The Winners: Where New York’s Money Goes

If you read my prior posts, you know that in Fiscal Year (FY) 2004 New York City residents paid an estimated $149.19 for every $1,000 of their personal income in state and local taxes, either directly or through the businesses they work in or patronize, and that the residents of the rest of New York State (the part outside New York City) paid $128.03.  This compares with a national average of $104.09.  And, you know that nearly the entire difference was accounted for by higher local taxes, since New York’s state taxes, at $62.12 per $1,000 of personal income, were just slightly higher than the national average of $60.83 per $1,000 (and New York State income tax payments by residents of Connecticut and New Jersey in part offsets that difference).  This is an overview of where that additional money goes.

In percentage terms, per the above, city residents paid an additional 4.5% of their income, and residents of the rest of the state paid 2.4% of their income, more than the national average in state and local taxes.  Taxpayers (especially those without special tax deals, or even with fewer such deals than average) are among the losers in New York’s fiscal priorities, most of which are set by the state government. 

An analysis of who the winners are must look beyond total spending and examine revenues, since some additional spending is financed by federal aid or fees for services.  For example, charges for services and federal and state aid accounted for 76.7% of New York City’s spending on Welfare, Health, and Hospitals in FY 2004.  Still, some conclusions can be drawn (see the table at the end of this).  The biggest sets of winners are below.

The first set is Medicaid, especially in New York City, and public schools outside the city.

New York City residents paid 1.1% of their incomes in local taxes to finance payments to the State of New York for Medicaid, while the rest of the state paid 0.5%, in FY 2004.  The national average was just 0.1% of income not only for Medicaid but for all public welfare programs.  Elsewhere, in fact, local-to-state aid for any purpose is uncommon.  New York State accounted for nearly 3/5 of all local-to-state aid in the country in FY 2004; New York City alone accounted for more than 2/5 of the national total.  In other research, I have found that the State of New York’s own Medicaid funding is about average as a share of state residents’ income.  So the entire excess state and local tax burden required to pay for New York’s unusually expensive Medicaid program was collected at the local level.  That’s an extra 1.0% of income right there for New York City.

Subtracting out federal and state aid, residents of the rest of New York State paid 3.6% of their income in local taxes for elementary and secondary public education, far more than the 2.3% national average, in FY 2004.  That is surprising in that the rest of the state also received federal and state aid equivalent to 3.3% of its residents’ income, also far above the national average of 2.6%.  That is because elementary and secondary education spending equaled a stunning 6.5% of personal income in the rest of New York State, far higher than the national average of 4.7%.  For New York City, in contrast, both local taxes and aid for education, along with spending on it, were below average as a share of income in FY 2004 (though to a lesser extent than in most past years).  Some of the state aid received by school districts in the rest of New York State was thus sucked away from New York City’s children, but much of it was paid for by residents of the rest of New York State themselves in state taxes.  Based on local resources alone, however, we can conclude that residents of the rest of the state paid an additional 1.3% of their incomes in local taxes for public schools in FY 2004.

Spending on Medicaid in New York State, and public schools in the part of the state outside New York City, have an incentive structure that encourages higher spending:  if one set of politicians decides to spend more on the margin, and gets credit, another set of politicians is forced to raise much of the additional tax revenue, and get blamed..

Let’s say the State of New York makes a decision to increase Medicaid funding to allow the health care industry to hire more workers, perhaps to provide more services and perhaps not, or to pay itself more, perhaps in proportion to the wage gains of others and perhaps more.  The state government gets all the credit, but the state pays only 30 percent of the cost, with the federal and local governments forced to kick in the rest.   Or, let’s say a local government willingly allows more seniors to become eligible for Medicaid-funded care without looking to closely at their own resources.  The local government gets credit from the seniors, but the local government pays only 20 percent of the added cost, while the federal and state governments pay the rest.

Similarly, in order to mollify local property taxpayers the State of New York, through the STAR program, has chosen to offset the ever-increasing hiring, spending and pay levels of public schools in the rest of New York State.  These school districts have reacted by getting as many “facts on the ground” as possible, all in advance of any increase in state operating aid for the New York City schools as a result of the Campaign for Fiscal Equity lawsuit.  Note that aside from Medicaid, and police in Nassau and Suffolk Counties, the public schools are the only category of expenditure where spending in the rest of New York State is far higher than the national average.  It is also the only category where the more local governments spend, the more state aid they get (and New York City’s children lose).

The second set of winners is interest on debts and contributions for pensions, which is another way of saying the past is a winner relative to the present and future.

