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For Release — Wednesday, December 10, 2003

TOP FISCAL-POLICY EXPERTS REVIEW THE NEEDS AND OPPORTUNITIES FOR SPENDING REFORMS IN NEW YORK'S STATE AND LOCAL GOVERNMENTS

ALBANY—Not raising state taxes in 2004 is a good and necessary first step in coping with the state's budget woes, but it's not enough, a top analyst of state finances told leaders in government and public policy at a symposium on state spending.

"New York's state and local governments spend more than they can afford, and everybody in Albany knows it," Robert Ward, director of research for The Public Policy Institute, said at a Dec. 11 symposium at the state Capitol. The Institute and the Manhattan Institute for Policy Research jointly organized the symposium, at which Ward and other public-policy experts discussed New York's spending crisis and specific ideas for easing it.

Ward praised Governor Pataki, Senate Majority Leader Joseph Bruno, and Assembly Speaker Sheldon Silver for their strong recent pledges to avoid new tax increases.

"But we must do more," Ward said. "We must get at the core problem of spending. If we don't, local taxes could go even higher, one of the nation's heaviest debt burdens could get worse, and we could see more fiscal gimmicks that push our problem onto future generations."

Ward cited an Institute analysis of New York's "tax gap" — the difference between this state's tax burden per capita and the national average—which showed that the gap widened from just below 40 percent in the late 1950s to about 65 percent in the mid-1980s. The gap shrank considerably in the late 1990s after the state enacted tax cuts, and job growth in the state rose sharply.

Also at the December 11 symposium:

Edmund J. McMahon Jr. of the Manhattan Institute and Geoffrey Segal of the Reason Foundation reviewed opportunities in competitive outsourcing of services now typically provided by government entities in New York State.

Segal noted that competitive outsourcing has grown tremendously in the last 10 years. The federal government, for example, expects to spend about $300 billion on contracting.

New York State must evaluate its government functions and separate those that only government can provide from those that private-sector sources could deliver.

McMahon, a senior fellow at the Manhattan Institute, reviewed a generally successful effort by New York State to outsource the processing of state tax returns.

Government entities should apply a "yellow-pages" test to the question of deciding what can be outsourced: If a flip through the phone book shows at least three firms that offer a service, a government entity should consider putting the service out to bid and getting out of that business itself, he said.

He recommended creation of an Empire Competition Council that would launch an initiative across state government to expand outsourcing. This entity should be based in, and staffed by, the state Division of the Budget. Once outsourcing opportunities are identified, state managers should be given incentives, including the possibility of bonuses, to encourage them to embrace the new approach to delivering government services.

McMahon also recommended creation of a permanent "sunset review commission" that would constantly evaluate government programs to look for appropriate opportunities to consolidate or eliminate programs.

Cynthia Green, a member of the Governmental Accounting Standards Board, argued that New York "has no clue how to cut spending" because it has no meaningful metrics for measuring the successes or failures of its spending and programs.

New York must emulate other states by developing systems to make regular, systematic, and statistical evaluations of the efficiency and effectiveness of its programs. Such an initiative will give the state information it needs to make spending decisions — information that is especially critical in challenging fiscal times, she added.

A growing number of government entities are measuring "service efforts and accomplishments" as the foundation of a commitment to managing by results, she said. Measures of expenditures of dollars, manpower, capital investments, and worker productivity are critical, she said. A typical measure might calculate work done — drivers' licenses processed, environmental complaints handled, students enrolled, and so on — per public employee.

With this data, a government entity can compare its results to other places that compile similar data, she noted.

Thirty-three states already have broad management for results program. Leaders include unlikely smaller states, such as Louisiana, as well as Texas, Florida, Washington, and Wisconsin. Even Washington D.C. now uses such a system to measure its productivity, she noted.

Charles Brecher of the Citizens' Budget Commission (CBC) reviewed the state's high state and local tax burden, focusing on how state government policies drive up local taxes.

