Lt. Governor: Fiscal Solutions Essential to Saving Key Services
Elected leaders in New York and other states must make politically risky choices involving spending, taxes and public-employee pensions if the states are to maintain higher education, transportation and other essential services in coming years, Lieutenant Governor Richard Ravitch told a Rockefeller Institute forum on December 9.
Ravitch was appointed lieutenant governor by Governor David Paterson in July 2009. At the request of the governor and with the assistance of the Rockefeller Institute, Ravitch has been developing proposals to help lead New York State toward structural budgetary balance while educating the public about the nature of the state’s fiscal challenges. His reports have dealt with the overall scope of those challenges, recommendations for budget reforms, executive and legislative budget powers, rising Medicaid costs, and a deteriorating transportation infrastructure.
The Institute forum was Ravitch’s final public appearance in Albany while serving in office. Answering questions from Institute Deputy Director Robert Ward, the Lieutenant Governor repeated his previous warnings about the state’s structural budget gap. In a March 2010 report, the Lieutenant Governor estimated the structural budget gap — the mismatch between spending and revenue that will remain even if economic times improve — at over $13 billion.
In the past, New York has avoided the issue of reconciling revenues with expenses, Ravitch said, because an infusion of surplus cash has always come through to cover its overspending. Those infusions have come in forms such as the sale of prisons or other assets, settlement of a lawsuit with tobacco companies, an influx of tax revenues related to short-term profits in the financial industry, and the federal stimulus package.
But many one-shot revenues are no longer available, and additional federal aid seems unlikely in the near future, Ravitch said. State officials in New York and across the country will need to make hard choices that take into account services they need to cut, taxes they need to raise, and where they need to invest.
One area that Ravitch said needs to change is New York's public employee pension system. State workers currently receive defined benefit pensions -- a type of retirement that has largely disappeared from the private sector -- in which the state is obligated to pay a certain amount when they retire. Ravitch said that for future employees, the state needs to shift to a defined contribution plan, like a 401(k) retirement plan, in which the amount paid out at retirement is dependent on how much the employee and employer contribute and on growth in those investments over time. Such a plan should include some minimum guarantee, he added.
Transportation and education are two areas where Ravitch said governments cannot afford to defer spending.
“You can duck. You can defer. But you cannot avoid paying for things you have committed to," he said.
The tough choices ahead — for the nation, for states and for cities and towns — will likely change the relationships among levels of government in our federalist system, Ravitch predicted. Officials will need to reconsider which responsibilities should fall to the federal government, which to the states and which to local governments. Shifting of responsibilities between state and local governments is likely to be seen first, he said.
Raising taxes may be one of the toughest decisions government officials must consider in a highly mobile, technological society, Ravitch said: If a state overtaxes a business, the company can quickly move to another state. It may be easiest to tax at the federal level, Ravitch said, to avoid what he called “artificial and temporary dislocations.” He mentioned the possibility of an increase in the federal gasoline tax, to fund infrastructure investments, as one example.
In the 1970s, Ravitch assisted New York City and state officials in helping the city avoid financial collapse. The key difference in trying to resolve the state’s problems, he said, is that the city had the option of declaring bankruptcy and reneging on obligations to creditors and employees, while states are not legally allowed to do so. The bankruptcy threat encouraged various interested parties — including unions that negotiated salaries for city employees and financial institutions that loaned the city money — to make some concessions that helped the city get back in the black. Similar groups do not have the same incentive to work with the state today, Ravitch said.
Introducing the day’s discussion, Rockefeller Institute Director Thomas L. Gais said the Lieutenant Governor has “educated many of us – many citizens of New York, people from around the country, many people who often didn’t hear what he wanted to say and often tried to change the subject.”
Gais added: “To the extent that there is more understanding of these and many other points about our state’s fiscal situation and practical ideas about how to remedy the problem, I think we have the Lieutenant Governor to thank.”
Ravitch predicted that officials in New York and other states will be forced to take action to correct their fiscal troubles when one of two things happens: governments run out of cash, or services diminish to such a point that many people are hurting.
Ultimately, he said, it’s the public that will need to force politicians to straighten up their fiscal messes.
“Until the public recognizes the seriousness of this,” Ravitch said, “I don’t think the political system is going to address it with the urgency that it should.”