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Wall Street Journal

 

The Ravitch Plan Won't Save New York

March 13, 2010

By E. J. McMahon

Until the state confronts the unions expect higher taxes and lower growth.

Like a drunk tempted to go on one more binge at a stressful moment, New York state may soon reach for the debt bottle in the face of mounting deficits. If it does, taxpayers will feel the hangover for a generation.

The stress is real. State officials need to close a looming deficit of $9 billion for the current fiscal year, which begins on April 1. That budget gap is more than $1.6 billion higher than the estimate Gov. David Paterson presented in his original fiscal year 2010-2011 budget proposal, in January. Projected deficits over the next five years now add up to $43 billion.

While the crisis mounted, however, inaction has been the rule in Albany. Like their counterparts in Sacramento, Calif., or Trenton, N.J., New York lawmakers have been paralyzed, feeling themselves beholden to various spending constituencies, especially labor unions. More lately the political class has been transfixed by the travails of Mr. Paterson.

The governor recently abandoned his election campaign and is now barely hanging onto office. He faces allegations that he improperly interfered in a domestic violence case involving a top aide, and that he lied under oath when asked how he landed $6,000 worth of complimentary World Series tickets. No matter how long Mr. Paterson survives in office, his political credibility is irretrievably damaged.

Enter Lt. Gov. Richard Ravitch, the 76-year-old New York City developer, financier, labor negotiator and onetime transit czar whose appointment by Mr. Paterson last year to the No. 2 slot added gravitas to an administration sorely in need of it. The governor assigned Mr. Ravitch to study potential long-term solutions to the fiscal crisis.

On Wednesday Mr. Ravitch proposed a five-year plan for restoring “structural balance” to the state budget. The proposal includes borrowing $6 billion over the next three years and a possible three-month extension of the fiscal year that ends March 31. In return, Mr. Ravitch wants the Legislature to shift the fiscal year start from April 1 to July 1, matching the norm in other states, and to transform the annual cash-basis budget to an accrual-based, long-term financial plan. He also wants the governor to have the power to impound spending if, in any given quarter, the plan is found to be out of balance by an “independent” Financial Review Board. Most of these reforms mimic the fiscal rules that now apply to New York City.

Mr. Ravitch’s reputation was built on the supporting role he played in engineering New York City’s recovery from its fiscal crisis of the mid-1970s. However, his attempt to apply the 1970s template to the 21st century state crisis, while clearly well-intentioned, is off the mark. For example, Mr. Ravitch’s desire to superimpose a Financial Review Board on the existing budget process—as opposed to an outright grant of impoundment power to the governor—hearkens back to the Financial Control Board created to oversee the earlier state bailout of New York City.

This ignores fundamental differences between the two levels of government. The city was functionally insolvent after more than a decade of chronic deficit spending concealed by capital borrowing to pay operating expenses. The state government, by contrast, has spent the last two decades veering from huge surpluses to occasional big deficits, patched when necessary with borrowing and temporary revenues. As a result, roughly $10 billion of $60 billion in currently outstanding state-supported debt can be attributed to past deficit borrowings. In short, New Yorkers have gone down this road before, and are paying the price.

The greatest difference, of course, is that the state is a sovereign entity that cannot go bankrupt under federal law. Municipal officials have limited powers, but the state’s leaders are equipped with all the constitutional tools they need to solve their problems—if they can muster the will to do so.

The focus should not be on budget “balance,” which is already required on an annual basis and can be achieved in different ways. The critical focus should be on curbing spending. A limited borrowing plan hardwired to firm and specific spending and debt caps, for example, is a better path than some “structural balance” approach.

New York City’s fiscal crisis in the 1970s established one key precedent Mr. Ravitch has so far ignored: the power of the state to freeze public-sector wages, notwithstanding contracts, in a fiscal emergency. Instead, Mr. Ravitch’s proposal would give legislative Democrats, led by Assembly Speaker Sheldon Silver, a rationale for permanently extending the large temporary personal income tax hike enacted by the state last year. This will suppress the economic growth the state desperately needs to grow its way out of its current problems.

As a potential road map for states in similar fixes, Mr. Ravitch’s plan offers all the surface appeal of the deus ex machina engineered by California Gov. Arnold Schwarzenegger early in his tenure. After voters approved his package of fiscal reforms linked to massive borrowing to cover the deficit in 2004, Mr. Schwarzenegger boasted, “We tore up the credit card. Never again will government be allowed to spend money it doesn’t have.” Famous last words. Five years later, the Golden State was again a fiscal basket case, more deeply in the red than ever.

California, here we come?

Original Source: http://online.wsj.com/article/SB10001424052748703625304575116490675891102.html

 

 
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