City Journal

William J. Stern
Empire State Perestroika
Governor Pataki has a glittering chance to restore New York State’s fading economic vitality. He must de-invent government, not re-invent it.
Winter 1995

The Pataki administration has an opportunity to transform radically the way state and local government works in New York. It must seize this opportunity, for the economy of New York can no longer support the vast government we have created. We need to restructure government completely, not only by examining each program to identify waste and inefficiency, but—more important—by questioning, rethinking, and redefining what the state government's role should be, even in popular areas like education. The state needs true restructuring: perestroika, not incremental reform. The government is going to have to get out of some of the businesses it's in; we need to deinvent, not just reinvent.

We need to cut huge sums from the state budget—the bulk of which already goes out to localities—and give the local governments more authority over their own affairs. Smaller state government should lead to smaller local government as well: restructuring at the state level can serve as a model for localities. And the dramatic changes in Washington will be the engine that can force significant change here.

Political leaders have reacted to fiscal crises in the past by refinancing debt, using oneshot gimmickry, and making small cutbacks across the board. There were changes in emphasis, with maybe the police department getting cut last, but there's been no real governmental revolution. Today we need a more radical agenda.

The first step is truly to restructure the state authorities, which are outofcontrol engines of borrowing. They create huge amounts of debt for the state without going through the normal procedure of gaining voter approval. I would begin, dramatically, with the Port Authority, which would be a good place to start because it actually takes in a lot of revenue. Also, the State of New Jersey is half owner, and we have reason to think its governor would be willing to experiment. We could begin a significant privatization at the Port Authority and then start to move on to the other authorities—Battery Park City, the convention center, the Urban Development Corporation, the Dormitory Authority.

In each case, the new administration would examine why the authority was created, where it is now, and whether it is still needed. But the administration would also get a handle on the debtfloating that these authorities have effected. That debt always winds up back in the general fund, as interest payments, and soon nobody even remembers where it came from anymore. While the Javits Convention Center is supposedly generating revenue, taxpayers are paying off the Triborough Bridge and Tunnel Authority bonds that built the center. Just producing a true accounting of the authorities' finances would be a significant reform.

Bond covenants may restrict what the administration can do. But by moving against the state authorities, Governor Pataki would at least limit the creation of future debt and do away with a lot of political patronage—both worker and vendor patronage. One of my favorite examples is the United Nations Development Authority, which, last time I looked, managed two luxury buildings on the east side of Manhattan. It exists for no reason other than to create business for politically connected vendors.

The Urban Development Corporation, which I ran from 1983 to 1985, was formed to build low-income housing after the riots of the late sixties. It has the power to override zoning ordinances and condemn property, and it is exempt from local property taxes and building inspections. It practically bankrupted the state and helped precipitate the fiscal crisis of 1975. Then it got into subsidizing developers. Today it's a huge patronage mill, with fortunes being made, and nobody knows who's really running things. There are organized crime figures roaming around. When I first got to the UDC, I thought my mother would be proud of me. But my second meeting there was with a pair of pretty well-known mob figures.

The authority structure has created welfarestate multimillionaires. It would be a great place for Pataki to start applying a little perestroika. It would produce expos6s that would keep the media happy. It would provide an example of privatization—and it would also give the new administration the credibility it will need when it turns to more controversial cuts in spending, from Medicare to welfare to education.

What about the agencies of the state government itself? Many could be eliminated outright, like the Consumer Protection Board, which exists even though the cities and counties have their own consumer protection agencies. Other agencies could be downsized, such as the housing authorities. The social welfare agencies could be restructured and minimized, with the idea of turning their responsibilities back to the localities. Many need overhauls. The procurement procedure of the Department of Transportation has turned out to be one of the great rackets of all time. Nowhere does it cost more to build or repair a road or bridge than in New York. It's something like 150 percent higher than anywhere else. The Department of Transportation would be an excellent place to experiment with privatization, by letting private contracts to maintain, repair, and improve the infrastructure.

The administration should move to freeze Medicaid spending. It is the single biggest item in terms of growth—the monster that's eating the state budget. You can't let health spending continue to grow 8 or 9 percent per year, way above the inflation rate, and expect to control state spending. I don't see any other way to deal with Medicaid than to acknowledge that we can't afford this growth. We need to put a cap on spending and work down from there. If you try to revolutionize the way medicine is delivered in the state, you're really left with waiting for change on the national level and dealing with details in which you have no expertise. If you go at it through incremental reform, you're going to fight every battle hedgerow to hedgerow, like the infantry in World War 11. Many experts recommend that New York move aggressively into managed care, as Michigan and California have done with good results. Only a spending cap would force such reforms.

The Pataki administration has to confront the question of education spending, but it had better be careful. The state university system is as untouchable in New York politics as Social Security is in national politics. It is enormously costly, and the families who take advantage of it make more on average than those whose children go to private colleges. Should the state provide higher education to anyone? Or should you either go and pay your share or, if you can't afford that, go to night school? I'm fairly radical about that—I don't see what's wrong with parents' scrimping and saving to send their kids to school.

