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How to Blow a Windfall

eye on the news

How to Blow a Windfall

Albany squanders an unprecedented influx of cash. April 1, 2015

On April 1, New York began a new fiscal year in a unique position: sitting on more than $6 billion in extra cash. But rather than seizing the opportunity to reduce the state’s reliance on debt while addressing urgent infrastructure needs, Governor Andrew Cuomo will squander it largely on political pork and corporate welfare.

The money is not “surplus” in the usual sense of the word. It doesn’t reflect successful fiscal policies or, as in California’s case, an unexpected surge of revenue from high-income taxpayers in a booming industry. Rather, to an unprecedented degree, New York has reaped a multi-billion-dollar harvest of fines and penalty payments from financial institutions—mainly multinational banks—charged with federal currency-trading or securities-law violations, or other regulatory infractions. Because these institutions have their U.S. headquarters in Manhattan, New York regulators and prosecutors played an active part in the probes—and got a big piece of the action for the state treasury. Roughly half the cash came from a single French bank, BNP Paribas, which agreed last summer to pay $3.4 billion in fines to the state (and billions more to the federal government) to settle charges of money laundering with parties in Iran, Sudan, and Cuba. The latest addition to the pile came two weeks ago, when the state Department of Financial Services announced a settlement with Germany’s Commerzbank, generating another $610 million for New York’s coffers.

Even by the Empire State’s lofty budget standards, $6 billion is real money—equivalent to more than 6 percent of current state operating funds expenditures. To his credit, Cuomo ruled out any use of the money to pad recurring expenditures—dashing the hopes of New York City mayor Bill de Blasio, among others, who clearly hoped that some cash would be diverted into local aid, especially for schools. On the other hand, Cuomo’s windfall-allocation plan, adopted with few changes by the legislature this week, favors dubious economic development “investments” over more traditional forms of capital spending on existing highways and bridges, transit, and municipal water and sewer systems.

Not including the Commerzbank money, which will remain uncommitted for now, the new state budget allocates a total $5.4 billion from the windfall. The first $850 million will go to make a down payment on a much larger penalty the state itself owes to the federal government, to compensate for overbilling Medicaid since the early 1990s. Out of the remaining $4.5 billion, the new budget directs the biggest chunk—$1.5 billion—to Cuomo’s “Upstate Economic Revitalization Initiative,” based on what the governor touts (unsupported by empirical evidence) as a “successful” state-induced economic turnaround in Buffalo. Known as the “Buffalo Billion” (although the amount spent so far is not nearly that much), Cuomo’s economic program for Western New York is a patchwork of economic-development subsidies, the largest of which will commit $750 million in state funds to build and equip a solar-panel plant in a former waterfront steel mill.

The new upstate money will go to three metropolitan regions (other than Buffalo) in a competition refereed by Cuomo’s economic-development agency; critics have called it the Upstate Hunger Games. Another $1.28 billion in windfall cash will flow to the state Thruway Authority, whose budget has been strained by Cuomo’s signature infrastructure accomplishment: a $4 billion replacement for the Tappan Zee Bridge across the lower Hudson River. More than two years after construction started, no financing plan exists for the new bridge, but the windfall money will make it easier for Cuomo to put off a toll increase for at least another year.

The much larger Metropolitan Transportation Authority (MTA) didn’t fare nearly as well. Last year, the state-controlled regional agency said its new five-year capital plan had a $15 billion funding gap. Even accepting Cuomo’s broad assertion that the MTA plan is needlessly “bloated,” the authority is still billions of dollars short of what it needs to modernize and maintain the transit system during a period of record rail, subway, and bus ridership.

Incredibly, however, the only piece of the windfall Cuomo and the legislature aimed anywhere near the MTA is a $250 million appropriation to begin construction of a new Metro North commuter rail line from southeastern Westchester to Penn Station. The Penn Station access project is an odd one to be singled out for preferential funding. As the Citizens Budget Commission noted, “its total cost has not been reported, its benefits have not been quantified, and it is not clear why it is preferred” over other priorities in the MTA plan. The new line can’t become operational until the MTA completes its massive East Side Access project linking Long Island to Grand Central Terminal, which will free platform space at crowded Penn Station. The latest completion date for that chronically behind-schedule, over-budget project is 2023. For now, the MTA will have to settle for a token $750 million that Cuomo agreed to provide in bonded support for the transit capital program.

Ignoring the MTA’s needs made it possible for Cuomo to spend upward of $1 billion in remaining windfall cash on other purposes—the most expensive of which is a promise to spend $500 million to provide every corner of the state with high-speed broadband Internet access within the next three years. Cuomo never explained why this couldn’t be left to the private sector; nor has he settled on a consistent definition of what he means by “broadband,” or how much of a matching investment will be required of Internet providers. For all intents and purposes, it shapes up as a potential telecom slush fund—though, like all the other windfall cash, it could also be transferred to reserves in a financial emergency under the budget bill language.

The rest of the windfall money will be distributed to an array of smaller projects and programs, ranging from $355 million to bail out financially distressed upstate health facilities to a $50 million package of agricultural subsidies targeted specifically to farmers in the Hudson Valley—where the money will help preserve the bucolic view-sheds of affluent weekenders—and to the Southern Tier region, where Cuomo’s fracking ban has deprived landowners of the ability to cash in on royalties from shale-gas drilling.

Late in the recent budget negotiations, Senate Republicans tried to persuade Cuomo to set aside more of the windfall cash for transportation infrastructure, as well for municipal water and sewer projects. When the governor wouldn’t budge, they countered by authorizing more borrowing to supplement a separate bonded appropriation Cuomo had already proposed for highways and bridges. (In true Albany fashion, the legislative additions also included a pork-like $400 million “transformative investment” fund just for Long Island.)

New York’s mishandling of the windfall opportunity was disappointing but not surprising, given the generic tendency of politicians across the country to favor shiny new projects over the boring rehabilitation of existing infrastructure—not to mention Cuomo’s Obamaesque propensity for sinking state money into trendy technology investments. At a time of record low interest rates, pols are more inclined than ever to view long-term bonds as a form of heavily discounted cash.

It’s all too common for crumbling infrastructure to be ignored until it poses an imminent threat to health or the smooth running of the local economy. Of course, occasional exceptions come to mind—none larger than New York City’s massive third water tunnel, under construction in fits and starts since 1970, despite being invisible to the businesses and residents who’ve paid steadily mounting water rates to finance it. As then-mayor Michael Bloomberg observed in 2013 when he cut the ribbon on the latest stage of the $4.7 billion project: “It’s not sexy, and nobody says thank you, but we all should be sleeping better because of this.”

The manner in which Cuomo and the Legislature have chosen to divvy up the windfall pie is sure to win them plenty of thank-yous over the next few years from politically wired developers, corporate executives, and unions around the state. But future generations of New Yorkers probably won’t feel as grateful.

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