GOVERNOR PATERSON’S 2010-11 EXECUTIVE BUDGET PROPOSES SIGNIFICANT SPENDING REDUCTIONS, KEY LONG-TERM REFORMS TO ELIMINATE $7.4 BILLION BUDGET GAP

Governor David A. Paterson today proposed a 2010-11 Executive Budget that makes significant spending reductions in order to eliminate a $7.4 billion deficit and institutes key reforms to put New York on the road to economic and fiscal recovery. The Executive Budget proposal includes spending reductions across every area of the budget; limits State spending to far below both the Governor’s proposed spending cap and the rate of inflation; implements the most significant public higher education reforms in a generation; and provides fiscal relief to local governments through an aggressive mandate reform agenda.

“Since the day I became governor, I have warned that New York is facing an inevitable fiscal reckoning,” Governor Paterson said. “There are no more easy answers. We cannot keep spending money that we do not have. Significant spending reductions are necessary if we want to emerge from this crisis and build a strong fiscal and economic recovery. Together, through shared sacrifice, we will move forward toward a more hopeful and optimistic future for New York.”

Eliminating the Deficit

Governor Paterson’s 2010-11 Executive Budget closes a $7.4 billion deficit through $5.5 billion in recurring spending reductions (74 percent of the overall plan), $1.0 billion in actions that increase taxes or fees (less than 14 percent of the overall plan), $430 million in revenue actions that do not increase taxes or fees, and $565 million in non-recurring actions. Overall, 92 percent of Governor Paterson’s gap-closing plan represents recurring actions that will help the State continue to address its future projected budget deficits.

Major spending reduction recommendations include:

• School Aid: A $1.1 billion or five percent year-to-year reduction in School Aid, targeted progressively based on local school district wealth and student need. Even after this reduction, overall recommended 2010-11 School Aid spending of $20.5 billion would still represent a $6.1 billion or 42 percent increase compared to 2003-04 – twice the rate of inflation (19 percent). Additionally, this $1.1 billion reduction represents only 2.1 percent of overall school district budgets, which total more than $52 billion, including State and local contributions. School districts also have reported undesignated reserves of more than $1.5 billion statewide.
• Health Care: $1.0 billion in Medicaid and health care savings, including reductions to providers and various programs, enhanced Medicaid fraud recovery efforts, and other measures.
• Agency Spending: More than $1.0 billion in reductions to State agency operations spending, including $500 million in additional across-the-board agency cuts, $250 million in negotiated workforce savings (including $28 million from administratively rescinding, for the second consecutive year, the scheduled general salary increase – four percent – for non-union management/confidential employees), prison closures, youth facility right-sizing, agency mergers, shared service initiatives through Governor Paterson’s Office of Taxpayer Accountability, and other actions.
• Hundreds of other individual reductions detailed below and on the Division of the Budget’s website (www.budget.state.ny.us)

The gap-closing plan includes $1.0 billion in tax and fee increases, 93 percent ($923 million) of which are dedicated to offsetting what would have been deeper cuts to health care services. They include a $1 per pack increase in the cigarette tax ($218 million) and a new excise tax of approximately one penny per ounce on sugared beverages linked to obesity ($465 million), which will help discourage consumption of those unhealthy products and improve long-term health outcomes. Each year, obesity causes the death of 112,000 Americans and costs New York’s health care system $7.6 billion. Annually, smoking causes the deaths of over 400,000 Americans (including 25,000 New Yorkers) and costs New York’s health care system more than $8.2 billion.

Additionally, while Governor Paterson maintains his strong commitment to tribal sovereignty, he will direct the Department of Taxation and Finance to withdraw its Advisory Opinion regarding the Department’s policy of forbearance of sales by agents of unstamped product to Indian retailers. The Department will also promulgate regulations for public comment, a process that will take six months. The purpose is to stop a handful of wholesalers from selling unstamped cigarettes. No revenue is currently assumed in the State’s financial plan from tax collections related to these unstamped products, as the regulatory process is not yet complete. Further health care revenue actions include $240 million in health care assessments and surcharges, which have an impact on providers similar to direct funding cuts, but without an associated loss of federal matching funds.

Spending Growth

The Executive Budget recommends 2010-11 All Funds spending of $134.0 billion, an increase of $787 million or 0.6 percent from the prior year. State Operating Funds spending (excludes federal funds and long-term capital) would total $79.9 billion in 2010-11, an increase of $745 million or 0.9 percent.

