Tax and Budget Analysis

The Budget Reform Section of Counterbudget: 2000-2001 March 2000 

Budget Process Reform

Adopting New York State's Annual Budget in a Timely Fashion

Background

The most visible shortcoming of the current system has been the legislature's inability, since 1984, to adopt a budget by the start of the state fiscal year on April 1st of each year. On several occasions, these budget delays have extended into August. In practice, the New York State Legislature does not actually adopt a budget. The Governor submits a complete plan of revenues and expenditures for the ensuing fiscal year to the Legislature early each year in accordance with the State Constitution. Nor is the Legislature required by the Constitution or any other law to do so. What the Legislature does do is act on bills that authorize the spending of money for particular purposes (known as appropriation bills) and bills that establish or change laws that generate the revenues necessary to pay for those expenditures. In fact, with the exception of scheduled payments of principal and interest on the debt that the state has incurred, the State Constitution makes very clear that no money can ever be paid out of the state treasury or any funds under the management of the state "except in pursuance of an appropriation by law." This is the so-called "power of the purse" that rests with the legislative branches of most democracies. An "appropriation by law" is a duly enacted bill that authorizes specified amounts of amount to be paid out of the state treasury for specified purposes. This situation is further complicated in New York State by a constitutional provision that says that "Neither house of the legislature shall consider any other bill making an appropriation until all the appropriations bills submitted by the governor shall have been finally acted on by both houses, except on message from the governor certifying to the necessity of the immediate passage of such a bill."

So, when news reporters or other observers indicate that the Legislature is late in adopting a state budget (or that the legislature has missed the Constitutional or statutory deadline for the adoption of the state budget), they are referring to the fact that the state has begun a new fiscal year without the legislature having passed appropriations bills covering the wide variety of purposes for which the state government spends money. In recent years, much of the anguish and turmoil that used to be associated with such delays has been eliminated by the adoption by the legislature of temporary appropriation bills for which the governor has issued messages of necessity. While the practice of adopting bi-weekly or monthly appropriations bills has eliminated most of the real pain that used to be associated with budget delays, the process still involves a great deal of uncertainty and brinksmanship. Such delays also undercut the state government's credibility with many media observers and many members of the public.

To date, the Governor and the Legislature have adopted three kinds of "reforms" that they felt would eliminate or reduce the delays that have come to characterize the state budget process. The first kind of "reform" involves the idea of a fast and/or early start to the budget process to deal with the fact that the New York State Legislature has a much shorter period of time in which to consider and act on the Governor's budget than the legislatures in most other states have to act on their Governor's budget proposals. The Governor's Executive Budget must be submitted in mid-January in most years (and, by February 1 in years following gubernatorial election years), thus leaving only 2 to 2.5 months between the time the legislature receives the executive Budget and the start of the fiscal year. In 1992, to facilitate a faster start to the state budget process, a law was enacted requiring the Budget Director, within 30 days of receiving agencies' budget requests each fall, to submit to the legislature, a "synopsis" of these requests including a schedule of appropriations requested as compared to the prior year, a brief description of the agencies' funding priorities, and a discussion of any major changes or initiatives being recommended for the coming fiscal year. The Budget Division has implemented this law through a requirement that each agency budget request begin with a "Statement of the Commissioner or Agency Head" that includes such a synopsis. While the 1992 law might be interpreted to require the Budget Director to submit a compilation of these statements to the Legislature, it is not clear that such a step would produce the originally hoped-for effect of jump starting the budget process.

The second kind of "reform" is premised on the belief that one of the main sticking points in each year's budget negotiations is the inability of the parties to reach an agreement on the amount of revenues that are likely to be received by the state prior to the end of the year for which a budget is being adopted. In 1996, a law was adopted requiring the budget director and the chairs and the raking minority members of the legislative fiscal committees to convene, during March of each year, a "consensus economic and revenue forecasting conference" to assist the Governor and the Legislature in reaching a consensus revenue forecast. That law also requires the director of the budget and the secretaries of the legislative fiscal committees to issue a "joint report containing a consensus forecast of the economy and of receipts for the current and the ensuing state fiscal year" by March 10 of each year. That law, however, does not require the Governor of Legislature to take any action on this staff report nor does it require them in any way to utilize the information presented in that report. This shortcoming has been compounded by the fact that, in practice, these annual staff reports do not actually present a consensus revenue forecast. Instead, these reports indicate that the three parties have not been able to reach a consensus and they characterize the differences that exist between their estimates.

