Net Loss: Secondary Effects of City Budget Cut Proposals

Chapter 2. Secondary and Long-Term Effects

In this section we examine the impact of cuts over time. Cuts phased in over time are less disruptive than cuts that take place over a short period of time. We examine the implications of this fact for the City's budget and then consider the impact of the Medicaid cuts on the City's economy.

We select Medicaid cuts for our first analysis because they represent (from Table 1) three-quarters of the proposed net cuts -- two-thirds of which are the proposed State cuts and the other one-third is the proposed City cut. Also, the Medicaid cuts have a highly multiplied impact on the City because the bulk of their funding comes from the Federal and State governments.

Timing and Concentration: Dominoes and Broken Rungs

The fact that cuts are being concentrated over a short period of time on programs targeted at categories of poor dependents (Medicaid, welfare) rather than on services to the whole population (police, fire, sanitation) has four implications:

1. Loss of Caseworkers. As programs are cut, caseworkers will be taken off their cases. In Medicaid, for example, doctors will be separated from their patients. Without government paying the bill, low-income Medicaid-dependent patients will find their doctors in many cases unable to continue treatment.

2. Lack of Institutional Alternatives. The City might be able to absorb without a crisis the initial effects of any of the cuts if those who depended on the lost services were able to find alternative support systems. But the secondary effects of the rapidity of the various budget cuts could be to remove these support systems one after another like dominoes falling. Patients seeking care might find the institution to which they are referred is unable to care for them because it too has absorbed deep cuts. It's as though changes were made to a fully utilized electrical system that cut the wiring capacity by one-fourth while increasing the electrical load by one-third. The result could be a domino-like chain of failures as one support system after another is overloaded and creates the administrative equivalent of a blown fuse.

A very real possibility in the case of cuts in Medicaid, programs for children and welfare is that institutional alternatives that were assumed to be there are not. The patient denied Medicaid treatment at the doctor's office goes to the Emergency Room where many others are in line with the same problem. The quality of care in the hospital plummets because funding for uninsured patients has been reduced and the HMOs that are supposed to provide an alternative are often overburdened and unable to provide the care. The alternatives turn out to be "rubber crutches," looking fine until they are leaned on.

3. Dependence and the Lack of Options. Those in the City who are better off might not appreciate the lack of options for the categories of the population most affected by the proposed budget cuts. If the local public school is failing or doesn't offer enough courses, the middle-class parent finds a better one, or supplements the school work with private programs run through such institutions as museums or Y's, or pays private-school tuition. If the doctor isn't providing good medical care, the middle-class patient finds another one.

For the City's dependent poor, the range of options is much smaller. Teachers, doctors, lawyers, security, transportation and even housing are often available only in or through the public sector and lower-income residents have few choices. If funding for dependent poor people is cut, they may have to make do with inadequate service. In the case of health care or child care, the consequences for the quality of life in the City may be severe.

4. Timing, Dependence and the Broken-Rungs Effect. In some cases the biggest problems come right away rather than emerging over time. The long-term impact of the cuts might be manageable, but problems may be created by the immediate imposition of dramatic changes on a complex system. It's like losing rungs on a ladder. If alternate rungs are lost, the ladder is still usable because the gap between two rungs is manageable. But if two rungs in a row are lost, the gap isn't manageable and the ladder becomes non-functional. The drastic cuts in Medicaid, for example, might not be so devastating if alternative health-care services and programs were in place -- as it is, the transition period will be made extremely difficult by the speed with which it occurs.

For example, Medicaid cuts would not be so worrisome if enough HMOs or primary-care facilities were in place, or even if the Governor's plan for them to be in place was credible: the combination suggests that two rungs on the medical-care ladder for the poor will be missing.

Certain communities that have a high concentration of hospital workers will be impacted by hospital cutbacks. These communities will not only see their hospitals less well staffed; they will also be less able to make up for the loss in medical care through private support systems.

Economic Loss from Cuts

How can we quantify the economic effects of cuts? The best way is to identify the direct impact of the proposed cut, and then take into account the secondary effects.

For example, in the first round of cuts a loss of housing subsidies will mean some lost income to both low-income tenants and their landlords. Some tenants may leave with or without eviction proceedings by landlords. Tenants have only four options:

Another way of assessing secondary economic effects is to use the multipliers derived from economic models that have been developed nationally and regionally. These multipliers permit an approximate determination of the likely multiplied effect on the economy of a change in jobs or incomes in a sector of the economy.

The Economic Loss from Proposed State Medicaid Cuts

Medicaid cuts are the largest cuts in both the City and State plans. The proposed cuts in the State's budget and the Mayor's Executive Budget amount to a reduction of $2.0 billion (including both Federal and State funds) in Medicaid funding for City residents; this is three-fourths of the net loss from all proposed City budget cuts. Medicaid is a target largely because it has been growing rapidly.[7] Also, the City is among only a very few local governments having to pay a share of the costs of local Medicaid services (it pays between 10 percent and 25 percent, depending on the program within Medicaid). Medicaid costs elsewhere are usually paid for entirely by the Federal and State governments.

