DIVISION OF THE BUDGET RELEASES UPDATED FINANCIAL PLAN AND ECONOMIC FORECAST

The New York State Division of the Budget today released its Enacted Budget Financial Plan, which contains updated information on revenues, spending, debt, the economy, and other fiscal indicators. In 2008-09, for the first time in ten years, the Enacted Budget will spend less than the Executive Budget proposal. The report also shows that although the 2008-09 budget is in balance, a $5 billion budget gap is projected for the 2009-10 fiscal year.

“While this year’s budget is balanced, we face some very significant challenges ahead to get our fiscal house in order,” said Governor David Paterson. “With a $5 billion deficit looming next year, we must immediately begin taking steps to rein in government spending.”

Spending Growth

• State Operating Funds spending, which represents all State expenditures excluding Federal revenues and long-term capital projects, totaled $80.5 billion at the time of budget enactment, an increase of 4.5 percent. Recently ratified labor agreements ($361 million), when approved by the Legislature, will make the overall size of the State Operating Funds budget $80.9 billion, an increase of 5.0 percent from the prior year. These additional labor costs will be funded by the State’s labor reserves, which were previously set aside for this purpose.
• All Funds spending, which includes Federal funds and long-term capital spending, will total $121.6 billion in 2008-09, an increase of 4.8 percent.
• General Fund spending will total $56.4 billion in 2008-09, an increase of 5.6 percent.

Out-year Gaps

Based on current forecasts, the Enacted Budget is projected to result in out-year budget gaps of $5.0 billion for 2009-10, $7.7 billion for 2010-11, and $8.8 billion for 2011-12. In January 2009, Governor Paterson will submit a balanced budget that closes the entire 2009-10 deficit.

2008-09 Gap Closing Plan

The Enacted Budget implements $6.1 billion of actions to close a 2008-09 General Fund gap of $5.2 billion and fund $873 million in new initiatives. These actions include:

• Savings Actions ($2.8 billion): Savings actions represent nearly 50 percent of total gap-closing measures. The largest of these are health care savings ($828 million), across-the-board reductions proposed by Governor Paterson ($710 million), and delaying a planned increase in the STAR rebate and other changes to that program ($354 million).
• Revenue Actions ($1.3 billion): Revenue actions include improved audit and compliance efforts ($487 million), closing tax loopholes to ensure that everyone pays their fair share ($429 million), increasing programmatically tailored fees ($203 million), and maximizing revenues from the State’s abandoned property accounts under an agreement with the State Comptroller's office ($150 million), among others.
• Non-recurring Resources ($1.4 billion): The $1.4 billion in non-recurring revenues included in the Budget are within historic levels. The largest of these is a proposal to negotiate an up-front payment from a developer in exchange for the right to operate a new state-owned Video Lottery Terminal facility at Aqueduct Racetrack ($250 million).
• Labor Reserves ($620 million): The financial plan utilizes labor reserves to fund salary agreements reached through the collective bargaining process. These labor reserves were previously set aside for this purpose.

Reserves

The gap-closing plan does not utilize any of the State’s $1.2 billion in rainy day reserves. Overall, the State is projected to end the year with $2.0 billion in total reserves.

Economic Climate/Revenue Reductions

The economic climate steadily deteriorated throughout the budget development process. The Division of the Budget is now projecting that the national economy is in a recession. This forecast is based on several negative indicators, including:

• Four consecutive months of declining private sector employment in the United States, with job losses totaling 300,000 nationwide during that time period;
• The continued weakening of the housing market. Average new home prices fell 8.9 percent in the first quarter of 2008 across the United States; and
• The crisis on Wall Street related to sub-prime mortgages has further worsened. Financial service firm write-downs now total over $200 billion, industry lay-offs have reached over 63,000, and bonuses are expected to decrease by 11.1 percent in 2008-09.

In order to protect the State’s finances against economic deterioration, today’s Enacted Budget report projects an additional $530 million reduction in General Fund revenues. Since the Executive Budget was introduced, the Division of the Budget has reduced its forecast for base 2008-09 General Fund receipts by $1.13 billion. In addition to today’s $530 million reduction, a $304 million reduction was taken during the 21-day amendment process in February and a $300 million reduction was agreed to during the revenue consensus process with the Legislature on March 1. For 2008-09, base tax receipt growth is projected to increase by 2.6 percent, compared to growth of 6.0 percent in 2007-08.

Preliminary results for April indicate that Personal Income Tax revenues were $1.6 billion higher than estimated in February, reflecting stronger than projected performance of the financial markets in the first half of 2007. However, because of the continued deterioration of the economy from the end of 2007 through 2008, the Division of Budget has significantly lowered its revenue collection projections for the remainder of the current fiscal year. As such, these higher than estimated payments in April will not lead to a surplus in 2008-09 or increased revenues for 2009-10.

Spending Reductions Ordered by Governor Paterson

On March 20, in advance of final negotiations with the Legislature, Governor Paterson expressed his concerns over the state’s economic outlook and ordered the Division of the Budget to impose across-the-board reductions in the recommended operating budgets of State agencies ($509 million or 3.35 percent) and non-entitlement local assistance programs ($269 million or 2 percent). Of the $778 million in proposed reductions, $710 million ($505 million for State agencies, $205 million in local assistance) were included in the final Enacted Budget. These savings were not used to fund legislative spending additions, but were instead designated to protect the State’s Financial Plan and maintain budget balance in the wake of the deteriorating revenues recognized in today’s Enacted Budget report.

Legislative Actions

During negotiations, the Legislature identified $1.25 billion of new resources (“avails”) to finance $1.25 billion of changes to the Executive Budget. These resources did not include the savings produced by the Governor’s across-the-board cuts.

• Avails: The Legislature’s $1.25 billion in available resources came from three sources: (1) Spending reductions to the Executive Budget ($341 million), the largest of which was a rejection of a proposed salary increase for the Judiciary; (2) Reestimates of spending and audit collection projections ($395 million), primarily in Medicaid; (3) and various revenue actions ($514 million), including an increased cigarette tax ($265 million) and making uncommitted fund balances in special revenue accounts available to the General Fund ($220 million).
• Legislative Changes: The Legislature used these available resources to change the Executive Budget proposal in two ways: (1) Increasing program spending or not accepting cost savings measures advanced by the Executive ($1.1 billion), the largest of which were in education ($436 million) and health care ($234 million); and (2) denying revenues earmarked to finance programmatic spending ($143 million), the largest of which was an auto insurance surcharge that would have been used to finance State Police and transportation safety initiatives.

State Debt

State related debt outstanding is projected to total $52.8 billion at the close of 2008-09, an increase of $3.2 billion. The largest new debt initiatives were for transportation ($814 million); health and mental hygiene ($713 million); higher education ($604 million), school construction ($596 million), and economic development ($466 million).

Workforce

The State workforce is currently projected to total 201,170 at the close of 2008-09. On April 21, 2008, Governor Paterson sent a letter to agency heads directing them to rethink their hiring practices and implement other cost-cutting measures. By May 16, commissioners must submit their savings plans. The State workforce total is expected to be modified at the First Quarterly Update to the Financial Plan to reflect the impact of the approved plans.

A copy of the Enacted Budget Report (PDF) can be found at http://www.budget.state.ny.us.