The third kind of "reform" attempts to secure timely action on the budget by subjecting the individual members of the legislature to financial penalties if the legislature fails to adopt a budget by the start of the state fiscal year. A law enacted at a special session of the Legislature in late 1998, and upheld by the NYS Court of Appeals in the fall of 1999, provides that if "legislative passage of the budget ... has not occurred prior to the first day of any fiscal year," the pay of all state legislators will be "withheld and not paid until such legislative passage of the budget has occurred." Since the legislature does not actually adopt or pass a state budget, this legislation provides that for the purpose of this salary withholding process, "legislative passage of the budget" shall mean that the appropriation bill or bills submitted by the governor along with the Executive Budget have been "finally acted on by both houses of the legislature ... and the state comptroller has determined that such appropriation bill or bills that have been finally acted on by the legislature are sufficient for the ongoing operation and support of state government and local assistance for the ensuing fiscal year. As a result of this law, legislators' pay was withheld for over four months during 1999, disproving the argument of its advocates that it would foster timely budget adoption. In addition to having this very practical shortcoming, this law has the dangerous effect of allowing the Governor and/or the members of one house of the legislature to subject the members of the other house to a prolonged period of having to work without pay.

Governor's Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that the 1996 law establishing the current Consensus Revenue Forecasting process be amended to require that the Consensus Revenue Forecasting Conference be held in February rather than March, and that the staff report on expected receipts be issued on or before March 1st rather than on or before March 10th.

Recommendation

This recommendation ignores the real problems with the 1996 law - that it simply requires three unelected staff members to make a report on the receipts expected to be received during the next fiscal year with no indication, whatsoever, as to what the Governor and the Legislature are supposed to do on the basis of the information presented in this report. Counterbudget recommends that New York follow the Congressional model where early in each year's budget process, each house adopts a budget resolution setting forth its revenue forecasts and spending levels for the coming year, with a conference committee process being used to reconcile the differences between those two resolutions. The 13 appropriations subcommittees in each house of Congress than work within the overall dollar limits established by the budget resolution in reconciling competing priorities within their respective areas of responsibility. In 1999, both houses of the U.S. Congress adopted such budget resolutions early in the year. Following the convening of a conference committee to work out the differences between the two resolutions, a reconciled budget resolution was adopted by both houses of Congress on April 15. This was five and one-half months before the beginning of the federal fiscal year, leaving a substantial amount of time for the members of the appropriations subcommittees to work out the details of the two houses' appropriations bills, for those bills to be processed through the full appropriations committees and to be debated on the floor, and for conference committees to resolve the differences between the two houses' bills. As a resolution, this action at the federal level is not subject to Presidential approval. New York may want to follow this model or, given the greater relative budgetary powers of the Governor in this state, it may want to utilize a process that involves and requires the concurrence of the Governor.

Counterbudget recommends that the Senate and Assembly each be required to adopt a budget resolution by March 1 of each year, and that a conference committee process be used to reconcile the differences between the two houses' resolutions in time for the two houses to adopt an agreed-upon budget resolution by March 8 of each year. Each house would then be required to finalize its appropriations bills within the parameters established by the joint budget resolution. The pay withholding sanctions should either be repealed or amended to apply to the intermediate deadlines suggested below and to apply only to the members of the house, committee or subcommittee to which the deadline applies. In this way, for example, members of the Senate could not cause members of the Assembly to miss a deadline and vice versa.

Adopting New York State's annual budget in a way that increases member and public involvement

Background

The closed nature of New York State's budget process has led to it being widely characterized as "three men in a room." This phrase succinctly captures the fact that much of each year's budget agreement (at least in years when this "process" doesn't break down and become two men in a room) is worked out, behind closed doors, by the Governor, the Assembly Speaker and the Senate Majority Leader. In fact, most aspects of the annual budget agreements are worked out by these officials' staffs in preparation for "leaders' meetings" at which the three leaders themselves attempt to resolve a relatively small number of outstanding issues. Governor George Pataki, Assembly Speaker Silver, and Senate Majority Leader Joseph Bruno have all publicly criticized the "three men in a room" process and have either (a) said that the days of "three men in a room"were over and/or (b) called for this system to be replaced with one that entails greater member involvement. In April 1998, Senator Bruno and Speaker Silver appointed a budget conference committee and nine budget conference subcommittees to help resolve the differences between the "one house" budget bills that the Senate and Assembly had each passed earlier that year. While a good deal of that year's final budget agreement was worked out privately by the two leaders and their staffs, the conference committee and its nine subcommittees did resolve a number of important differences between the two houses' budget bills in unprecedented public sessions. This experience raised the hope that there might in future years be greater member involvement through working committees and subcommittees in the development of each of the two houses' budget bills. This has not yet happened and while, in 1999, conference committees were again used in the budget process they were used to help resolve issue differences between the two houses that were then incorporated into a single set of privately drafted budget bills which were then passed with messages of necessity from the Governor in order to avoid the Constitutional requirement that those bills be available for member and public scrutiny prior to their adoption rather than to resolve differences between two sets of publicly available budget bills.

