State Budget Crisis, New York Edition

According to the New York Times, Governor Paterson is looking to layoff about 10,000 state government workers in order to balance the budget. This comes just days after a federal judge blocked the governor from furloughing half of the state workforce for one day a week. Last year, the governor made a pledge to the public employee unions that there would be no layoffs until January 1, 2011. So, under the governor’s new plan, the layoffs would not take effect until that date. It is probably not a coincidence that that is also the day the governor hands the keys over to his successor.

Meanwhile, the Wall Street Journal reports “the state has paid out millions of dollars to local nonprofit groups—including $28,500 for a tennis league, $11,000 for a lighthouse museum and $2,700 for a curling club.”

Most states have been on a long-term spending binge (according to data from the BEA, real aggregate state and local government spending is 230% its 1980 level while real aggregate state GDP is just 197% its 1980 level). Of course, public employees and other special interests (such as tennis leagues) benefited mightily from that spending binge.

However New York ends up balancing its budget, it is interesting to note that, as a general rule, states tend to deal with unforeseen shortfalls by cutting spending rather than by raising taxes. This, at least, was the finding of a 1996 study by Bohn and Inman.

Which leads us to an often-underemphasized point: When states over-extend and over-spend, it isn’t just the taxpayer who ends up feeling the hurt. In the end, it is often those who have been made unrealistic promises–the public employees with the giant pensions or the special interests with the sweet deals–who end up paying when those promises are unexpectedly snagged away.

Over the course of the next several months, New York and other states will provide a test of this hypothesis.