New York City local governments, including a share of payments by the state-run MTA, paid interest on debts equivalent to 1.3% of the income of New York City residents in FY 2004.  The national average was 0.6% for interest on debt.  While the rest of the state did not have a higher than average interest burden, even when allocated a share of MTA debt, in New York City that excess burden thus equaled 0.7% of its residents’ income.  It should be noted that as of 2004, aside from the enormous transit debts foisted on the MTA, the interest payments by the State of New York were only slightly higher than the national average as a share of its residents’ income, with higher than average debts apparently offset, in part, by lower than average interest rates.  New York State’s excess debt burden, therefore, was concentrated on New York City.  And after all the borrowing for the 2005 to 2009 MTA capital plan, that burden will be much higher.

 New York City, but not the rest of the state, also has an excess burden for local pension contributions, which equaled 0.8% of city residents’ income and 10.8% of public employee payroll in the city in FY 2004, compared with a national average of 0.3% of everyone’s income and 6.2% of public employee wages.  That’s an additional 0.5% of personal income for residents of New York City, but the excess burden is probably greater today.  That is because the long run national average for pension contributions is 10% of public employee wages; in New York City, however, pension contributions are expected to exceed 25% of public employee wages – and 1.25% of the personal income of NYC residents – in FY 2007.  While pension contributions are going up elsewhere, it is likely that the gap has grown.

Spending on debts and pensions are another instance where one group of politicians gets credit for the benefits – those in the past who provided more in spending than they collected in taxes and who awarded richer pensions – while another group of politicians gets the blame for the cost – those who come later.  And, in addition, one group of citizens gets the benefit – those cashing in and moving out – while another is sacrificed – those who will live in New York in the future. In the value-free atmosphere in Albany, it’s no wonder the future has been sacrificed.

In New York City police and corrections expenditures are another “winner.”  In FY 2004, New York City residents spent 1.1% of their personal income local taxes for police and 0.4% on correction, compared with a national average of 0.6% and 0.2%.  Taken together (and given rounding), that is a total of an additional 0.7% of personal income city residents had to pay in local taxes for police and correction.  The rest of New York State was only slightly above average.  Moreover, since FY 2004 spending on the police force has likely soared as a result of higher pension contributions.  Whether all this additional police and correction spending in New York City is necessary, due to a greater tendency toward criminality and the threat of terrorism here, is a matter of debate.  What is not debatable is that although the NYPD deserves credit for reducing crime, that organization received enormous financial support for that effort, support not given (for example) to the city’s public schools.

Medicaid, public schools, interest on debt, pension contributions, and local police and correction are present all over the country.  New York City also spends more than the national average in certain categories of public services that are not available everywhere.  Whether these expenditures are excess or not depends on the worth what is received in return, and the cost of non-public alternatives.

For example, spending on mass transit in New York City as a share of city residents’ income was 2.1% higher than the national average, funded by both fare payments and taxes, but few places in the country have a transit system like New York’s.  This allows city residents to own far fewer motor vehicles than the national average, at a savings based on national expenditures per motor vehicle equal to 1.6% of the income of city residents.  (The costs savings is actually higher in New York City of course, since the national average is $464 per vehicle for insurance).  New York City spends more than the national average on solid waste collection and fire protection, but not every community has public garbage pick-up and a professional fire department. (Interestingly, spending on fire protection is slightly above average as a share of income in the rest of New York State despite the large extent of the state protected by volunteers!)

A more important locus of higher than average spending is housing and community development (mostly public housing and Section 8 vouchers), which absorbed 1.0% of the income of New York City residents in FY 2004 vs. 0.3% nationally.  Or would have, except that New York City’s obligation to serve as a home to an above average share of the nation’s poor (over 20 percent of the city’s population), disabled and troubled people has traditionally been offset by having federal aid cover the entire cost of public housing not borne by residents and all Section 8 costs.  In FY 2004, New York City accounted for 10.5% of the nation’s housing and community development expenditures, and the vast majority of such expenditures in New York State.

It is unknown how much federal aid in other categories New York’s Congressional representatives traded away to get this assistance.  What is clear, however, is that New York’s disproportionate spending in this category has made it a target for a downsizing federal government, with more and more of the contingent cost of maintaining and rehabilitating the city’s aging public housing (which federal rules require be made available to the most troubled and needy people from all around the country) shifted to the city’s budget.  The $120 million in local funds spent for this purpose this year is just the beginning.

For now, however, the “winners” in New York’s fiscal priorities are those identified previously.  Places have different needs, and just because it’s the national average, that doesn’t make it right.  But where there is a large deviation from the national average, in either direction, it should be questioned and justified each and every year, and the costs elsewhere should be acknowledged, and judged worth it.  Does anybody believe that is what happens in Albany?   Because, with the exception of high police spending in New York City and high education spending in New York City, that’s where the decisions are made, or at least the incentives to favor certain priorities are created.

You can have a copy of the spreadsheet by downloading it.  It reports spending per $1,000 of personal income.  A summary, as a percent of personal income, follows.