ALBANY, N.Y. - Jan. 5 - Following is a transcript of Gov. Andrew Cuomo (D) 2011 state of the state address:

Well, good afternoon New York. Oh, it is a better afternoon than that, 2,200 people are here today to talk about their government in a way they never have before, Good afternoon New York! Let me first begin by acknowledging a truly extraordinary public servant, he was a great mayor of Rochester, that’s Rochester, he is going to be a phenomenal Lieutenant Governor, Lieutenant Governor Bob Duffy.

To my colleague and congratulations to the re-elected comptroller, Thomas DiNapoli. To our brand new, right out of the box Attorney General, Eric Schneiderman. To Majority Leader Dean Skelos thank you very much Dean. Assembly Speaker Sheldon Silver. Senate Minority Leader John Sampson. Assembly Minority Leader Brian Kolb. To the judges of our great court of appeals it’s an honor to be with you, Chief Judge.

And a special thank you to the young people behind me, these are high school students who represent New York’s 62 counties, they are the future, and the state that we are talking about preparing today is the state we will leave them. We hope we do a good job and we thank them for being with us. Thank you.

My friends I believe this state is at a crossroads and I believe there are two very different paths this state may down. Certain factors are pushing us down one path — the national economic pressure; the costs of state government that we’re currently expending; the dysfunction that the state government has been manifesting and the fact that the people have lost trust in our government. They would dictate this state follow one course. But there’s an alternative, when you look at the assets of this state; when you look at the legacy of this state; when you look at the tenacity of our people and when you look at the quality of our people — you have the very real sense that we can turn this crisis into an opportunity.

What is the state of the state? This is a time of crisis for our state, a time when we must transform our government to once again become the progressive capital of our nation, and to seize the moment of opportunity that is before us. What we do today, January 5, 2011, will determine the course of this state for decades to come. For New York, it is time to change my friends and that’s what today is all about. This convening itself is a metaphor for change. This convening itself says that change is possible in Albany, believe it or not, and I say ‘Amen,’ because we need change in Albany.

This is the first time, since Governor Al Smith, that the State of the State is not being given in the Capitol. It’s the first time that the Legislative Leaders were asked to participate in the presentation. It’s the first time that technology is actually going to be used in the presentation and it’s the first time that the most important participants have actually been invited to participate, the people of the State of New York. And we say welcome New Yorkers to being here today, because this is your government and no one is better suited to be here to hear this message than you. Thank you all for coming.

The State of the State begins with an honest analysis of the crisis that we face. In government, as in life, you can never solve a problem if you refuse to acknowledge it. The economic recession has taken an especially hard hit on the State of New York. In 2009, we had a twenty-six year high in unemployment, roughly 800,000 New Yorkers are now unemployed, hundreds of thousands more are under-employed. We have the worst business tax climate in the nation, period. Our taxes are 66 percent higher than the national average. Upstate is truly an economic crisis. In real GDP, from 2001-2006, upstate New York grew about 1.7 percent per year while the average in the nation was 2.7 percent. The costs of pensions are exploding, 1.3 billion in 1998-1999, projected for 2013, 6.2 billion — a 476 percent increase and its only getting worse.

The State of New York spends too much money, it is that blunt and it is that simple. Our spending has far exceeded the rate of inflation. From 1994-2009, inflation was about 2.7 percent per year; medicaid when up over 5 percent per year and education went up over 6% per year. We just can’t afford those rates of increase. State spending actually outpaced income growth. State spending increased just under 6%, personal income growth was only 3.8 percent. And most damaging, our expenses in this state far exceed revenue. We’ve been focusing on this year and the deficit this year, which is a very large deficit about $10 billion, and that is a problem and it is a major problem; what’s worse, is it’s not just about this year. Next year, the problem goes to $14 billion. The year after, the deficit goes to $17 billion. This is not a one year problem my friends. This is a fundamental economic realignment for the State of New York. You look at the chart, you look at the arrows and this is an unsustainable rate of growth and it has been for a long time.

Not only to we spend too much, but we get too little in return. We spend more money on education than any state in the nation and we are number 34 in terms of results. We spend more money on Medicaid than any other state in the nation and we are number 21 in results. We spend about $1.6 billion per year in economic development and we are number 50 in terms of results. We are spending more, and government is growing more. We now have more than 600 Executive branch agencies.

