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New York Numbers Racket

New York State has masked the actual size of its deficits through maneuvers that provide merely temporary budget relief, the state comptroller said in a report yesterday.

The report comes as the state operates on emergency spending measures after a budget deal to close a $9.2 billion hole eluded lawmakers before the April 1 beginning of fiscal 2011. The Legislature returns to session tomorrow after breaking for the Passover and Easter holidays.

“The state dips into dedicated funds here and shifts money over there, all to cover cash shortfalls and avoid making the difficult decisions needed to align spending with revenues,” Comptroller Thomas DiNapoli said in a press release. “If the state’s true structural deficit is hidden, hard decisions can be avoided and everyone can pretend things are fine.”

The state has been playing a “fiscal shell” game that makes it difficult to peg the real size of its underlying structural deficit, the report said.

Budgeting ploys described in the report totaled $6.4 billion in fiscal 2010. They included fund sweeps, temporary loans from state investment pools and shifting pay-as-you-go funding to bonding, the comptroller said.

Lieut. Gov. Richard Ravitch last month said the state faces an estimated $13 billion structural deficit. Ravitch has proposed creating a financial review board to oversee the state’s budgets and the phase-in of generally accepted accounting principles for budgeting that would stop the state from pushing out current expenses into future years.

“The best remedy is to require the state to use generally accepted accounting principles rather than to be budgeting on a cash basis,” said Charles Brecher, vice president and research director at the Citizens Budget Commission, a business-oriented fiscal watchdog organization. “If the state was relying on GAAP budgeting, most of these gimmicks wouldn’t help.”

The state categorizes its hundreds of funds and accounts as either general fund, special revenue funds, capital projects funds, or debt-service funds. Over the past 25 years, the state’s general fund spending has shrunk as special revenue fund spending has grown. The use of special funds linked to new taxes or fees has masked the true growth of spending, the report said. The state also “sweeps” those accounts — transferring monies to the general fund — to help it balance its budget.

The use of sweeps has increased in recent years — of the roughly $2.9 billion of fund sweeps carried out since fiscal 2000, $1.8 billion have been in the past three years, the report said.

One of those special funds, the environmental protection fund, was established in 1993 to provide pay-as-you-go capital for environmental projects primarily using real estate transfer taxes. In fiscal 2003, the state swept $346 million from the fund to balance its budget and instead issued $111 million of bonds through the New York State Environmental Facilities Corp. to finance projects. Since fiscal 2000, the state has swept $854 million from that fund and partially replaced the monies with $347 million of bonds.

In a similar vein, the state has used its dedicated highway and bridge trust fund for operating expenses and sold bonds against a stream of a revenue that was originally intended to provide pay-as-you-go funding, the report said. The New York State Thruway Authority has sold $9.34 billion of new-money bonds secured by the trust fund, according to Thomson Reuters. Those budget tactics “have rendered the trust fund effectively bankrupt,” the report said.

As budget talks continue, it is unclear whether budget reform will end up in the final deal. The Assembly has advanced a proposal modeled on the lieutenant governor’s, but the Senate has to date taken a different path.

Ravitch’s proposal borrows from the playbook that helped restore New York City’s fiscal health after it teetered on the edge of bankruptcy in 1970s. If some of the remedies are similar, the state’s quandary differs significantly. For one thing, states can’t go bankrupt. Another difference is that New York City’s crisis was in part a product of its reliance on short-term borrowing to fund operations. The city temporarily lost access to the credit markets, but the state doesn’t have that problem.

“The city had a financing crisis in 1975. This is not a financing crisis, this is a revenue insufficiency crisis or an over-expenditure crisis, depending on what your political views are,” Ravitch said in an interview last month.

Though the state can still sell its bonds, that may not always be the case if current practices continue, he said. “What is not sustainable won’t ultimately be sustained,” he said.

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