Dec. 18 (Bloomberg) -- New York state relies on gimmicks and nonrecurring revenue to pay for rising pension costs and the most-generous Medicaid benefits in the U.S., said a group led by former Federal Reserve Chairman Paul Volcker and former Lieutenant Governor Richard Ravitch.
Annual pension contributions may increase 31 percent to $10.6 billion by 2015 from about $8.1 billion in 2013, and would probably need to rise by an additional $14.8 billion if the state were to adopt a 5 percent assumed rate of return on invested assets, instead of the current 7.5 percent, the State Budget Crisis Task Force said in a report issued today.
In 2009, New York spent $9,056 per enrollee in Medicaid, the federal-state health program for the poor. That’s 69 percent higher than the U.S. average, according to the report. Even with a cap instituted last year, the state expects to pay $22.8 billion in fiscal 2014, an 8 percent increase from last year, the group said.
“Retirement obligations and health care are outdistancing revenues at an ever-increasing pace, and it’s hard to believe New York finances will remain sustainable unless there’s dramatic economic recovery at a 7 to 8 percent rate,” Ravitch said in an interview. That’s not likely to happen, he said.
“The Empire State is not the powerhouse it was generations ago,” the group concludes in the report.
Ravitch and Volcker created the task force of former government officials in 2011 to examine U.S. state finances. The group released a main report in July on California, Illinois, New Jersey, New York, Texas and Virginia, and is preparing reports on individual states.
Their Dec. 13 report on New Jersey said that state’s pension contribution may consume almost one-fifth of its annual budget by 2018, under a law enacted by Republican Governor Chris Christie to compensate for underfunding its obligations since the mid-1990s. The state’s contribution must rise by about $4.5 billion over the next five years, from $1.03 billion in 2013, which Ravitch said may require “a Draconian tax increase.”
To balance New York’s budget, state officials have relied on about $25 billion in nonrecurring, or “one-shot,” revenue actions, over the past 10 years, according to today’s report. The budget is $132.6 billion for this fiscal year.
“New York’s structural deficit, papered over with gimmicks, has existed for decades,” according to the report.
Morris Peters, a spokesman for New York Governor Andrew Cuomo’s budget office, responded to the report by saying that the governor has gotten rid of “many of the budget gimmicks made by previous administrations.”
Since assuming office in 2010, Cuomo, a 55-year-old Democrat, has cut about $77 billion in projected budget deficits, Peters said. This year, Cuomo made the first deposit into the state’s rainy-day fund since the 2007 start of the fiscal crisis, Peters said in an e-mail.
“Spending growth has been limited to 2 percent or less for the second year in a row, and there have been no new taxes or fees or gimmicks like borrowing to pay for operating expenses,” Peters said.
Common practices include transferring unspent money from a state fund or public authority; refinancing bonds without creating new assets; delaying payments to suppliers, contractors and localities from one fiscal year to the next; and delaying payment of tax refunds, the group said.
“As a result of this reliance on cash manipulations and one-shot transactions, the typical budget projections associated with the enacted budget will show that the adopted spending plan is in balance, but projections for future years will show ever-growing potential budget gaps,” the group said in the report.
The state’s fiscal challenges include its reliance on income levies for 61 percent of tax revenue, which fluctuates with the economy. Its sales tax, which represents a broader base, brings in about 17 percent of tax revenue, compared with the average of 32 percent among U.S. states, according to the report.
A new top income-tax rate of 8.82 percent for singles making more than $1 million and couples earning more than $2 million, enacted a year ago, means that “the economic fortunes of less than one-half of 1 percent of taxpayers will have especially significant implications for the state’s fiscal stability over the next three years,” according to the report.
The report contains a warning for local officials who amortize pension costs. The practice, which the report describes as a “gimmick,” stretches contributions over 10 years by borrowing, at 3.75 percent interest this year, and treating the transaction as if the obligation has been paid in full.
That form of borrowing allows lower payments by the state and participating municipalities in the short term and higher total payments by future generations, the report said. It also means the funds’ assets need to earn higher returns to make up for amortized interest paid.
New York Comptroller Thomas DiNapoli, a Democract, attended Ravitch’s and Volcker’s presentation of the report today in Manhattan. He praised it as an “objective look from top to bottom of New York’s financial condition.”
At the same time, DiNapoli defended the use of amortization to reduce yearly pension contributions, describing the tactic as “an effort to deal with real-life budget challenges.”
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