11/08/2010 01:39 pm ET Updated May 25, 2011

Now You See It, Now You Don't: Plugging the Gaps in New York's State Budget

Last spring, while the New York legislature stubbornly refused to agree on a budget, Richard Ravitch, the newly appointed Lt. Governor, came up with a plan to rein in the state's out of control deficit. His idea was simple: to stop hiding debt in funds, borrowing fast cash from trusts and end New York's reliance on short sighted, get-rich-quick schemes. His plan was turned down. The bickering continued until a budget was finally agreed upon in August -- four months into the fiscal year, four months overdue, and with gaping holes which, if left unattended, will rapidly grow out of control.

"My proposition didn't automatically solve the problems," Ravitch says. "It was a road map towards a solution, but it still involved cutting expenses or raising taxes, or some combination of the two. There's no magic formula. You gotta cut or you gotta tax." The problem at the time was that both these prospects were tough sells in Albany.

"Half the world doesn't want to cut and half the world doesn't want to tax," he says. "And nobody wants to do both."

Adding to the disincentive was that the New York legislature knew that Ravitch's tough suggestions of cuts and taxes weren't the only solution. In fact, there were solutions that were far less politically painful, and that had worked for years. Contrary to what Ravitch was saying, there was a magic formula.

Enter off-loads, sweeps and one-shots.

A one-shot, or a non-recurring resource, is like a budgetary get out of jail free card. It is something that will work only once, much like selling an old watch. You can only sell it once, and if you're broke next year, you either have to get used to a cheaper lifestyle or sell something else. New York, and many other states, has consistently chosen the latter.

"It's selling assets to produce the cash," Ravitch says, "to keep going, to keep paying their bills, in the hopes that some day soon the dog will talk."

Most famously, in 1991 New York sold Attica Correctional Facility to one of its own authorities, the Urban Development Corporation. The sale was for $200 million dollars and the Urban Development Corporation paid by issuing bonds to to the state that are being paid for with the money the state gives them to lease the prison back. According to Ravitch, so far the state has spent more than $400 million on rent for a prison they sold for half that amount.

In Arizona, the state recently sold more than 20 properties, including its capitol building, to plug budget holes. How much it will cost them in the long run to lease it back is uncertain.
A shuffle is a collective term used for the budgetary sleight of hands know as off-loads and sweeps. While not as overtly shortsighted as the other one-shots mentioned, they are still a form of financial alchemy that postpones a budgetary crisis rather than tackle it. An offload involves transferring spending from a general fund, the big sack of money that the state is supposed to use to cover its commitments, to other funds. A sweep is essentially the same, but rather than transferring the spending to another fund, a sweep takes money from other funds and puts it into the general fund.

This year, New York off-loaded $261 million to the basic state welfare program (TANF). There was not enough money in the General Fund, so the state transferred some of its expenditures into TANF. The budget points out that this will not be possible next year. This means that next year's budget gap will have to be filled with money from somewhere else and that the welfare program will be $261 million short.

Erik Kriss, the spokesman for the Division of Budget, says that this is not as dramatic as it seems, but still unfortunate. "Shuffles can sometimes be less intrusive than cuts into people's lives," Kriss says. "And sometimes funds have more than enough money. The funds we borrow from won't go belly up," Kriss says.

Earlier this year, New York State Comptroller Thomas DiNapoli released a report criticizing the rampant use of budget shuffling to plug gaps, saying, "To enable the State to emerge from the current recession in a stronger financial position, annual budget games like the deficit shuffle must be stopped. Taxpayers need a solution to the budget problem that is open, transparent and accountable."

The Division of the Budget of New York recently released its Mid-Year Financial Plan Update. The 437-page document is a revision of the budget that was enacted only three months ago, and if its numbers are to be believed, there are grim times ahead for New York State. The predicted budget gap, the gap between projected spending and revenue, for 2010-2010 is $315 million. Much of the savings are results of cutbacks and revenue increasing measures, but $660 million are one-shots. Savings that won't be available next year.