Governor's Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that: (a) in any year in which the legislature has not, by March 1, finally acted upon the appropriations bills submitted by the Governor along with the Executive Budget, the Senate Majority Leader and the Assembly Speaker be required to appoint one or more joint conference committees on the budget, and (b) when any such budget conference committees are appointed, they be required to issue their reports on the budget by March 29.

Recommendation

The Governor's proposal represents a step backwards from the progress made in 1998 in that it provides for the use of conference committees only when a budget agreement has not emerged full blown from some undefined process of private negotiations. It thus views the "three men in a room" process as the norm, and the conference committee process as something be used if the "closed" system does not work. Counterbudget recommends that budget conference subcommittees become a regular, established part of the state's budget process and that the Senate and Assembly each establish nine budget subcommittees, with jurisdictions consistent with the jurisdictions of the nine budget conference subcommittees that have functioned for the last two years. Each of these nine subcommittees would play the lead role in developing its house's changes to the Governor's appropriations and language bills in its area of jurisdiction. To facilitate this process, the Governor should divide his proposals into nine rather than four appropriations and accompanying language bills corresponding to the jurisdictions of these subcommittees. Each house's budget subcommittee should include the five individuals from that house who serve on the corresponding budget conference subcommittee along with as many additional members as possible consistent with not having any member serve on more than one such subcommittee while having each subcommittee reflect, as closely as possible, the party breakdown of the whole house. Each subcommittee should be required to work within the parameters established by the joint budget resolution that must be adopted by March 8 of each year. These subcommittees should begin their work as soon as the budget is submitted so that they are able to finalize their specific proposals within one week following the adoption of the joint budget resolution (i.e., by March 15). An overall budget committee in each house (corresponding to the overall budget conference committee), or a tenth subcommittee, should handle revenue bills rather than having such bills assigned to one of the nine subcommittees that handle appropriations. The overall budget committee should handle cross-cutting bills submitted with the Executive Budget that do not fall into the jurisdiction of any of the nine budget subcommittees, such as the debt reform and budget process reform bills submitted by the Governor along with this year's Executive Budget. Each of the two houses should be required to complete floor action on a full set of budget bills by March 22, with the budget conference committee and the budget conference subcommittees being required to reconcile the differences between the two houses bills by March 29.

Requiring the Legislature to consider the multi-year implications of proposed budget agreements before adopting them

Background

During each of the last six years, the Governor, as part of his annual Executive Budget has proposed tax reduction plans that would grow substantially in cost over time. In at least half of these years, the Legislature has reduced the cost of these plans in the short run and increased their cost in the long run, thus exacerbating the state's structural deficits. The result is the enactment of tax cuts that can only be financed through good luck (such as the current boom on Wall Street or so-called Welfare Windfall) or through reductions in services that would not be acceptable if proposed at the same time as the multi-year tax cuts.

Under current law, the Governor is required to submit a multi-year financial plan only once a year (within 30 days of the submission of the Executive Budget) and that plan is only required to give estimates of what receipts and disbursements are likely to be during the budget year and the two succeeding years, if the Executive Budget is adopted as submitted. No baseline information is provided, thus obscuring the impact of the proposals contained in the Executive Budget. Nor is any information available on the financial plan impact of changes that would not take effect until the third or fourth years following the budget year. For example, this year's Executive Budget proposes to use the cash balances that have been accumulated over the last several years to cover the cost of various tax reductions during the next two years but it is not required to disclose the impact in subsequent years when those tax cuts will still be in force but the accumulated cash balances will have been used up. In addition, the multi-year implications of the changes embodied in the budget agreements negotiated by the Governor, the Senate Majority Leader and the Assembly Speaker are not disclosed in a comprehensive manner until the next Executive Budget is submitted. This means that when the members of the Senate and the Assembly are required to vote on the bills implementing those agreements, neither they nor the public are aware of the multi-year implications of the actions that they are taking.

Governor's Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that when the Senate and Assembly "are in agreement and prepared to finally act on the appropriations bills submitted by the governor," the Division of the Budget shall prepare a report describing the impact of the changes proposed by the legislature in these and other budget bills on the state's receipt and disbursement estimates for the budget year and the two succeeding years.

