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NYS Executive Budget Leaves $7.9 Billion Gap for Next Two Years

Spending Grows Faster than Revenues; Budget Temporarily Plugs Structural Gaps with Debt, One-Shots & Risky

Although the 2006-07 Executive Budget is balanced for
fiscal year 2006-07, it creates budget gaps totaling $7.9
billion over the following two years because it cuts taxes
while increasing spending, prolongs the rapid growth in
debt, and maintains the use of non-recurring revenues or
one-shots to pay for continuing expenses, a report issued
today by State Comptroller Alan G. Hevesi finds. In
addition, the 2006-07 budget has $4.2 billion in risks that
could eat up some or all of the projected $2 billion
surplus for 2005-06.

“With an estimated $2 billion surplus from the current
year, the State has an opportunity to invest in reducing
its costs and eliminating the persistent structural
imbalance, as Mayor Bloomberg is doing with the prudent use of New York City’s surplus,” Hevesi said. “Instead, the
proposed budget increases the future gap between revenues and spending and increases the State’s already huge debt burden. The proposed budget makes the State’s fiscal problems worse and leaves it to someone else to fix the growing problem.”

The report finds:

Spending growing faster than revenues. The Executive Budget includes a three-year financial plan during which General Fund spending is projected to increase by 19.4 percent, more than two and a half times the 7.3 percent growth in revenues.

Out-year impact of tax cuts. Tax cuts are a major
contributor to the growing imbalance. The Executive Budget
includes tax cuts with relatively minor fiscal implications
of $397 million for 2006-07, which explode in 2008-09 to
$3.4 billion – a tenfold increase.

Out-year impact of spending plans. The budget includes new
General Fund spending of $406 million in 2006-07, which
expands to three times that and reaches $1.2 billion in
2008-09.

“Properly designed tax cuts can spur improvements in the
State’s economy, but to be responsible, such tax cuts
should be matched by spending cuts. This budget, instead,
proposes large spending increases on top of tax cuts, paid
for with one-shots,” Hevesi said.

Risks to the budget plan. The 2006-07 Proposed Budget is
balanced but contains risks that could be as high as $4.2
billion. These include the possibility of additional costs
related to the 2003 Campaign for Fiscal Equity court
decision ($1.4 billion); revenues that are unlikely to
materialize, including video lottery terminal dollars to
support education spending ($358 million) and
overestimation of abandoned property revenue (also $358
million); unrealistic savings projections from Medicaid
anti-fraud activities ($125 million); and a number of
proposals to reduce spending or raise revenues that have
been rejected by the Legislature in previous years ($2
billion).

Use of non-recurring resources. The Executive Budget again
relies on other non-recurring resources totaling $1.6
billion, bringing the two-year total to $5.5 billion. It
allocates the $2 billion surplus to reduce future deficits,
which is again using non-recurring revenues to pay for
continuing expenses, rather than using the surplus to
reduce long-term expenses.

Debt levels. Responding to demands for controlling the
State’s huge debt burden, the budget includes a debt reform proposal that claims to implement a more realistic count of debt and to ban backdoor borrowing. However, the count is designed to understate actual growth in debt and the ban does not prevent backdoor borrowing from continuing to grow.

Growth in debt. The Executive’s reform plan also does not
effectively constrain the growth of debt issued without
public approval.

Outstanding State-Funded debt will increase to $56.6
billion by the end of 2010-11, representing a 17.3 percent
increase from 2005 and a 103 percent increase from 1995.
State-Funded debt service is projected to increase to $6.5
billion in 2010-11, an increase of $2.1 billion or 48
percent from 2005-06 and an increase of 137 percent from
1995.

General Obligation debt is planned to increase $653
million, or 19 percent. In addition, appropriation-backed
debt issued by public authorities (back-door borrowing) is
expected to increase 25 percent, or $9.3 billion, by
2010-11.

Overall Spending. The Governor’s spending plan on an All
Funds basis for 2006-07 totals $110.6 billion, an increase
of $4.4 billion or 4.1 percent over 2005-06. General Fund
spending totals $49.7 billion, an increase of $2.5 billion
or 5.2 percent over 2005-06. On a State Funds basis
spending totals $75.0 billion, an increase of $4.6 billion
or 6.5 percent over 2005-06.

“In addition to spending that doesn’t match revenues, this
budget continues to rely too heavily on debt. For too long,
we have used debt to permit unsustainable levels of
government spending. This is simply wrong and it needs to
be brought under control,” Hevesi said.

The report notes that the combination of spending and
revenue actions will place enormous pressures on the
State’s financial plan in the next two years. In addition
to the risks noted above, additional risks include high
energy prices, a weakening housing market, and rising
interest rates, which have the potential to reduce State
revenues.

“Today, thanks to strong revenues from last year, the State
has a tremendous opportunity to initiate reforms in the
State’s financial management that could have a positive
impact for years to come,” Hevesi said. “We simply cannot
afford to do business as usual anymore. Abandoning the
shortsighted budgeting for a long-term vision for the State
will not only improve the State’s financial standing and
make us more competitive, but will have a favorable effect
for years to come.”

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