New York's combined state and local tax burden is high because local taxes in New York are extraordinarily high. Considering the tax burden per $1,000 of personal income, he showed that New York's combined tax burden is the highest in the nation, and 26 percent above the average of 12 other states, the 10 largest plus Connecticut and New Jersey.

New York's local taxes are 71 percent above the average in those states, he noted. He added: "We don't get 71 percent more in value of services."

This trend holds statewide, and is not a function of any skewing by New York City's tax burden, he said.

Nationally, the U.S. average of locally raised revenues is $69 per $1,000 of personal income. The New York State average is $101; the New York City average is $107; the average for New York State outside New York City is $97.

His analysis also showed that:

Marcus Winters of the Manhattan Institute showed that further increases in school aid will produce little improvement in performance. In a period in which the nation doubled spending on schools, high-school completion rates have actually fallen and performance metrics have remained flat, he said.

He cited the Bridgehampton School District on Long Island, which spends $45,000 per student. This makes possible a one to three teacher-student ratio and class sizes of five to 12 students. But students in this district have scored below the state average on standardized tests. On some tests, they have scored below New York City students, he added.

"In any business organization or government activity, this would be considered a productivity crisis," he said.

The problem is that schools have no incentive to change. Students, and the government dollars attached to them, are both generally stuck in public schools regardless of how well or badly they perform.

What is needed is competition to give schools meaningful incentives to improve, he said. He cited the experience in Florida, where schools receive annual grades, from A to F, based mostly on scores on standardized tests. Schools that receive two Fs in any four-year period must offer their students vouchers good at any public or private school.

The experience shows that schools consistently respond to this healthy competitive pressure, he said.

Schools that received two Fs and were forced to give out vouchers responded by increasing their students' scores more than five percentile points above the improvement of all Florida schools. Schools that received one F and feared the second raised their scores more than 3 percentile points beyond the average statewide improvement.

The value of this competition was further demonstrated by the performance of schools that received one F but never got the second. After the competitive pressure was eased, their students' scores actually decreased by two percentile points, Winters said.

Kathryn English of Associated Builders and Contractors argued that New York State's prevailing-wage laws are outdated and have required school districts, municipalities, and the state itself to waste billions of dollars on construction projects. Prevailing-wage laws, strongly supported by labor unions, require public entities to pay wages identified as the prevailing wages in a community or region.

Moreover, the law is based not on actually communities where projects will be done, but on larger regions. This has the effect of making prevailing wages as high as union wages. For example, in central New York, the "prevailing wage" for electricians is $51,480 while the actual average for all electricians is $39,370, according to data from the state Department of Labor.

English argued that this law has the effect of making wages mandated by law much higher than wages that actually do prevail in the communities where projects are done. She cited many examples of school districts documenting construction project costs that were inflated significantly by the prevailing-wage requirement.

Michael Conners, Albany County comptroller, reviewed his proposal to cut Medicaid costs by giving recipients the same health insurance benefits that government workers currently receive. He noted that New York's Medicaid benefits are actually richer than those offered either to government workers or to typical private-sector employees.

"Medicaid in New York is broken," he said, warning that failure to fix it creates a real risk of counties going broke. He also emphasized the importance of reducing the burden, as opposed to debating different ways to shift the burden from one government entity to another.

John Rodat of SignalHealth LLC noted that the only common measurement of Medicaid performance has been spending on services — and "that's silly." More appropriate metrics would focus on the health and quality of life of recipients of health care under the program.

He noted that the most costly county in New York spent about three and a half times the least costly county on an average Medicaid client. Even more narrow geographic breakdowns show even starker differences, he noted. For example, in some communities, Medicaid recipients are 20 to 40 times likelier to be hospitalized for the same ailment than are recipients in other communities.

Yet the research shows these high variations in spending produce little variations in medical outcomes or quality of life, he added.

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