Saturday, August 21, 2010

New York's Fiscal Disaster Keeps Getting Worse

There is no good news to be found when it comes to the New York state budget. It's a disaster. Out of control spending combined with ever higher taxes have resulted in a disastrous budget situation.

Legislators cannot find the courage to cut spending. Heck, they can't even be bothered to keep spending flat. Instead, they increased spending more than $3 billion this year, all while calling for an increase in taxes of more than $1 billion.

The result? A budget that will be in deficit next year by nearly $8.2 billion that will only grow by billions in future years.

This is a structural deficit caused by prodigious spending and a refusal to deal with the situation. Taxpayers are soaked in New York and have the highest tax burden in the nation.

And as bad as that situation is, it gets worse once you factor in the overly rosy forecasts for pension obligations.
The budget news came with release of the final 2010-11 budget, which totals just under $135.5 billion.

While that spending plan is finally balanced, future gaps have grown larger than earlier predicted.

Next year, the gap stands at $8.2 billion, and grows to $13.5 billion in 2012-13 and almost $15.6 billion in 2013-14.

Next year's predicted gap stood at $5.4 billion earlier this year, before the budget was completed.

Those deficits would arise if current trends continue and nothing is done to close the gap, either through reduced spending, higher revenues or a combination. By law, the state budget has to be balanced.

Meanwhile, localities likely will feel a pinch for the next few years on their public employee pension costs as Comptroller Tom DiNapoli is poised to announce a lowered expected return on the state's $132.5 billion pension fund.

The fund currently generates 8 percent, but the Comptroller's panel of actuarial experts is expected in coming weeks to recommend that the "assumed" rate be lowered to 7.5 percent or 7.7 percent, said DiNapoli spokesman Robert Whalen.

"There's been a lot of public discussion of whether (8 percent) is realistic or not," Whalen said.

The sluggish stock market and with record-low interest rates, which decrease the return from bonds, is helping push down the amount of money the fund spins off each year.

With less money generated by the fund, the state as well as municipalities and other local government entities would have to increase their share of pension payments for retirees. Unless they can cut costs in other areas, localities might have to raise taxes in coming years to make up the difference.
The more conservative estimate, the more money must be directed into the pension funds to fund the state's obligations to workers. The problem is that the state needs higher returns to justify lower funding - and the current economy means that there is no honest way to justify the higher rate of return.

That's why the state must start trimming spending. It cannot justify higher spending on programs when it lacks the revenues to fund these programs and obligations. Higher taxes aren't driving higher revenues either - they've fallen off even harder. When Wall Street falters, the revenues at the highest brackets falls the greatest.

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