During his first six months in office, New York governor Andrew Cuomo pulled off something of a fiscal trifecta: closing a $10 billion state-budget gap without raising taxes, capping local-property-tax levies, and wringing concessions out of state-government labor unions.
If these accomplishments weren’t quite as “transformational” as Cuomo made them out to be, they certainly restored a sense of direction to a state government that had gone dangerously adrift under his hapless predecessor, David Paterson.
#AD#Now comes the hard part. Governor Cuomo faces daunting challenges that will make his second year much tougher than his first, testing his oft-stated commitment to holding down taxes and taming unsustainable growth in New York’s public-sector spending.
State tax receipts for the first half of the 2011–12 state fiscal year came in at $392 million below the budget forecast, according to the state comptroller. The budget gap for fiscal 2012–13, which begins April 1, is likely to grow beyond the $2.4 billion projected in the spring.
The governor had some good news last week when members of the state’s second-largest union voted to ratify a new contract, which will prevent 3,500 layoffs while allowing Cuomo to count on savings from union concessions. But it does nothing to fundamentally improve a fiscal picture that has been deteriorating along with the outlook for employment and profits on Wall Street, which generated about a fifth of the state’s taxes before 2008.
Governor Cuomo is under pressure from public-employee unions and fellow Democrats in the legislature to extend a temporary income-tax increase on upper-income households, signed into law by former governor David Paterson in 2009 and set to expire at the end of this year. The widely mislabeled “millionaire tax” applies to incomes as low as $200,000 for individual filers and raises income taxes by 31 percent on incomes above $500,000.
So far, Cuomo is standing firm. “I think you are kidding yourself if you think you can be one of the highest-taxed states in the nation, have a reputation for being anti-business, and have a rosy economic future,” he recently said.
Economic harm aside, extending the income-tax hike would leave the state budget even more precariously balanced on a tiny pinnacle of wealthy households. The highest-earning 1 percent already generate 43 percent of New York’s personal-income-tax revenue. The temporary tax has made the state more vulnerable to sudden drops in capital gains and bonus income — like those that precipitated the current fiscal crisis.
Paterson kicked the can down the road, closing state-budget gaps mainly with massive injections of temporary federal-stimulus aid and over $7 billion in tax hikes. Cuomo, by contrast, actually reduced the total budget, offsetting the loss of stimulus aid by ordering state agencies to make across-the-board cuts and slashing school aid by 6 percent. He sidestepped a big political fight over needed reforms to New York’s bloated Medicaid program by assigning the task to a “redesign team” dominated by the health-care industry and the health-care-workers union, and he won unprecedented authority to unilaterally make further needed changes in the program.
#PAGE#But the can is still rolling. The price Cuomo paid for swift passage of his first budget was a promise to boost Medicaid and school-aid spending by 4 percent next year — effectively locking higher spending into 40 percent of the state operating-funds budget. That means he must spend less on everything else — when the state’s transportation-infrastructure plans for the next three years are already underfunded by billions.
Meanwhile, the state’s budget problems pale in comparison to those faced by many of New York’s local governments and school districts, whose employee-pension and health-benefit costs are skyrocketing. Cuomo’s historic tax cap, which limits property-tax-levy growth to 2 percent, has highlighted the governor’s failure to deliver meaningful relief from state mandates that drive up local expenses and tie the hands of local officials in union-contract talks.
#AD#For all his talk of transforming government, Cuomo has refused to embrace the kind of structural reforms local officials in both parties are seeking — especially those touching on collective bargaining. As for local pensions, which are financed out of statewide funds controlled by laws written in Albany, Cuomo says he’ll fight for changes next year. Unfortunately, his initial reform proposal is a disappointment.
While New York’s constitution rules out pension changes for current employees, it would allow the state to move future workers from defined benefit (DB) pensions to 401(k)-style defined-contribution (DC) plans, or at least to the kind of DB-DC “hybrid” offered last week by California governor Jerry Brown. But Cuomo won’t even go there. His plan trims benefits, raises retirement ages, and increases employee contributions for new hires — the kind of changes that could be (and, in the past, have been) undone — while preserving the basic defined-benefit structure in its entirety.
In the long term, of course, New York needs economic growth — and one potential growth engine is already idling. Vast swatches of upstate New York lie atop the same natural-gas-shale deposits that have been a bonanza for neighboring Pennsylvania. Cuomo lifted the Paterson administration’s moratorium on gas hydrofracking, but the state’s permitting process is moving slowly under pressure from anti-drilling environmentalists. Without the more than 50,000 jobs that gas exploration would help create, upstate New York’s main economic fallback will remain the government-subsidized health-care and higher-education sectors.
During his 2010 campaign, Cuomo’s agenda pointed to a “New New York.” In the months ahead, he’ll need more than rhetoric to avoid becoming the latest personification of the same old Albany.
— E.J. McMahon is a senior fellow at the Manhattan Institute and its Albany-based Empire Center for New York State Policy.