EdVANTAGE Blog

Yesterday, Governor David Paterson began to follow through on his threat to withhold School Aid, and extended the threat to include STAR payments.

At a Sunday news conference, the Governor announced that he is directing the state Division of the Budget to reduce scheduled December payments to school districts, municipalities, and other purposes by a total of $750 million.

Among these reductions, he proposes to reduce school aid payments due to be paid by December 15th by 10 percent, or $146 million.

The Governor said he will also withhold $436 million in STAR reimbursements to school districts later in the month, a 19 percent reduction.

At this time we do not have estimates of the impact of the Governor’s action on individual districts. Generally, however, he has said these administratively imposed reductions would have to be made across the board, on an equal percentage basis.

In other words, school officials should assume that whatever School Aid payments they were anticipating this month will be reduced by 10 percent, and any STAR reimbursements will be reduced by 19 percent.

If district-by-district estimates become available, we post them on our website – www.nyscoss.org

The Governor leaves open the possibility that he will seek legislation to make the withholding permanent.

Beyond the immediate cash-flow impact for individual school districts — coming with essentially no time to prepare — two other concerns may have greater implications.

First is the uncertainty of whether the aid withholding will be made permanent.

With that prospect still on the horizon, schools may need to consider actual spending reductions rather than just cash-flow management actions.  If spending reductions do become necessary, more drastic actions would be needed to achieve the same level of savings later in the school year than would be the case if implemented now.

Second is the precedent.

There seems to be a logical inconsistency in the Governor’s position:  He concedes that to permanently withhold aid would require changes in law to be approved by the Assembly and Senate. If so, then how can those same laws be interpreted to permit temporary withholding of aid payments?  But conversely, if he is allowed to temporarily withhold aid now, could he later assert that current laws would permit him to withhold aid permanently, in effect unilaterally amending the state budget and state laws governing the payment of local aid?

The Governor seems to have partly backed down from his threat to make the withholdings permanent by seeking legislative approval, no longer saying that he would definitely seek legislation to make the withholding permanent.

His news release concludes,

“As sufficient revenue becomes available, the State will potentially pay the amounts that were delayed [emphasis added]. As a result, these particular December reductions represent cash-management actions, rather than a permanent elimination of liability for these specific payments. Governor Paterson will announce further actions in his Executive Budget to fully eliminate the Stare’s remaining current-year deficit. He also reserves the right to institute further payment delays later over the remaining months of the fiscal year in order to preserve the State’s cash position.”

Still the threat of permanent aid loss remains.

As we have noted in the past, at best state laws are in conflict. One law provides that no money may be spent from an appropriation until a “certificate of approval” has been issued by the Governor’s Budget Division. Other laws prescribe School Aid and STAR formulas and payment schedules, with the effect of requiring the state to pay specific aid sums on or by specified dates.

The Governor’s news release is copied below:

For Immediate Release: December 13, 2009

Contact: Marissa Shorenstein | marissa.shorenstein@chamber.state.ny.us | 518.474.8418 | 212.681.4640

DOB Contact: Matt Anderson | matt.anderson@budget.state.ny.us | 518.473.3885 | 518.248.7310

GOVERNOR PATERSON OUTLINES PAYMENT REDUCTION PLAN TO KEEP STATE SOLVENT

Action Needed to Address Cash-Flow Problem

Through Use of the Certification Provision, Budget Division to Withhold $750 Million in Scheduled Payments

Governor David A. Paterson today outlined what steps he has directed the Division of the Budget to take in order to keep the New York State solvent. To address a severe cash shortage and help keep the current-year budget in balance, he has ordered $750 million in reductions to scheduled December payments. The following fact sheet outlines the State’s current cash position, as well as the specific actions Governor Paterson is ordering the Budget Division to implement through its Certification Provision authority. These measures will ensure the continued operation of New York’s government.

