When I think of the state of New York's finances, I often think of the term in farming "eating your seed corn." Before a farmer sells or eats the corn he has harvested, he puts aside part of his crop as seed for next year's planting. If be consumed his whole crop instead, he would be "eating his seed corn"--getting by in the short run, gambling on an upturn in his fortunes, and risking his long-term chances of survival.
For the past decade New York State, through its budgeting practices, has been eating its seed corn by acting only with an eye to the short term. The state essentially spent down its reserves and set aside little for the future. Now, faced with revenue declines, the state is challenged to weather the hard times.
II. FISCAL OUTLOOK
Budget Gaps in the Coming Years
The state is currently in a fiscal crisis which is expected to continue over the next few years. There are projected budget deficits of $8 to $9 billion in 2010-2011 and $12 to $13 billion in 2011-2012. (1) State obligations are expected to rise faster than revenues. The deficits will grow even larger in the next few years. New York is not alone; many other states are facing large and growing deficits. According to the Center on Budget and Policy Priorities, the states have faced, and will face, combined budget shortfalls estimated at $375 billion in fiscal years 2010 and 2011. (2)
III. HISTORICAL CONTEXT: BUDGET HISTORY
A. Structural Imbalance
To understand how New York arrived at this point, with projected budget deficits of $8 to $9 billion in 2010-2011 and $12 to $13 billion in 2011-2012, it is important to look at the state's recent budget history. Over the past ten years, the state's spending has increased at a rate 20% faster than its revenue growth.
[FIGURE 1 OMITTED]
The long-term gap between spending and recurring revenues is what budget specialists call "structural imbalance." This gap has widened in recessions and narrowed in good times. Figure 1 above illustrates the structural gap and shows how expenditures have outpaced revenues and have also grown faster than personal income growth.
Even in years of normal economic growth, the gap has been significant. Instead of limiting spending to normal income growth and building reserves in good times, the state has let spending rise in boom years--and stay at boom-year levels. Little has been set aside for the lean years that inevitably arise.
B. Non-recurring "One-shots"
To sustain spending that outpaces revenue growth, the state has used "one-shots," non-recurring actions--like borrowings, asset sales, the use of reserves, and accounting devices--which increase receipts or decrease expenditures temporarily, but do not change long-term revenue and expense patterns. Over the past decade the state has used at least $20 billion in one-shots to sustain its spending habits.
Some one-shots, like using reserves to fund spending in down years, are just good budget planning. Other one-shots are justified if they cover one-time expenses for important policy objectives or help to implement reforms whose savings will show up only in future years. But New York has often used one-shots to mask the structural deficits generated by spending trends that outpace reliable, recurring revenues.
One such one-shot was the $4.2 billion that the state received in 2003-2004 by issuing "tobacco bonds," which were financed by future payments owed to the state under a national settlement with tobacco companies. …