There are many things short of this that we could do in education—elementary and secondary as well as college—but they require tackling the most powerful special interest in New York: the education industry. Teachers' unions and associations are big campaign contributors. They are close to both parties in the Legislature—probably closest to the Senate Republicans. They supply fullservice political operations—phone banks, advertising, management expertise—for candidates. The teachers are really out there doing work.

And plenty of people have made money out of education: all the vendors to the Dormitory Authority or the new School Construction Authority, the people who do everything from building schools to selling pencils. Because the politics are so perilous, it makes sense to postpone action on restructuring education until farther down the road. But ultimately, action must come.

The kind of restructuring that's needed faces huge obstacles. There are a lot of people who have very strong vested interests, ranging from millionaires who made their fortunes by manipulating the welfare state, to people who have the soap contract at the prisons, to government unions. These are very powerful forces, and they will fight any kind of meaningful change. You're always stepping on a toe. Even privatization has risks: the nomenklatura, the insiders who benefit from our oversized government, could easily wind up controlling the private organizations supposedly taking over from the government.

We also have a huge constituency of welfare recipients, and some of them are truly sad. They are also an impediment to change. We have a huge population of the truly lost, of people who can't function, who can't or don't want to work. A lot of these people are shipwrecked, and there is nothing to do but feed them, house them, and pray for them. New diseases afflict them, new plagues like AIDS, and behaviorally caused problems that are getting worse. We have a growing prison population. All these social pathologies are an impediment to change.

I don't see anything government can do about social welfare other than to put a cap on how much it spends, because it's counterproductive to destroy the whole state's economy trying to fix these problems. Government can try to reform or reinvent what remains—but that has never worked. The problem here is that no one has ever successfully dealt with social behavior by material means anywhere in the world. The culture is not yet ready to accept that there are things about our entire society that are creating socially destructive behavior by a large number of people of all economic classes. Ultimately, we need to rethink the despiritualization of the culture, the entire twentiethcentury view of life. I'm not optimistic that we will do so soon.

The most dramatic, complete impediment to change is the State Legislature. It is the worst governmental institution of the Western world. It has more employees than California's Legislature, even though California's population is half again as big as New York's. It is filled with conflicts of interest. Members are allowed to practice law on matters that come before the committees that they sit on. There has been no postWatergate ethics reform of the New York State Legislature. Many other legislatures have instituted reforms—including the U.S. Congress—but New York has a completely unreconstructed Legislature, presiding over a blown-up welfare state.

There's so much money swinging around in the Legislature that criticizing it is almost like throwing money on the street and condemning the people who pick it up for not being honest. It's an undemocratic body, in which a few people have enormous power. Citizens can't find out how members voted or how matters are progressing through the committees.

Election outcomes are gerrymandered. In New York City, there were 25 State Senate elections. In five, candidates ran unopposed; in ten, the victor got 90 percent or more of the vote; in five others, the victor got 80 percent or better. The Legislature blatantly allocates taxpayer monies for campaigns. The only way to get at this would be to have an election where the Legislature became an issue. This year, no one in either party said a word about it. Nobody knows who these people are, up there in Albany.

In the same way that Newt Gingrich nationalized the 1994 congressional election, you need someone who could "stateize" New York's legislative elections. The voters need to find out that it's not whether Johnny Jones is better than Joan Smith in Suffolk County that counts, but whether they're pulling a lever for reform.

The media in New York are another impediment to change. There's really no coverage at all in Albany. Few reporters go up to Albany, few want to go, and when they do go, the idea is to get along.

What has to happen for significant change really to take place in New York? First, consider what actually happened in the election. The candidates didn't present any kind of vision. Pataki ran as Anyone But Cuomo. He has a mandate for cutting taxes, but not an elaborate mandate for true and total toptobottom government reform.

But I think we're lucking out a bit, because a lot is happening nationally that will have tremendous repercussions for the state. Visualize a flat tax at the national level, eliminating deductibility of state and local taxes. Imagine block grants, rather than specified grants, allowing tremendous competition in the way states provide services. These are real possibilities in Congress now, and you can go on and on. Eliminating deductibility of state and local taxes would be an act of reform for the states because deductibility amounts to a subsidy for our huge state government.

What's happening in Washington is possibly very dramatic. When innovative Republican governors talk with newly elected Republican congressmen, there's a real sense of possibilities. People are talking about legislation or a constitutional amendment restricting the power of federal judges over state policies. They are talking about just sending a check to the states and letting the states have full control over welfare, education, and other programs. They're proposing radical things in Washington; if even onetenth of them get through, it will have a big impact.

Assuming dramatic change from Washington, and assuming that Governor Pataki goes ahead and cuts taxes—the only way to control spending—he has to be careful not to be misled by events and sidetracked. When Cuomo took over in 1983, he thought there was a recession on. It had actually just ended, but nobody knew yet. Partly because of that, he didn't continue the Carey policy of cutting taxes. Because he thought there was a recession, he thought he faced a budget gap. It turned out the economy recovered quite significantly, the financial services industry boomed, and revenues came swelling into state and city government. They spent it all and exploded the size of government, proving that, in the real world, if the money is available, government will spend it. Cutting taxes to limit the money available is key—but the new administration must do much more.

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