And it’s not just State government — the proliferation of local government and special districts all across the State now over 10,500 driving that property tax rate up all across the State. And the large government we have is all too often responsive to the special interests, over the people of the State of New York. The proof is in the pudding. And New Yorkers are voting with their feet. Two million New Yorkers have left the State over the past decade. What does this say? It says we need radical reform, it says we need a new approach, we need a new perspective and we need it now. We must use this moment to transform our government. We currently have a government of dysfunction, gridlock and corruption — we have to transform it into a government of performance, integrity and pride. It is time that we speak to these issues and actually get results for the people of the State and stop offering rhetorical solutions. And I am going to present the budget in several weeks — but this year’s budget discussion is not just about a budget exercise. That’s what those numbers are saying. This is a fundamental realignment for the state. You can’t make up these kinds of savings over this long of period of time through a budget cutting or trimming exercise. We are going to have to reinvent government. We are going to have to reorganize the agencies. We are going to redesign our approach because the old way wasn’t working anyway, let's be honest.

We need literally a transformation plan for a new New York and we have four principles that will guide our new government. Number one, we want a government that pays for performance. No more blank checks. Number two, we want a government that actually gets results in real time. Number three, we want a government that puts the people first and not the special interests first. And number four, we want a government that is an icon for integrity where New Yorkers can be proud of their government once again. We are going to start by transforming New York’s economy. Because what made New York the Empire State was a not a large government complex, it was a vibrant private sector that was creating great jobs in the State of New York that’s what made us the Empire State once and that’s what’s going to make us the Empire State again.

When you look at the beautiful State seal, at the heart of the seal in the middle of the shield are two ships in the Hudson River those two ships were put there when the seal was designed to symbolize intercostals and international commerce. That at the heart of his State is business. And we have to relearn the lesson our founders knew and we have to put up a sign that says New York is open for business. We get it. And this is going to be a business friendly State. We are going to establish economic regional councils. Ten economic regional councils all across the State. They are going to be chaired by Lieutenant Governor Bob Duffy. These will be public private sector partnerships the focus of which is to create jobs, jobs, jobs in those regions. It starts with the premise that there is no top down template to create jobs. You have different regions in this State with different assets and different abilities and these plans are going to have to come from the bottom up and let’s empower the local communities to plan their future and help themselves.

Higher education will be the key economic driver. We look to partner with our great SUNY system, especially across upstate New York in making this a reality. They will provide both intergovernmental and intra-governmental coordination and be one stop shops. State government, county government, local government will all be on one board and all the State agencies will be on that one board. If you need to get something done in that region, it’s a one stop shop and the government will actually cooperate with each other rather than conflict with each other.

These councils will have two main functions. First they will coordinate all the existing economic development money that goes into that region, primarily through ESDC. But second, they will be able to come up with job development plans and then compete against the other councils - to compete for up to $200 million in funding. Competition works. Let them come up with their best plans, compete against the other regions and we will fund the most creative plans. Next, we are going to have to confront the tax situation in our State. The property taxes in New York are killing New Yorkers. Thirteen of the sixteen highest tax counties are in New York when asset by home value. In absolute dollars, Westchester County the highest property taxes in the United States of America. Nassau County the second highest property taxes in the United State of America. It has to end, it has to end this year. We have to hold the line on taxes for now and reduce taxes in the future. New York has no future as the tax capital of the nation. Our young people will not stay. Our business will not come. This has to change.

Put it simply the people of this state simply cannot afford to pay any more taxes, period. I would now like to introduce you to Ms. Geraldine Sullivan. Ms. Geraldine Sullivan is a resident of Monroe County. She is 81 years young. She has been retired after 28 years at Bausch and Laumb. Geraldine lives alone on social security and owns her own home. Her home value, property value has gone down and her taxes have gone up. Geraldine could no longer afford to make ends meet. What did Geraldine do, so at 81 years old she went back to work as a lunch monitor at the local high school just to be able to stay in her home and just to be able to stay in the State of New York. Geraldine we understand your problems, help is on the way we will pass a property tax cap Geraldine once and for all and we, and Geraldine we applaud your spirit and your strength and your tenacity; let’s give Geraldine a big New York round of applause.

We must transform our state government. The last time the state government was reorganized was 1927 under Gov. Al Smith. 1938 a reform was passed, a constitutional amendment, that said there could be only 20 executive departments — 20 — so what has happened since then. Well we couldn’t create any more departments but the law didn’t say anything about creating councils, advisory panels, working groups, facilities, offices, task forces, institutes, boards and committees. So what do we now have? The Department of Health, only one department in compliance with the law, however there are 87 other organizations that have been added to the Department of Health, 46 councils, 6 committees, 17 boards, 6 institutes, 2 task forces, 5 facilities; it’s time to organize the government make it professional make it efficient make it effective. To undergo a comprehensive review lets eliminate transfer and consolidate the funds. I propose setting up SAGE, a spending in government efficiency commission, it would be styled like a Berger Commission where the commission would come up with a reorganization report that is submitted to the Legislature and the Legislature has 30 days to reject it otherwise its passed. The charge to the commission would be operational improvements metrics and targets a reorganization plan due in 6 months and it would consist of private sector experts who could come in and advise us on how to do it and incorporate members of the Legislature.

