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McMahon: New York State's teetering financial structure

Richard Ravitch, chairman and founder of Ravitch Rice

Richard Ravitch, chairman and founder of Ravitch Rice & Co. LLC and former Lieutenant Governor of New York, speaks during an interview in New York. Budget cuts in Washington may put added pressure on state governments already strained by employee pensions and rising health care costs, according to a report by a group of former government officials led by former Federal Reserve Chairman Paul Volcker and Ravitch. (July 2, 2012) Photo Credit: Bloomberg

A task force co-chaired by former New York Lt. Gov. Richard Ravitch this week reached an "unambiguous" conclusion about the fiscal stresses on state governments: "The basic problem is not cyclical. It is structural."

In other words, this is not just a passing thing. Even before 2007, state and local budgets in New York and elsewhere had become dangerously overloaded with long-term promises whose true costs were concealed by opaque accounting. The financial crisis of 2008 merely supplied enough wind to blow the whole thing down.

Focusing on New York and five other major states, Ravitch's task force ticked off a list of challenges, including "the aging of the population, rising health care costs, unfunded promises, increasingly volatile and eroding revenues, and impending federal budget cuts."

That's pretty accurate, as far as it goes -- with one big exception when it comes to the Empire State. While revenues in New York certainly have become more volatile thanks to our heavy dependence on income taxes paid by the wealthy, they have not been "eroding." Quite the contrary.

As the economy peaked in fiscal years 2007 and 2008, state tax collections rose to 6 percent of New York's share of Gross Domestic Product for the first time since the mid-1990s, according to federal data. In other words, despite a series of tax cuts, Albany's total tax bite grew faster than economic output, which itself had been inflated by gargantuan profits on Wall Street. And this, mind you, was before Gov. David A. Paterson and lawmakers hiked taxes by billions in 2009.

As for where the money has been going, data cited by the Ravitch panel point to two answers. First, there's our Medicaid program, which the report calls "by far the most extensive and expensive" in the country. Second, education. Between 1999 and 2009, New York boosted per-pupil state and local revenue for K-12 public schools by 95 percent, way above the 61 percent average for the other states.

The task force said New York and five counterparts -- California, Illinois, New Jersey, Texas and Virginia -- all suffer from a lack of financial transparency and accountability, especially when it comes to public pensions. Echoing the views of most actuaries, accountants and economists, the task force agreed that public-sector pension funds have systematically under-estimated their long-term liabilities.

New York's sins in this department are less egregious than those of some other major states, mainly because court precedents stop employers from skipping tax-funded pension contributions. But even this virtue comes with an asterisk, since New York State has let itself and its local governments stretch some pension payments over a 10-year period, a form of borrowing the task force called "a gimmick." At the same time, New York and other states have put away nothing to cover more than $1 trillion in promised retiree health benefits.

These findings are not exactly earthshaking. But coming from a group that includes veterans of Republican and Democratic presidencies along with former Federal Reserve Chairman Paul Volcker, they can't be dismissed as partisan sniping.

The Ravitch panel's report implies that short-term fixes, like President Barack Obama's proposal for a second round of stimulus-style state aid, would be tantamount to putting a fresh coat of paint on rotten timbers. A "structural" problem demands a structural solution. In New York, we can start by demolishing the legal props that support unaffordable public-employee compensation. Otherwise, our unbalanced state, local and school budgets will begin to topple.