However, it is not the current year Ravitch and many others worry about.

The update predicts that even with the recurring cuts made this year in health care, school aid, education, arts and other areas, the gap for next year will be a whopping $9 billion.

Additionally, the Division of Budget predicts that the gap will continue to grow to $14.6 billion in the 2012-2013 fiscal year and $17.2 billion the year after that. With harsh spending cuts already in place, finding the money to plug future gaps will be harder to come by, and outlandish one-shots become more likely.

"When the stimulus was enacted no one anticipated the tough times to continue for this long," Kriss says. "In a couple of years the ARRA money goes away and it is time for some very serious decisions. Governor Paterson has been sounding warnings about this for a long time."

Earlier this year, when Ravitch tried to warn people about coming fiscal crisis, he had a tough time being heard. Mark Hansen, the spokesman for the Senate Minority Leader Dean Skelos (R), says that what ultimately doomed Ravitch's plan was that the governor pulled the rug from under him. "When the governor didn't come out in support for Ravitch's plan, that killed it," Hansen says.

He places the blame for New York's fiscal crisis squarely with the Democrats in the legislature. "We need to restore checks and balances," he says. "New York is doing the exact opposite of every other state. While other states are tightening measures of accountability, the Democrats are making them looser." Exactly how Democrats have reduced accountability he doesn't say, but much of the blame allegedly lies with Democratic Speaker Sheldon Silver, who has been in office since 1994. "Democrats have controlled all three branches of state government for two years, and there have been endless scandals," he says. "Absolute power corrupts. Half the Democratic conference is under investigation."

Erik Kriss at the Division of Budget disagrees with Hansen's diagnosis. "The idea that one party is to blame for this is ridiculous," he says. "Some states have Republican legislatures, and some have Democratic. They're all just as deep in trouble. It's the business cycle. Also, the problem goes back longer than the two years the Democrats have been in power. Blaming the Democrats is to ignore the Recession."

Ravitch says he was disappointed that he could not convince the legislature and the governor of the soundness of his plan, but that he's now expanded his horizon and is looking at not only the fiscal problems of New York, but also other states.

"We've been too generous," Ravitch says. "The cost of our benefits caught up with our benefits and passed it. Now, we're in a hell of a fix."

According to the Mid-Year Financial Update, the rate of spending in New York is projected to grow by 12.8% through 2014. Receipts however, are only projected to grow by 4.3%. These numbers put the political gridlock of Albany into perspective. Republicans want to balance the budget by cutting and Democrats disagree. However, cutting expenditures to the levels needed for rate of growth to match rate of expenditures means gutting many state programs completely. Conversely, raising taxes to a point where money-in matches money-out will make a real difference for people's wallets. In a gridlocked legislature where bi-partisan cooperation is a four-letter word, compromise between cuts and taxes becomes difficult to imagine.

Ravitch is pessimistic about states' fiscal futures and worries that our current political climate is not equipped to handle a fiscal crisis of the magnitude we are facing. "Nobody knows what will happen if the state's deficit is allowed to continue to grow," he says. This uncertainty is the crux of an argument Ravitch has made a lot lately. The fiscal crisis of New York City in 1975 was, in his opinion, ultimately resolved by the threat of the city going bankrupt. The possibility of bankruptcy forced politicians to make tough decisions they wouldn't normally make. States, however, can't go bankrupt. "We don't have a triggering event like that," he says. "We lack the tool that allows us to discipline the budget the way it should be disciplined."

Ravitch believes future politicians will need to look beyond electoral gains to the greater good if New York and other states are going to be able to pull themselves out of the fiscal quagmire. While sweeping deficits under the carpet and leaving it for the next guy is tempting, shuffles and one-shots only exacerbate the budget crisis. "Fixing it won't be easy," Ravitch says. Sacrifices will have to be made.

"Some people believe that New York will eventually default on one of its obligations. I believe that the courts will make New York tax enough to meet its obligations. I think the real long-term risk is confiscatory levels of taxation. Either way, we're going to go through hell."