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Pity Your State Government

How the collapse of Wall Street will hurt for years to come

Earlier this week, New York State Comptroller Thomas DiNapoli reported that state tax revenue collections are down over $3 billion compared to last year. He also reported that spending on Medicaid is up by over a billion dollars, even though overall spending by our state government is down.

Here’s what this means to you if you’re the winning candidate for governor in 2010: Whether you’re a Republican or a Democrat, you’d better start praying that President Barack Obama succeeds in 2009. If the president does not succeed in reforming healthcare and stimulating the economy, then chances are good that the federal government will not be in any position to help a state where the really scary numbers haven’t really made headlines yet.

Here’s the bad news:

• A report from the state Department of Labor shows that employment in New York City is down by over 200,000 individuals;

• Another Department of Labor report shows that income tax receipts from the New York City area are down 15 percent so far in 2009; and

• A soon-to-be published analysis by the Center for Economic and Policy Studies at Buffalo State College will show that more than 75 percent of all New York State revenues come from the greater New York City area, which has only 60 percent of the population.

The alarming drop in revenues—before we even get to the question of what the money gets spent on—is all about the drop in employment in New York City, especially on Wall Street. There is today—notwithstanding the more than $1 trillion that George Bush and Barack Obama have extended to Wall Street—no serious prospect of state revenues rising back up until and unless the Wall Street resumes hyper-drive.

The disconnect

Strange, you may say. There doesn’t seem to be a crisis we can touch or feel. The incumbent mayor of Buffalo brags about a reserve fund of over $130 million. Erie County no longer has a “hard” control board because the county’s four-year fiscal plan shows balanced budgets and modest surpluses for the next two years. Unemployment is up, true, but then it’s never small around here.

If there is no house-on-fire mentality now, it’s because of the federal “stimulus” money that has already arrived. Governments, including the state and the county, have used the funds from the American Recovery and Restoration Act of 2009 to plug their gaps.

Call it the Obama respite. We’re good until 2011. But after 2011, unless there is another huge transfusion of Obama money, there will be massive shortfalls, as Medicaid and other safety-net programs rise in cost and as revenues from New York City and environs fall.

It would seem logical, then, that now would be the time for government to get going on restructuring.

Except we’re not talking about it. Without another federal “stimulus” package or a great turnaround in New York State’s economy, spending on the stuff that prevents the unemployed, the poor, and the elderly from sliding into darkness will rise so much that there won’t be enough money for much else starting in 2011.

The successful candidate for governor in 2010 will have the following choice: either raise taxes a lot and cut what little is left of discretionary spending, or raise taxes a little, raise tuition at SUNY campuses, cut discretionary spending, and in addition to all that, shift as much as possible of the state burden down to the county property taxpayer.

Poor and old

New York State’s rich are less rich than they were when Wall Street was on a testosterone-steroids-Madoff cocktail. There are more people out of work than at any time since 1982. There are more stressed-out folks in the middle-income, property-tax-paying class than before, folks who had counted on annual increases in their home values. Home values have stopped rising. Just a couple of years ago, growth in the value of home equity used to be turned into home-equity loans that funded new cars, college tuitions, and other kinds of consumption. No longer. Not now. Some say never again.

Meanwhile, the portion of New York’s population that is eligible for federal healthcare programs—some of which is paid for by state and local tax dollars—is huge and growing. Medicaid is for the poor; its expenditures are up because the number of poor people is up. Medicare expenditures, which are not paid for with local tax dollars, are up because so is the number of folks who are over age 65.

When you add up those two populations, the Medicaid-eligible and the Medicare-eligible, the numbers are breathtaking: Almost half the folks who live in New York City are eligible for one of those two programs. About 33 percent of the folks who live in Erie County are eligible. Their income profiles are surprisingly similar: Four out of 10 households in Erie County are poor.

But here’s the difference between upstate and downstate: In New York City, local taxpayers actually pay the local-share costs of these programs, whereas here in Upstate New York, local taxpayers do not. New York City subsidizes its own poor and elderly. But it also subsidizes our poor, our elderly, our local governments, our local school districts, and much, much more up here in the red part of New York State.

It’s only New York City’s income-creation machines that keep this state going. That machine took a big hit and it’s not yet recovering, and the fact is, the financial services part of it may never recover.

So who the hell would want to be governor of a state where the poor and the elderly are growing, the middle class is broke, the rich are less rich, and the only way to keep the current system going is to get a federal handout that probably won’t come?

Reality check…in the mail?

Pity the poor politicians. Everybody talks a great game about cutting Medicaid expenditures until it comes time to take on the nursing-home operators, the home healthcare aides, the advocates for the poor and for the chronically ill (including the mentally ill), all of whom New York State treats more decently, both as service providers and as service recipients, than does any other state. What candidate for governor will commit to cutting Medicaid expenditures to the level of California’s? Which legislator is going to explicitly go after the salaries and benefits of state police? Brave campaign words will be spoken about how to get property-tax relief by kicking public-sector workers, but don’t go believing that firefighters, teachers, police, public health nurses, or other civil servants won’t remind voters that their salaries recycle back into hard-stressed local economies.

The truth is that nobody is getting rich off entitlement programs or public employment. The truth is that downstate is subsidizing upstate. Tax breaks for wealthy investors have not stopped a terrible increase in unemployment.

Our prospects for sustainability beyond the crash of Wall Street must involve the following change agenda: To get upstate off the dole, local governments have to become regional governments that end the sprawl that preserves poverty; to keep the workforce smart and to stop dozens of rural counties from dying, the 46 campuses of the state university system have to be funded; federal healthcare reform has to get implemented so that Medicaid stops busting the bank; our federal stimulus money has to actually stimulate income-generating green jobs, including water-quality systems; some kind of as-of-right or across-the-board investment incentive will have to be enacted in return for cutting the Gordian Knot of IDA reform; and overall, New York is going to have to become known again, as it was in the 1960s, as the place where smart people, strivers, entrepreneurs, and risk-takers get the welcome mat, and the insiders get shooed away from the table.

The Obama respite, from 2009 until the start of fiscal year 2011, is the time to get moving. As the numbers will show more and more clearly, New York City won’t have the money for change after 2011.

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.

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