reduction program. Now, homeowners throughout the state have been promised major reductions in their school property taxes, through the STAR program. A spending binge this year might endanger that promise.
- Across-the-board increases in business taxes, and repeated postponement of the promise to scale back these increases. A "temporary" business tax surcharge was enacted in 1990, and scheduled for elimination in 1992. It was left in place year after year, and finally went away in 1997 thanks to the leadership of legislators including Senator Joseph L. Bruno and Assemblyman Joseph Morelle. Now, businesses have been promised real, permanent tax rate reduction this coming year and into the year 2002. Keeping that commitment is imperative if we are to become truly competitive for new jobs - as we must.
- New taxes on key industries such as energy, telecommunications, and manufacturing. Besides the alternative minimum tax mentioned above, the disaster years brought a major increase in the gross receipts tax on our energy and telecommunications bills. Now, those taxes are headed down. We can't afford to jeopardize that progress.
Going forward - or going back?
We need to cut taxes further. Everyone agrees on that, now. The four party conferences in the Legislature - Democrats and Republicans, Senate and Assembly - have all proposed major new tax cuts, as has Governor Pataki. Those reforms are needed to ease the still-high tax burden on working New Yorkers, and to give our resurgent economy the extra boost it still needs.
Some lobby groups for the hospital and education establishments claim that a hold-the-line spending level this year means catastrophe. They're even attacking Assembly Speaker Sheldon Silver for refusing to restore every last penny that was cut out of the rapid growth of hospital spending three years ago. The question is: What happens to all the money we spend now? Our K-12 school spending totals nearly $10,000 per student, 50 percent above the national average. Our Medicaid spending is the highest in the nation by far - and, on a per-capita basis, 58 percent above the second-highest state. Governor Pataki's suggestion of holding overall new spending to the inflation rate makes sense and is, in fact, more than generous.
Today, New York State's financial position is strong. On April 1, the state entered a new fiscal year with a surplus of some $1.8 billion from 1998-99. The situation is much like that of a decade or so ago, when revenue flooded into Albany's treasury such that state leaders dreamed up entire new programs to spend it. That turned out to be a big mistake.
Let's not make that mistake again.