What will the direct and indirect impacts of these cuts be on the City's economy? How will the cuts affect jobs, earnings, output, and tax revenues? The answer is that the cuts will have a severe effect both on services and on jobs.

To quantify the economic impact of the proposed cuts on the City, we develop estimates using the Regional Input/Output Modeling System (RIMS) of the U.S. Department of Commerce and the regional Port Authority's input/output model, based on RIMS[8]. RIMS generates economic-impact ("final-demand") coefficients for different industrial sectors of the City economy based on the assumption that its economy is a "shared-down" equivalent of the national economy. All multipliers are based on the theoretical concept of an infinite series of decreasingly significant indirect effects from the initial shock of lost or gained spending and jobs.

Using the RIMS II model, the proposed Medicaid cuts of $2.0 billion would cost the City more than 61,000 jobs, about one of every five health-care jobs. Nursing, home-care and other personnel would lose 48,000 jobs for a total wage loss of $691 million. Hospitals would employ 13,000 fewer workers as a result, costing the industry another $333 million in wage losses. (See Table 2.)

Table 2.
Economic Loss to the City from Medicaid Cuts, Based on National RIMS II Model

CutOutput LossEarning LossJob Loss
Medicaid Service$mil. Multiplier $mil. Multiplier $mil. Multiplier Jobs
Hospital Services$606 1.68 $1,018 0.55 $333 21.4 12,968
Home Care
$1,410 1.57 $2,214 0.49 $691 34.1 48,081
Total$2,016 $3,232 $1,024 61,049
Source: The multipliers are derived from the RIMS II national Input/Output table of the Bureau of Economic Analysis, U.S. Department of Commerce; coefficients take into account direct, indirect and induced economic effects. Medicaid cuts are those in the Mayor's FY 1996 Executive Budget (April 1995).

Thus the State's proposed Medicaid cuts of $2.0 billion would cost the City economy $3.2 billion and would reduce worker earnings by $1.0 billion -- much more serious effects than might first suggest themselves.

In Table 3 the calculations are redone using the regional Port Authority model. The output-loss and earnings-loss results are similar to those of the national model, but the job loss is lower in the regional model because the multipliers are lower.

Table 3. Loss to NYC Economy from Medicaid Cuts, Based on PA's Regional Model

Output LossEarning LossJob Loss
Direct 1.04 $2,097 0.44 $887 15.3 30,845
Indirect 0.61 $1,230 0.15 $302 1.7 3,427
Source: NYC Comptroller's Office, based on Port Authority input/output model, March 1995.

The range of estimates is wide -- 34,000-61,000 lost jobs. But the two models come close together on lost City output of $3.2-$3.3 billion from the State's proposed Medicaid cuts of $2.0 billion. The loss of worker earnings is in a range of $1.0-$1.2 billion.

Secondary Fiscal Effects of Cuts in Worker Earnings

Medicaid cuts in the first round will have a smaller secondary impact on tax revenues than on spending because most of those who will lose their jobs are home health workers, whose earnings are relatively low. Doctors, nurses and hospital technicians are likely to keep their jobs or to find work in the rapidly expanding private-sector health organizations. Those who do lose their jobs will have less income to pay taxes, so a secondary effect of the Medicaid cuts will be the "fiscal impact," i.e., a loss of personal-income taxes and other taxes.

Two estimates of the fiscal impact of Medicaid spending cuts are shown in Tables 4 and 5. Table 4 shows a tax-revenue loss of $268 million, 15 percent of the $2.0 billion in cuts and about 8 percent of the $3.2 billion economic impact (regional basis).

Table 4.
Impact of Medicaid Cuts on City Taxes, Based on National RIMS II Model

Effective Tax RateLost Earnings
and Output, $bil.
Tax Revenue Loss, $mil.
Personal Income Tax1.7 percentEarnings: $1.0$17.4
All Taxes8.3 percentOutput: $3.2$268.3
Source: NYC Comptroller's Office, based on National RIMS II model, Bureau of Economic Analysis, U.S. Department of Commerce, 1994.

Table 5, based on the Port Authority's regional model, is close, $274 million.

Table 5.
Impact of Medicaid Cuts on City Taxes, Based on PA Regional Model

Effective Tax RateLost Earnings, Output, $bil.Tax Revenue Loss, $mil.
Personal Income Tax1.7 percentEarnings: $1.2$20.4
All Taxes8.3 percentOutput: $3.3$273.9
Source: NYC Comptroller's Office, based on Port Authority Regional I/O model, March 1995.

So the range of the two estimates is quite narrow. Lost personal income taxes from Medicaid cuts are $17-$20 million and lost total taxes are $268-274 million. Such secondary losses are not estimated in the Mayor's FY 1996 Executive Budget.

When secondary effects of budget cuts are estimated, they raise some questions about the focus and priorities of the State and City cuts. The adjustment process would be easier if the cuts were spread over a broader base of services and over a longer period of time.