Budget Deal’s Good News for the Industry
Over this past weekend, it appeared that a budget deal for New York State was agreed upon in principle. If finalized, the agreement would provide Governor Andrew Cuomo with a remarkably decisive first victory by delivering an early budget deal that would erase a $10 billion budget deficit without raising taxes and without borrowing, something he pledged to do during the campaign but something few expected he could actually deliver. The deal also would begin a long-term overhaul of the state’s out-of-control Medicaid programs.
The tentative agreement between the governor, Assembly Speaker Sheldon Silver and the majority leader, Dean Skelos, results in a $132.5 billion budget that mirrors very closely the initial proposal made by the governor less than two months ago. The agreement calls for a 2 percent year-over-year reduction in spending, or roughly $3.4 billion less than 2010 levels. The governor promised significant change, and this budget reflects real spending cuts for the first time in nearly 15 years.
Spending in the state has been spiraling upward during the past decade as inflation grew by 2.4 percent annually and tax receipts rose by 3.8 percent per year. Simultaneously, state spending increased by 5.7 percent on an annual basis. This difference is stunning, particularly when compounded. Additionally, spending increases in some areas were mandated to increase by as much as 13 percent per year!
Remarkably, the governor was able to convince legislative leaders to agree to a cut of more than $2 billion in spending on health care and education. These two components of the state budget make up nearly 50 percent of all spending.
Powerful unions have thwarted cuts in these areas in the past and the governor’s ability to garner public sentiment and support for these cuts is impressive. He was able to pull together support from some of the unions (which were given a stake in process of formulating a resolution) as well as business leaders to “sell” the need for dramatic fiscal action. In addition to reduced spending in these areas, significant fundamental reforms must also be undertaken.
ew York City alone has approximately 300,000 public employees, operating under more than 100 collective-bargaining agreements. These public-sector employees operate under far too many rules and protections that hurt, disproportionately, the very people progressive reformers care about most: the disadvantaged members of society, who rely most heavily on effective support services.
The existing labyrinth of work rules, protections and employment guidelines has created a system that hires without discretion, provides raises and promotions without merit and lays off teachers without considering performance. A system like this is not in the best interest of New Yorkers and certainly does not truly serve those who need support, particularly children.
Additionally, unsustainable pension burdens have been imposed by state legislators who have been pawns in the collective-bargaining process. Powerful unions have had the ability to mobilize large voter bases and to provide massive levels of campaign contributions to the very people whom they will then sit across the table from and negotiate contracts with. Is it any wonder that these elected officials have made promises they can’t possibly keep?
In fiscal year 2012, $8.4 billion will be spent from New York City’s operating budget to fill a hole in unfunded pension obligations. The new budget deal will force the city to face an even larger fiscal challenge, as state funding to the city will be cut substantially. This will likely lead to the significant number of layoffs that Mayor Bloomberg warned of, as tax increases would be untenable in today’s environment.
Trying to tax a city into prosperity has become an increasingly futile approach for urban mayors across the country. New Yorkers’ tax burdens are already the highest in the nation; therefore, figuring out how to do more with less is the new political reality.
It appears the governor has utilized the threat of passing his complete budget proposal under an extender bill if the Legislature did not agree to an on-time budget. This approach worked well for Governor Paterson, and, clearly, his successor was taking notes.
The version of the budget that appears to have been agreed to restores about $250 million that was projected to be cut in the governor’s initial budget. Clearly, both sides retreated from positions in which they appeared to be entrenched. Shelly Silver backed off his position of reacquiring the renewal of an income tax surcharge on people making over $200,000 per year, and Dean Skelos agreed to have upstate prisons containing as many as 3,700 beds closed.
FOR COMMERCIAL REAL estate, any budget deal would have profound impacts on two issues central to the health of the industry: both income taxes and real estate taxes; and New York’s rent-regulation laws, which are set to expire on June 15.