How the State Budget Prioritizes Spending
By Dave Lucas, NYSAC, Director of Finance & Intergovernmental Affairs
In recent years the state budget process has become more predictable and disciplined. Governor Cuomo's insistence on enacting on-time budgets and within certain spending restraints forces deadlines to be met and tough decisions to be made. The spending restraint comes in the form of a two percent spending cap on state operating funds (which excludes federal aid and capital spending). For the 2017 state fiscal year this cap is built upon a spending base of about $96 billion upon which spending can grow by two percent.
Building upon this overarching budget framework state leaders must then figure out how to prioritize spending across all programs. The first priority designated by the Governor and state leaders is providing general growth factors for school aid and Medicaid. For school aid, allowable annual growth is linked to the growth in personal income, which has been averaging in the 4 percent range the last couple of years (the state has exceeded this allowable growth in recent years). For Medicaid, allowable growth is linked to the 10-year average growth in health care costs, which will be 3.4 percent in 2017. These two programs also happen to be the largest spending items in the state budget.
Summary of State Spending
When you look at total spending commitments in this year's state budget it amounts to just under $200 billion spread over several years in state,
and special revenues. The actual cash behind these commitments for the 12 months April 1, 2016 through March 31, 2017 is closer to $155 billion.
What is not included in this $155 billion amount is more than $12 billion in county and New York City taxes raised in support of state mandated spending. Mainly for Medicaid and public assistance programs provided through local social services districts. In addition, more than $35 billion in local property taxes raised by school districts to provide education services is not included in the $155 billion.
The state prioritizes spending in several key areas:
ï® Medicaid and Public Health Insurance programs – $70 billion, about 36 percent of total state spending commitments;
ï® K-12 and Higher Education – $49 billion, about 25 percent of state spending;
ï® Transportation – $18 billion, just over 9 percent of state spending;
ï® Social Services, Labor (mainly unemployment insurance benefits) & Housing – nearly $16 billion, about 8 percent of state spending; and
ï® Mental Health and Public Health – $10 billion, about 5 percent of state spending.
As the chart shows, nearly 70 percent of all spending that runs through the state budget falls into three major buckets; Medicaid, education and transportation. With the two largest spending items in the state budget (Medicaid and School Aid) given priority increases before all other programs, it means everything else in the state budget pretty much must be held flat, or cut, to make the budget work.
As mentioned, we must also remember that counties and New York City contribute over $12 billion annually to pay for state mandated Medicaid and social service programs. This local spending is not recognized in the State Financial Plan even though without this contribution of local funds the state programs could not be implemented. If this locally raised funding was formally accounted for and recognized in the State Financial Plan it would equal about 15 percent of the State General Fund.
The actions taken by the state to maintain fiscal discipline trickle down to all local governments because the amount of state aid, reimbursement, or lack thereof, directly impacts the finances and budgets of local governments. This is especially true for counties which provide a large share of direct funding and local staff to implement state programs.
How a Spending Cap Differs from a Revenue Cap
The prioritization of spending in the state budget and its impact on local governments brings to the forefront a significant state policy goal that needs further clarification. While the state maintains a self-imposed spending cap of two percent, this differs significantly from the revenue cap placed on local governments by the state (the property tax cap).
ï® A spending cap on total operating funds will always be proportionally larger than a cap on revenue in the context of the total budgets of the state and counties – especially in the case of the Governor's two percent spending cap vs the two percent property tax cap. Additionally,
• The state uses a two percent growth factor regardless of the actual rate of inflation.
• Counties are subject to a revenue cap equal to the lower of two percent or the rate of inflation – which will be less than two percent in 4 out of 5 years covering 2013 through 2017. Also, the inflation factor counties must satisfy is connected to the rate of inflation in the prior year – not what is projected for the coming budget year. The impact of this can swing both ways of course.
• The state budget uses its operating funds budget as the threshold for applying the two percent limit – this generally allows growth on 65 percent of the total state budget.
• The property tax cap for counties is applied against its revenue base which ranges from 9 percent to 40 percent of respective county budgets, with the average per county of about 20 percent.
ï® We must also consider the revenue and spending base (starting point) upon which the cap became effective.
• For the state budget, the self-imposed two percent spending cap became effective after significant tax increases were enacted in response to the fiscal crisis and budget shortfalls. About $33 billion in state taxes and fees (about half of this came from PIT changes) were raised to fill a projected multi-year $85 billion budget gap between 2008 and 2013. The state also used $12 billion in one-time federal funds (ARRA) to help close the gap. More than half the state budget hole was filled with revenues. Some of these prior tax increases are now being reversed by the Governor and Legislature to the benefit of taxpayers. Spending cuts and reforms filled the rest of the state budget hole. However, the state spending cuts related to counties, schools and other local governments generally had to be absorbed by these entities as mandates related to them were not reduced commensurately.
• For counties, the property tax cap is built on a revenue and spending base that went through four years of severe austerity directly before implementation. During this austerity period the average annual growth in property taxes was about two percent, county fiscal reserves were diminished and state funding cuts largely had to be absorbed by local governments without reducing mandated services.
ï® Another important determinant to consider is how much one government is at the mercy of another for its sources and uses of funds.
• For the state – they are subject to changes imposed by the federal government. As noted the federal government expanded aid to states during the fiscal crisis.
• For counties – they are subject to changes imposed by the federal and State government. During the Great Recession the federal government expanded spending to help alleviate fiscal pressures on governments below them. The state however, cut reimbursements to counties without a commensurate reduction in state mandated services.