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Observation: New York: Harbinger of How the Stimulus Works? April 2009

New York: Harbinger of How the Stimulus Works?

By David Shaffer
Senior Fellow, the Rockefeller Institute of Government

David Shaffer

New York is the first state to enact a new budget with federal stimulus money in it. If the Empire State is any indication, things may not work out exactly as Congress had hoped.



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David Shaffer is a senior fellow at the Rockefeller Institute, focusing on education issues and economic development. A version of this article appeared earlier on www.stateline.org, a news website that reports on state policy and politics.

The federal government offered states $144 billion to bolster their budgets over three years. The idea is to avoid tax increases and layoffs that could damage their economic recovery, and increase their fiscal stability.

New York took all the extra federal money it could get this year, about $7.2 billion - unlike some states still wavering on certain provisions. But the Empire State still ended up raising taxes by about $7 billion. It plans to cut the state workforce by at least 8,900 starting in the next few months. Schools, local governments, and hospitals report that they too will face layoffs. And New York is sticking with spending patterns that could pose enormous new fiscal problems once the federal stimulus money runs out.

Because New York’s fiscal year begins April 1, which is unusually early, it often serves as a bellwether for new directions in state fiscal policies. That may or may not prove to be the case this time; New York's revenue base is unusually dependent upon the reeling financial services sector, so other states may not face equivalent budget problems. But the $787 billion federal stimulus package relies upon states to do much of the economic “pump-priming.” So how this plays out in other states will tell us much about the ultimate success of the program.

A key problem for New York was that its budget gap started in January at $13.7 billion – almost twice the available federal stimulus aid – and grew to $17.7 billion as revenues continued to deteriorate.

But another problem was that it’s never easy to cut spending – especially in the face of a weakened economy, which cuts state revenues but increases demand for services. With the federal stimulus money included, New York's new budget grew 8.7 percent, to $131.8 billion.

Indeed, the availability of the stimulus money seemed to undercut whatever support there might have been for cuts. Every interest group asserted there was enough money in the federal package to avoid cutting their particular program – even though the total added up to less than half the state's deficit. The federal money also comes with strings attached to prevent certain kinds of state budget cuts – in school aid, for example, or in Medicaid eligibility. In the end, the math just didn't work.

One key bone of contention was Medicaid spending – the fastest-growing item in many state budgets. Congress appropriated $90 billion to increase the federal matching share of Medicaid spending. The bill said the purposes were, first, to “provide fiscal relief to the states,” and second, to help “avert cuts” in health-care spending. New York's share of this is $11.1 billion, of which $3.5 billion was available to the state in the new fiscal year.

With busloads of demonstrators at the state Capitol and an advertising campaign on television, New York's health-care unions and hospitals made a strong effort to convince the Legislature that all of the matching-grant increase should go to health care (though the federal statute does not require this). But in the end, the New York budget uses about $1.2 billion for health care. The other $2.3 billion went into general state coffers.

The other big piece of federal budget relief to the state came in the form of education aid – about $1.2 billion in the new fiscal year. New York’s elected leaders used that to reverse school-aid cuts proposed by Gov. David Paterson (D), and to add another $405 million on top.

The Rockefeller Institute of Government, which specializes in studies of federal-state relations, forecast in February that once the federal stimulus money runs out, states generally will face huge budget deficits. Now that one state has acted on its new budget, we can already see that pattern emerging – indeed, New York’s latest official forecast is for an out-year deficit of $11 billion. What happens then? It may not be long before Congress hears demands for more aid to states.


ABOUT THE ROCKEFELLER INSTITUTE OF GOVERNMENT

The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.