Recommendation

The Governor's proposal represents an improvement over current law but it could be improved substantially. Counterbudget recommends first requiring that a multi-year financial plan be prepared for review by legislators and the public only on a final budget agreement between the two houses means that relevant information will be made available earlier than it is made available under current law but not early enough to have an impact on the outcomes of the budgetary process. It is much more important that such a multi-year financial plan be prepared for the budget packages (i.e., the combinations of appropriations, revenue and other budget bills) that are to be adopted earlier in the process by each of the two houses. This would make extremely useful and relevant information available to the public, the media and legislators for use during the conference committee process when differences between the two houses' positions are being worked out. Second, the multi-year financial plan submitted with the Executive Budget and the multi-year financial plans for the Senate, Assembly and finally agreed-upon budget packages should all be for five years rather than for three years (the budget year and two subsequent years). Third, a baseline or current services financial plan should be submitted with the Executive Budget in addition to the currently required multi-year financial plan that estimates what receipts and disbursements are likely to be if the Executive Budget is adopted as submitted.

Increasing the stability of state and local public services

Background

In 1987, the state enacted a large multi-year tax reduction program that cost much more than was originally estimated. This estimating error was compounded in the early 1990s by a national recession that hit New York, New England and California with particular force. The result was a series of budgets (and mid-year Deficit Reduction packages) that included substantial reductions in state and local services. The magnitude of these service reductions would have been even greater if a temporary surcharge on the state's main business taxes and several more narrowly-drawn tax increases had not been enacted. In addition, after the implementation, on schedule, of the first three annual steps of the 1987 tax cuts, the implementation of the two remaining steps were deferred on several occasions.

If the current recovery ends, New York State is likely to find itself in a situation similar to that which it faced in the early 1990s. Over $4 billion in additional annual tax cuts are either currently scheduled to be phased in over the next four years or proposed for enactment in this year's Executive Budget. While the state is using its accumulated cash surpluses and the three windfalls that are currently propping up state revenues (the Wall Street, Tobacco and Welfare Windfalls) to get through the next two years without deep service cuts, the situation will be very different if there is either a downturn on Wall Street and/or an economic downturn.

Governor's Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed (a) increasing the amount of end-of-year surplus moneys that the state can deposit into its official "rainy day" fund (the Tax Stabilization Reserve Fund) from two-tenths of one percent of its annual General Fund disbursements to one-half of one percent of such disbursements, and (b) increasing the total amount that it may maintain in such reserve fund from two percent to five percent of its annual General Fund disbursements. This program bill also includes language implementing a proposed Constitutional amendment that would require a two-thirds majority of both houses of the legislature to approve any tax increase of $50 million or more.

Recommendation

In anticipating the possibility of a downturn in the state's economic fortunes, it is logical that the state should set aside more of its current cash surpluses for use in a "rainy day." The state should not increase the amounts that it can deposit in the Tax Stabilization Reserve Fund (TSRF), however, unless it also changes the rules governing the use of monies from this fund. Under current law, the state may use moneys from the TSRF to balance its budget in bad times, but any monies withdrawn from the TSRF for this purpose are, in effect, loans that the General Fund must repay "...in not less than three equal annual installments within the period of six years or less next succeeding the date of such transfer..." Given this rigidity, the state's preeminent budget director, T. Norman Hurd, became very wary of ever depositing any monies into this particular fund. Counterbudget, therefore, recommends that the changes proposed in the TSRF by the Executive Budget not be adopted unless they are accompanied by an elimination of the repayment requirement. The proposal to require a two-thirds majority of both houses to pass any bill that increases the revenue from any individual tax or other revenue source by more than $50 million would mean that 21 of the Senate's 61 members, or 51 of the Assembly's 150 members would be able to veto any such increase in revenues even if it were supported by the Governor and an overwhelming majority of the Legislature. This would mean, that in the time of a recession, a small minority of one house of the legislature could require that the budget be balanced entirely through service reductions rather than through some mix of service reductions and revenue increases, even a mix that consisted primarily of tax reductions. This proposed super-majority requirement would also be likely to increase the state's borrowing costs. In its new study of Fiscal Rules and Bond Yields, the Public Policy Institute of California found that states with tax restrictions and those that require super-majorities to increase taxes face higher borrowing costs than states without such restrictions. Controlling for other factors that affect borrowing costs, this study found that states with tax restrictions pay $1.75 million dollars more in interest for every $1 billion of debt than states without such limits.