Sunday, June 20, 2010

Will changing the budget year help?

As usual, New York State's budget is overdue again--long overdue.

The state constitution requires that the legislature pass a budget before the fiscal year begins on April 1, but in 24 out of the past 25 years, including this one, the state government has been tardy. The record was set in 2002, when the budget was 208 days late!

The state has been operating on week-to-week emergency appropriations bills since April 1. Every week since April 1, the governor has sent over an extender to enable the state to keep the lights on and operations going for another week. Most weeks the extender has passed the Senate by a narrow margin, with all 32 Democrats voting for the extender, and all 30 Republicans voting against it. Last week, however, was a particular nail-biter, because two Democratic senators threatened to vote against the bill, raising the prospect that the state would have to shut down indefinitely. In the end, a few Republican senators broke ranks to end the stalemate and keep the state going for another week.

But all this procrastination makes it very hard for others in the state to make any kind of sensible long-term plans. Voters all over the state once again had to vote on local school budgets on May 18 without any information on how much state aid their local districts will receive next year.

As Senator Liz Krueger has been pointing out since 2003, the April 1 fiscal year is an oddball one and deserves scrutiny.

New York used to have the same July 1-June 30 fiscal year used by most other states. It's kind of funny to consider the reason why New York changed from a July 1 start to an April 1 start, back in 1943. According to a whitepaper report issued by Senator Krueger's committee on budget and tax reform:

When lawmakers in 1943 shifted New York to an April 1 fiscal year, the State suffered from budgets that were passed too early; the State typically ended its fiscal year on June 30 with huge surpluses that irked taxpayers...

Ha! We should be so lucky to have those problems...these days our problems are not "huge surpluses," but rather huge deficits and budgets passed too late rather than "budgets passed too early."

It should be noted that times were very different back then. Prior to 1943, Americans in general, including New Yorkers, paid their income tax bills once a year each spring. There was no withholding on wages before 1943, at either the federal or state level. The economic boom caused by wartime production was causing big state surpluses to build up: on the one hand, state income tax revenues were flowing in at record rates and on the other hand, the state government needed to delay public works projects due to shortages of materials and personnel required by war-related industries. As a result, in 1942, Governor Lehman had requested "a 25 per cent emergency reduction in the [New York State] income tax payable this April 15 and April 15, 1943."

An emergency tax reduction? Yes, times sure are different now!

Senator Krueger proposes to change the budget year to run from June 1 to May 31, and to change the date of school budget elections to the end of June. Her committee's white paper points out that there is nothing "sacred" about an April 1 budget date. It presents a number of good arguments for such a calendar change. For example, a June 1 start to the fiscal year would allow legislators to get a more accurately updated picture of revenues based on April 15 tax filings.

On the other hand, there's a lot of potential for creative accounting mischief whenever a fiscal year change occurs. Given the projected $9 billion budget gap this year, the temptation to get creative might be overwhelming this year.

And, as Senator Krueger's white paper itself points out, there's no guarantee that the legislature will adhere to a later budget deadline any better than it's managed to deal with the current April 1 deadline. Quite a few other states with July 1 budget years still don't manage to make their deadlines either.

Nevertheless, a July 1 fiscal year is not a panacea; it does not guarantee a smooth and prompt budget process. For example, between 1967 and 2007, Wisconsin only passed eight budgets prior to the start of its July 1 fiscal year.5 Eight states—all with July 1 fiscal years—started their 2010 fiscal years without finalized budgets. They included Arizona, California, Connecticut, Illinois, Mississippi, North Carolina, Ohio and Pennsylvania. Indiana and Rhode Island finalized their budgets on June 30. Since 2002, 19 states have entered fiscal years without a final budget.

And such a change can't happen very quickly--it would take a state constitutional amendment to change the fiscal year. And the legislature has demonstrated very little interest in dealing with systemic long-term issues in a responsible manner.

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