Spending recommended in the 2010-11 Executive Budget is well below the projected rate of inflation (2.0 percent) and the requirements of Governor Paterson’s proposed spending cap. If enacted, this spending cap initiative would generate an over $1 billion surplus in the following 2011-12 fiscal year, which would be returned directly to more than one million property taxpayers in the form of a progressive circuit-breaker tax credit that averages over $1,000 per recipient.

Growth in 2010-11 State Operating Funds ($745 million or 0.9 percent) spending is composed entirely of fixed costs related to prior commitments over which the State has limited control. In 2010-11, the State is projecting substantial growth in debt service ($844 million or 17.1 percent) and fringe benefits ($437 million or 9.9 percent) related to prior commitments. Debt service represents payments to bondholders (including interest) on past capital projects for which a liability has already been incurred. Changes to pensions and certain employee health care benefits are restricted by constitutional and contractual obligations. All other 2010-11 State Operating Funds spending outside debt service and fringe benefits is projected to decline by $536 million or 0.8 percent from prior year levels.

Key Reforms

The Executive Budget proposes the most significant reforms to the State’s system of public higher education in a generation. The Public Higher Education Empowerment and Innovation Act will provide the State University of New York (SUNY) and the City University of New York (CUNY) with the flexibility they need to thrive academically and become centers of job creation. Governor Paterson’s proposal would take tuition setting outside the politics of the state budget process, allowing SUNY and CUNY to institute a rational tuition policy, tied to the higher education price index, which makes the cost of public higher education more equitable and predictable for students. The reforms would also provide SUNY and CUNY with greater operational independence so that they can adapt and thrive in an ever-changing innovation economy, eliminating numerous burdensome State regulations on contracting, procurement, land use, and other areas, while still maintaining appropriate accountability and oversight.

Governor Paterson’s budget proposal also puts forward an aggressive mandate reform agenda that includes repealing the Wicks Law for all school districts (lifting contracting restrictions that increase costs for property taxpayers) and a four-year moratorium on unfounded mandates. In total, the Governor’s mandate reform agenda includes more than 100 mandate reform initiatives that will provide savings to local governments of nearly $1 billion over the next three years.

School Aid

The Executive Budget recommends $20.5 billion for 2010-11 School Aid, a $1.1 billion or 5.0 percent reduction from the prior year. This reduction is structured progressively so that lower-wealth districts would experience smaller percentage cuts than higher-wealth districts.

There are several factors that indicate that the vast majority of school districts should be able to manage these reductions without adversely impacting property taxpayers or educational quality.

• This $1.1 billion year-to-year reduction represents only 2.1 percent of overall school district budgets, which total more than $52 billion, including State and local contributions.
• Even after this proposed reduction, the $20.5 billion in 2010-11 School Aid recommended in the Executive Budget would still represent a $6.1 billion or 42 percent increase compared to 2003-04 – twice the rate of inflation (19 percent) during that period.
• New York public schools spend more per pupil overall ($15,546) than nearly any other state and 61 percent above the national average. New York ranks first in per pupil spending for school district employee salaries ($7,328, or 71 percent above the national average) and benefits ($2,901, which is 109 percent above the national average). A strong funding commitment will remain even after this proposed reduction.
• School districts have reported undesignated reserves of $1.5 billion statewide, according to State Education Department data.

The 2010-11 Executive Budget also extends the existing two-year statutory freeze on Foundation Aid (2009-10 and 2010-11) by one year through 2011-12. Additionally, the full phase-in of Foundation Aid would now take place over a ten-year period (complete in 2016-17) rather than the seven-year period assumed in current-law. This measure would allow the State to meet its commitment to fully funding the Foundation Aid formula, while also addressing its substantial structural, out-year budget deficits.

Health Care

The Executive Budget recommends a health care gap-closing package of $1.9 billion. It includes reductions to providers and various programs, and other savings measures, totaling $1.0 billion. Additionally, approximately $923 million in taxes and assessments dedicated to health care purposes would be instituted. The largest of these taxes and assessments are an increase in the cigarette tax and a new tax on sugared beverages, which will help discourage unhealthy consumption habits that put New Yorkers at risk for obesity, diabetes, cancer, heart failure, strokes, and other diseases, as well as offset what would have been deeper cuts to health care services.

Specific 2010-11 gap-closing impacts across selected sectors include the following: hospitals ($244.6 million), nursing homes ($140.2 million), home and personal care ($73.9 million), pharmacies ($12.2 million), insurance ($222 million); public health and aging ($104.2 million). Additionally, the State will increase its Medicaid Fraud recovery target by $300 million to $1.17 billion, instituting new civil penalties and other measures to ensure the integrity of the Medicaid program.

