Time for a Turnaround: Facing Fiscal Reality in New York State A Presentation by the Citizens Budget Commission September 29, 2009 (Updated February 23, 2010)

Summary A pattern of high spending growth – combined with recent revenue losses – has put New York State into the worst fiscal condition in decades We have exhausted the capacity of our traditional solutions – taxing our way out of the problem, borrowing to cover operating shortfalls, and/or burdening local government by pushing costs down – which would both damage the state and leave the structural problems unsolved Meaningful spending cuts and more strategic investment of limited resources are the only responsible course of action

Fiscal Reality #1 - For a quarter century New York State spending has been growing steadily New York State Operating Fund Disbursements, New York State Personal Income and U.S. Consumer Price Index , 1984-2009 (indexed, 1985 =100) Sources: State of New York, Office of State Comptroller, United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI – U), United States Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts, State Annual Personal Income

Fiscal Reality #2 – Nearly 70% of the budget goes to school aid, Medicaid, and employee salaries and benefits New York State Operating Spending by Major Category $78.2 B Fiscal Year 2008-09 Cash Disbursements Source: New York State Division of Budget, Fiscal Year 2009-10 Financial Plan, First Quarter Update, July 30, 2009

Fiscal Reality #3 - Personal Income, Sales / Use, and Business Income Taxes equal three quarters of the base State Operating Revenues by Major Category $75.2B Fiscal Year 2008-09 Cash Receipts Source: New York State Division of Budget, Fiscal Year 2009-10 Financial Plan, First Quarter Update, July 30, 2009

The big taxes are shrinking – Down by 10% from last year and 10% from the original enacted budget projection for this year General Fund Tax Collections for Three Major Taxes* April to January - Last Year Compared to this Year Down 10% Source: New York State Comptroller and New York State Division of Budget Notes:*Personal Income Tax adjusted for State-City offset payments $32.1B $28.9B

Fiscal Reality #4 - Revenues are shrinking but spending is not Projected Spending in the “Big 3” Medicaid Expected to grow by 37% in four years, adding $5.3B to the gap Per beneficiary spending 70% above the U.S. average Employee compensation costs Expected to grow by 19% in four years, adding $2.9B to the gap Salaries are 35% above the U.S. average, and fringes are comparatively generous in key ways Education aid Expected to grow by 13% in four years, adding $3.6B to the gap Per pupil spending is 65% above the U.S. average

Medicaid Spending Growth of 37% 70% above U.S Planned Spending on Medicaid Fiscal Year 2009-10 to 2013-14 Source: U.S. Department of Health, Center for Medicaid and Medicare Services, State Data Files, Federal Fiscal Year 2008 Per Beneficiary Spending – NY vs. U.S. Source: New York State Division of Budget, 2010-11 Executive Budget 21 Day Amendments, February 9, 2010

Employee Compensation Spending Pensions One of only three states to allow OT Among only 4% of systems with member contributions in the 1-3% range Lower retirement ages; high disability rates Health Insurance Only 5 other states pay any of Medicare Part B premiums for retirees – only NY pays 100% NYS retirees pay 10 and 25% of premiums for single & family coverage; public sector norm is 50% for both Salaries and Wages Wage increases of 13.4% 2007 to 2011 Growth of 19% Unusual Features Planned Spending on Employee Compensation Fiscal Year 2009-10 to 2013-14 Salaries & wages Health Insurance Pensions Source: New York State Division of Budget, 2010-11 Executive Budget 21 Day Amendments, February 9, 2010

School Spending Growth of 13% 65% above U.S. Source: U.S. Census Bureau, State and Local Government Finances, 2007 Per Pupil Spending – NY vs. U.S Planned Spending on School Aid Fiscal Year 2009-10 to 2013-14 Source: New York State Division of Budget, 2010-11 Executive Budget 21 Day Amendments, February 9, 2010

Fiscal Reality #5 – This combination of steep projected spending increases and declining revenues produces daunting budget gaps New York State Projected Operating Budget, Next Four Years ($ millions) Source: New York State Division of Budget, 2010-11 Executive Budget 21 Day Amendments, February 9, 2010

Fiscal Reality #6 - Raising taxes is not the answer Taxes have already been raised significantly – This year’s budget included $8B in measures to increase revenues The Tax Foundation ranks New York #49 among states on its business climate index naming the state among the ten states whose tax systems “are the most inhospitable to economic growth” Census data show that our combined state and local tax burden per $1,000 of personal income is 36 percent above the U.S. average – NY ranks as having 2nd highest burden among states

Fiscal Reality # 7 - Passing costs to local governments is not an option – New York’s local tax burden is the highest in the nation – 77% higher than average Local Tax Burden Per $1,000 Personal Income New York Compared to the U.S. Average Fiscal Year 2007 Source: U.S. Bureau of the Census, State and Local Government Finances, 2007

Fiscal Reality #8 - Our $56B in debt will put us close to the debt cap - NY owes $11B from prior borrowings to cover deficits New York State Supported Debt Outstanding Fiscal Year 2010-11 and 2014-15 Source: State of New York, Division of Budget, 2010-11 Executive Budget, Five-Year Capital Program and Financing Plan, January 2010

Agenda for a Turnaround Reject tax increases or borrowing to fund operating expenses Reduce State spending Improve management of limited resources (e.g. procurement reform, performance metrics, IT innovation, agency & program consolidation) Adopt new, strategic approach to investment that promotes economic growth and infrastructure modernization