E.J. McMahon is a senior fellow at the Manhattan Institute for Policy Research and its Albany-based Empire Center
There was an air of anticlimax to the state budget deal announced this week by Gov. Andrew M. Cuomo and state legislative leaders. That's mainly because two big sticking points were essentially settled a year ago, when Cuomo's first budget included school aid and Medicaid appropriations for both 2011-12 and 2012-13.
A third potential hang-up was addressed in December, when the governor (breaking a campaign pledge) approved the temporary extension of a so-called millionaires' tax. The tax hike is expected to yield a net $1.5 billion, more than covering next year's planned 4 percent increases in school aid and Medicaid spending. The $132.6 billion 2012-13 budget features no new taxes -- other than old new taxes.
With little extra money to spread around, the State Legislature made few additions to the executive budget. As a result, the increase in the bellwether state operating funds category apparently will come to just under 2 percent. Adjusting for inflation, Cuomo's first two budgets shape up as the most frugal since those enacted in Gov. George Pataki's first two years as governor, 1995 and 1996.
While Pataki needed to hold down spending to pay for his tax cuts, Cuomo faced a different kind of challenge. During the Great Recession, Albany received a massive injection of temporary federal stimulus aid, which helped the state keep spending at unsustainable levels for two full years after its tax receipts cratered in 2008-09. The stimulus peaked at more than $6 billion in 2010-11 but is now mostly gone.
Cuomo dealt with his immediate problem last year by cutting spending, most notably school aid. Just as important, he dismantled the budget's automatic long-term spending escalators -- statutory formulas that drove automatic annual spending increases. As a result, while the pre-Cuomo "current law" trend would have resulted in a 2012-13 state operating funds budget of nearly $99 billion, the actual number will be closer to $88 billion. School aid alone is $5 billion lower than would have been required by the 2010 aid formula -- which was unaffordable in any case.
The new budget relies on at least one noteworthy gimmick: Continuing a practice first authorized under former Gov. David A. Paterson, it defers $782 million in pension costs over the next 10 years. Cuomo plans to put off a total of $3 billion in pension expenses in this manner between now and fiscal 2015-16 -- in effect, pushing some current operating expenses into the future by handing the pension fund a series of 10-year IOUs.
For all of the governor's success in restraining spending, the budget rests on some questionable revenue assumptions -- for example, that the conversion of the nonprofit HIP and GHI health insurance companies into for-profit insurers will generate $250 million for the state next year and $900 million in three following years. But, as the state comptroller's office noted, "The conversion process has, in the past, proven lengthy, and funds have not been realized as expected in prior financial plans."
The budget assumes that receipts from traditional lottery games will generate a healthy $100 million (5 percent) more in 2012-13, although the comptroller points out these receipts have fallen short of projections in nine of the last 10 years. Cuomo also projects nearly $100 million in gaming revenues from American Indian casinos, even though they have failed to fork over the $250 million expected in the last two years. And, as always, there's the risk that tax revenues will falter in uncertain economic times, especially with much of Wall Street retrenching.
Cuomo has effectively quelled Albany's spending addiction for now, but he'll need to administer more tough medicine to keep it from returning in the future.
E.J. McMahon is senior fellow at the Manhattan Institute's Empire Center for New York State Policy.