December Payment Reductions Fact Sheet

The Division of the Budget’s most recent update to the State financial plan forecasted a current-year deficit of $3.2 billion. Additionally, the Office of the State Comptroller has said that this budget gap could be more than $4 billion. However, the Deficit Reduction Plan (DRP) that the Legislature enacted on December 2 – when combined with the administrative cuts Governor Paterson is implementing – included only $2.7 billion in current-year savings actions. Regardless of any budget actions proposed in January, measures must be taken to address the State’s severe projected cash-flow crunch during the month of December and the remainder of this fiscal year.

Background: Cash-flow Situation

Even after using $1.2 billion in rainy day reserve funds for cash-flow purposes and delaying a scheduled $1 billion pension fund payment, the Division of the Budget forecasts that, if current expenditures are made on schedule, the State’s General Fund will have a negative balance of over $1 billion at the close of December. This would represent the first time in New York’s history that the General Fund has ended a month with a negative balance. Indeed, the State’s cash position is weaker than at any point in recent history – even after the attacks on September 11.

When the General Fund has a negative balance, it is authorized to temporarily borrow money from other governmental funds (the “Short-term Investment Pool” or STIP) for a period of up to four months or the end of the fiscal year – whichever period is shorter – in order to help meet immediate cash-flow needs. However, the funds available to the State in the STIP for cash-flow purposes are limited. At the close of December, current projections from the Division of the Budget and Office of the State Comptroller indicate that STIP resources may be temporarily exhausted. Moreover, within the month of December itself, there may be periods of time when daily available fund balances are inadequate to make scheduled payments.

Background: Certification Provision

The 2009-10 Enacted Budget included a blanket “Certification Provision” that governs local assistance appropriations. It states that:

“No moneys appropriated by this [law] shall be available for payment until a certificate of approval has been issued by the director of the budget, who shall file such certificate with the department of audit and control, the chairperson of the senate finance committee and the chairperson of the assembly ways and means committee.”

In order to preserve the continued financial stability and orderly operation of State government, Governor Paterson has directed the Division of the Budget to exercise its authority to withhold certification of local assistance payments for appropriations subject to the Certification Provision.

Specific December Payment Reductions

The Division of the Budget has identified the largest expenditures that the State is expected to make in December. These include: a $2.3 billion payment to school districts for the STAR program; $1.5 billion in School Aid payments; $450 million in payments to cities through the Aid and Incentives to Municipalities (AIM) program; $398 million in payments to counties for human services reimbursements; and $247 million in payments to health insurers for State employee fringe benefits. Together, they total $4.9 billion.

Municipalities and school districts are expected to receive payments for AIM ($450 million) and School Aid ($1.5 billion) by December 15. The certificates for those payments will each be reduced by 10 percent. These reductions will help the State maintain a positive cash position over the course of the next week.

Additional payments for STAR, human services, and State employee fringe benefits are expected to be made later in the month. The certifications for those expenditures will each be reduced by approximately 19 percent. This higher percentage reflects the significant uncertainties related to cash availability at the end of the month due to risks associated with potential receipts volatility.

In total, these December certification reductions will produce a total of $750 million in cash-flow savings.

Payment	Amount	Reduction	Payee
STAR Payment	$2,295M	$436M	School Districts
School Aid	$1,460M	$146M	School Districts
AIM	$450M	$45M	Cities
GSCs (State Employee Fringe Benefits)	$247M	$47M	Insurance Carriers
Human Services	$398M	$76M	Counties
TOTAL	$4,850M	$750M

As sufficient revenue becomes available, the State will potentially pay the amounts that were delayed. As a result, these particular December reductions represent cash-management actions, rather than a permanent elimination of liability for these specific payments. Governor Paterson will announce further actions in his Executive Budget to fully eliminate the Stare’s remaining current-year deficit. He also reserves the right to institute further payment delays later over the remaining months of the fiscal year in order to preserve the State’s cash position.

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