As part of the nearly $1.0 billion in reductions and other savings measures included in this plan, the Executive Budget would establish more rational and cost-effective reimbursement methods to produce better care at lower costs; modify reimbursement across sectors; control public health insurance program costs; and reduce spending for less essential public health programs. After the actions proposed in the Executive Budget, Medicaid spending would total $51.5 billion in 2010-11, an increase of 1.8 percent compared to 2009-10. Prior to budget actions, it was projected to grow by 5.0 percent.

Other Major Budget Areas

• Environment and Energy – Funding for the Environmental Protection Fund would be reduced by $79 million from 2009-10 Enacted Budget levels, including a moratorium on forest preserve and open space land acquisition. Additionally, a new training class of Parks Police Officers would be delayed until after 2010-11, saving an estimated $3.5 million. 
• Higher Education – Aid to SUNY senior colleges ($95 million savings) and CUNY ($47.7 million savings) would be reduced by $143 million on a State fiscal year basis. Additionally, changes to the Tuition Assistance Program (TAP) will generate $49.7 million in savings (including a $75 reduction to all awards) and community college base aid would be reduced by $285 per full-time equivalent student ($56.7 million savings).
• Local Government – Aid and Incentives for Municipalities (AIM) funding for New York City ($301.7 million savings) would be eliminated. New York City has a broad range of revenue sources – AIM accounts for less than 0.5 percent of overall NYC revenues. AIM funding for other municipalities would be reduced by either two or five percent ($15 million savings), depending on their overall reliance on that revenue source.
• Public Safety – State Police training classes will be delayed until after the 2010-11 Fiscal Year ($17 million savings). Additionally, as a result of continued declines in the prison population, the Department of Correctional Services would continue to consolidate facilities and eliminate excess capacity. Two prisons would close in January 2011: Lyon Mountain minimum security (Clinton County) and Butler minimum security (Wayne County). Another two prisons would close in April 2011: the Moriah shock facility (Essex County) and Ogdensburg medium security (St. Lawrence County).
• STAR – The Executive Budget would restructure the New York City Personal Income Tax STAR benefit by limiting eligibility to the first $250,000 of taxable income ($143 million savings). Currently, taxpayers who earn in excess of $250,000 receive more than 50 percent of the overall benefit from the NYC STAR personal income tax rate reduction, but represent only 2.9 percent of the total number of recipients – a poorly targeted allocation of the State’s limited resources, especially during a fiscal crisis. The Executive Budget would also eliminate the STAR exemption for homes valued at $1.5 million or more ($30 million savings) and would increase the maximum annual reduction in STAR benefits that can occur as a result of changes in assessed value or market value from 11 percent to 18 percent ($40 million savings).
• Transportation – The Executive Budget proposes a two-year, $7 billion, Department of Transportation capital plan that increases the General Fund subsidy for the Dedicated Highway and Bridge Trust Fund, supports rail capital investments, and preserves aid to local governments for highway and bridge projects. It also eliminates a mandated license plate reissuance previously scheduled for April 2010.
• Economic Development – The 2010-11 Executive Budget recommends a number of initiatives to keep New York competitive, create new economy jobs, and attract capital. The budget proposes merging the Department of Economic Development and the Empire State Development Corporation into a new Job Development Corporation to streamline economic development activities and save $4.7 million in 2010-11. It would also create the Excelsior Jobs Program and includes funding for Innovation Economy Matching Grants ($100 million over a five-year period), a New Technology Seed Fund ($25 million), a Small Business Revolving Loan Fund ($25 million), and over $45 million to support other economic development initiatives.
• Human Services – The Executive Budget proposes delaying the full implementation of a scheduled public assistance grant increase begun last year, reducing from ten percent to five percent the statutory July 2010 increase and delaying full implementation of the full 30 percent increase until July 2013 ($14 million savings). The budget would also rightsize the residential juvenile justice system by consolidating and reducing capacity in line with population trends. The Annsville and Taberg residential facilities located in Taberg, Oneida County would be consolidated into the Taberg facility. Additionally, two other facilities would be downsized to reduce excess capacity, including the Tryon Boys facility in Johnstown, Fulton County (eliminating the limited-secure program for boys) and the non-secure residential center for girls in Lansing, Tompkins County. The Executive Budget also includes $18.2 million to increase staff-to-youth ratios and to provide improved medical and mental health services for youth in State-operated juvenile justice facilities in order to improve conditions in the facilities and outcomes when youth return to their home communities. This action would result in an increase of 169 staff in the youth facility program. This investment would begin to address conditions identified by Governor Paterson’s Task Force on Transforming Juvenile Justice.

