The State Budget Meets Law and Economics

New York and other states are struggling with their budgets. Governors around the country are slashing their budgets because they know that tax revenues are way down. Governor Paterson likes to say that New York has been “ground zero” for the stock market plunge and that is having an enormous impact on New York revenue.

Of course that means that all sorts of programs are being cut, from education to state services of all kinds. And programs throughout the state are struggling to make ends meet, inevitably by cutting their own budgets, laying people off and eliminating services.

To economists other than those blinded by ideology, this is just the opposite of what ought to be happening. Instead, the state should be running a full employment budget. That’s a way of saying that when times are bad, the state needs to put its shoulder against the economic implosion and hold up its part of the economy. The state isn’t like you or me when we lose some income. When an entity as large as a modern state government shrinks significantly, the tidal wave sweeps through the already weakened economy and makes the problem worse. Several times worse. That’s what economists call a multiplier – the contraction of the New York economy will be a multiple of the contraction of the New York State Budget. It’s not fiscally responsible to make bad times worse. It’s not good economics. And it’s not good sense. So don’t do it.

But that’s where economics bumps into law. The New York Constitution, Article VII, § 9 says:

The state may contract debts in anticipation of the receipt of taxes and revenues, direct or indirect, for the purposes and within the amounts of appropriations theretofore made.

There are some additional provisions but that’s the gist of it. What does that mean? The provision authorizes deficit financing “in anticipation of the receipt of taxes and revenues.” It doesn’t say when or that the money has to come in before the end of the recession. And we know that the most likely cure for the deficit is to get the state back on its economic feet.

So let’s take a look at the Court of Appeals. In the first of two cases brought under the Carey Administration, the Court of Appeals wrote:

if repayment of tax and revenue anticipation notes may only be made by creating … a budgetary deficit … [the next year], such borrowing … violates constitutional limitations

In a followup case, the Court explained that the question is the honesty of the budgets, not whether there was a shortfall. It continued by pointing out that:

Depressed economic conditions can affect both sides of the balance. Catastrophies [sic], emergencies, or, in smaller scale, significant needs may arise, which, if unanticipated, may upset the balance on one side or the other. Indeed, it is unattainable for any budget plan, perfectly and honestly balanced in advance, to remain in balance to the end of the fiscal year. There must, as a practical matter, in every year be either a deficit or a surplus.

The Court’s interpretation, in other words, was that the plan must be for annually balanced budgets, although honest mistakes will happen. It understood that economic conditions can change the balance.

The legal question is whether a plan to pull the state out of its troubles must be a single year plan? That’s not solved by the general wording of the New York Constitution. And given what we have learned about recessions in the twentieth century, it’s not clear that is the way the Constitution should be understood, whether the governor has to balance the budget, and whether it’s wise.

–  This commentary was broadcast on WAMC Northeast Report, October 27, 2009.

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