Workforce

The overall size of the State workforce is expected to total 195,700 at the close of the 2010-11 fiscal year, a decrease of 675 from 2009-10. The portion of the workforce subject to gubernatorial control is projected to total 131,900 at the close of 2010-11, a net decline of 625 from the prior year and 5,775 from the time Governor Paterson took office in March 2008. When completed, the annual General Fund savings associated with this 5,775 position decline is estimated to total $457 million, including fringe benefits.

The Governor will seek to partner with public employee unions to implement a number of targeted workforce actions that reduce State employee salary costs. These actions are expected to save $250 million in 2010-11. As part of these $250 million in workforce savings, Governor Paterson will administratively eliminate, for the second consecutive year, a scheduled April 1, 2010 general salary increase (four percent) for non-union management/confidential employees ($28 million).

Tax and Fee Increases

The 2010-11 Executive Budget includes $1.0 billion in actions that increase tax or fee liability. In addition to $923.2 million in taxes and assessments that offset what would have been deeper cuts to health care services and account for 93 percent of the total, other proposed tax and fee actions include establishing a parental fee on a sliding scale for Early Intervention services similar to the policy of numerous other states ($1.0 million), increasing certain court filing fees to finance civil legal services and other criminal justice priorities ($41 million), closing tax loopholes to ensure that all taxpayers pay their fair share ($30 million), and imposing a three percent tax on severing natural gas from a gas pool in the Marcellus or Utica Shale formation using a horizontal well.

Additionally, the Department of Taxation and Finance will withdraw its Advisory Opinion regarding the Department’s policy of forbearance of sales by agents of unstamped product to Indian retailers. The Department will promulgate regulations for public comment, a process that will take six months. This action will permit the State to seek the lifting of the injunction preventing the State’s statute prohibiting the sales of unstamped cigarettes to Indian retailers from going into effect. The purpose is to stop a handful of wholesalers from selling unstamped cigarettes. No revenue is currently assumed in the State’s financial plan from tax collections related to these products, as the regulatory process is not yet complete. Governor Paterson maintains his commitment to tribal sovereignty and will work with the State’s Native American tribes to implement these measures in a peaceful and efficient manner.

Non-Tax and Fee Revenue Actions

The Executive Budget recommends several revenue actions that do not increase taxes or fees. These include permitting the sale of wine in grocery stores ($93 million), legalizing Mixed Martial Arts in New York ($2.1 million), eliminating certain Quick Draw restrictions ($33 million), extending Video Lottery Terminal (VLT) hours of operation ($45 million), deploying speed enforcement cameras ($32.9 million) and improving tax audit and compliance ($221 million).

Deficit Projections

The Deficit Reduction Plan that the Legislature enacted on December 2, 2009 achieved $2.7 billion in 2009-10 savings, which was not sufficient to close the State’s $3.2 billion current-year deficit. Rather than proposing additional gap-closing measures in the current fiscal year, when the range of options for achieving recurring savings is increasingly limited, the State expects to carry this remaining $500 million deficit forward into 2010-11, where it is addressed in the 2010-11 Executive Budget as part of a responsible multi-year plan that emphasizes recurring savings. As such, the combined 2009-10 ($500 million) and 2010-11 ($6.9 billion) deficit that is addressed in the 2010-11 Executive Budget totals $7.4 billion.

Prior to Executive Budget actions, the State faced a cumulative deficit of $60.8 billion ($7.4 billion in 2010-11, $14.3 billion in 2011-12, $18.3 billion in 2012-13, and $20.7 billion in 2013-14). Prior to Executive Budget actions, spending was projected to increase during that five-year period by an average annual rate of 7.5 percent, while revenues were projected to increase at an average annual rate of 3.1 percent. The Executive Budget cuts the State’s long-term structural deficit in half to $29.0 billion ($6.3 billion in 2011-12, $10.5 billion in 2012-13, and $12.2 billion).

Reserves and Financial Plan Assumptions

The Executive Budget does not assume the use of any of the State’s Rainy Day Reserves for gap-closing purposes, which are projected to total $1.2 billion at the close of 2010-11, unchanged from 2009-10. However, as was the case in 2009-10, the Rainy Day Fund and Short Term Investment Pool will be used for temporary cash-flow purposes at times during 2010-11, including the close of May 2010 and June 2010, when the General Fund is projected to have a negative balance. Additionally, the Executive Budget does not assume an extension of federal stimulus funding.

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