We need to transform our budget. We have to start with an emergency financial plan to stabilize our finances we need to hold the line and we need to institute a wage freeze in the State of New York. We need to hold the line on taxes, we need a state spending cap and we need to close this $10 billion gap without any borrowing. We need to transform the budget process that we use in this state. The Legislature is very familiar with the budget process and we need to transform this process from partisan political theater, which is what it is today, to productive debate and compromise. Right now the budget process is like ships passing in the night; hold on a second. Bring those ships back, I think I recognized someone. Is that, zoom in on that man on that battleship, yes it is, Senate Majority Leader Dean Skelos. And look, it’s Commander Sheldon Silver, oh, and there I am. And here are the special interest groups. You notice Dean how all of the missiles from the special interest groups went into my battleship. I would humbly suggest as the new governor that maybe, just maybe we try doing it a different way this year, what do you say?

We need to try a different approach. And think of it this way, there are basically three flashpoints when it comes to the budget: it’s the education funding, medicaid and state and local mandates. We want to try a new approach. The State of Wisconsin actually used an interesting model. The governor had announced across the board cuts on the medicaid program, the industry said they couldn’t live with the cuts, and what Wisconsin actually did was basically brought everyone in. It was a hybrid alternative dispute resolution meets binding arbitration process and it actually worked fairly well in Wisconsin. The industry came in, they worked with the government, they accepted the budget target and then redesigned the program to meet those targets. Remember, this is not going to be a budget cutting or trimming exercise. We need to redesign the medicaid program. I can also tell you this. As the Attorney General, I audited the medicaid program for four years, even without this budget problem, the medicaid program needs a desperate overhaul. It is dysfunctional on many levels, so this process has to be done anyway. Our suggestion is to take a crisis management approach and put together a Medicaid Redesign team.

The Medicaid Redesign team will start on January 7, it will commit to reinventing a time for the April 1st deadline, it will assume the Governor’s budget target for the Medicaid cut, and the exercise will be to find alternative ways to reach that cut. If we institute a cut in the normal budget process it is basically through reducing the reimbursement rate. Let’s see if we can’t actually find efficiencies in the program so we actually provide a better service for less money.

The committee will include legislative, executive and the stakeholders. Dennis Rivera from SEIU, George Gresham from 1199, Mike Dowling from LIJ, Ken Raske, Dan Sisto, members of the Legislature have agreed to participate in this process. We also have Jason Helgerson who is the former Medicaid director, who did this in Wisconsin, who is responsible for designing the exercise, we have seduced him to come join us in the State of New York, which was not a difficult sell obviously; and Jim Introne who is a great veteran of State government and has done extraordinary work in health care, we’ve asked to come back. They’re with us today, let’s welcome Jason and Jim. Thank you very much welcome aboard and welcome back Jim.

We’ll use the same approach when it comes to mandate relief — putting together a group that will start January 7, and will commit to have actions by the April 1 deadline, and will propose eliminating any unnecessary state mandates. Again we’ll include all our partners: legislative, executive and stakeholders, labor groups; and that group will be run by Larry Schwartz, who is now a senior advisor to me, but many of you worked with him when he was Secretary to Governor Paterson. He’s done extraordinary work and he’ll be excellent heading up this group. Thank you very much Larry Schwartz.

When it comes to Education funding, as I mentioned earlier we’re number one in spending but thirty-four in terms of results, that has to change. The current education funding goes out by formula grants, meaning there are no performance incentives in the grant process. A school district gets their numerical formula and that’s what they’re going to get, whether they do a good job, a bad job, it doesn’t matter; they get the same level of funding every year. The federal government is actually more innovative in this area. They’re doing it now in the area of education where they run competitions, and for example, when they fund a state government, if the state government wants to qualify for the federal money they have to win the competition. We know in New York how effective those competitions were in making the state government actually move and pass a piece of legislation authorizing charter schools so we could qualify for the Race to the Top money. Competition works. When I was in the federal government ten years ago, we moved from block grants to competitive grants. Everything was performance grants, because when you just give people cash with no results, you take the incentives out of the system

Our suggestion is when it comes to education, have two competitive funds that reward performance. One is a school performance fund which would have a $250 million competition fund for districts that increase performance in the classroom. For example, improving grades of historically underperforming children. If there is a school district that does stellar work, let them compete, let them be rewarded and let them be emulated. We would have a second competition for administration efficiency. A $250 million competition for districts that can find administrative savings through efficiencies, shared services, etc. Run those two competitions and actually incentive performance and change the behavior through the funding mechanism.

For those of you who are skeptical about performance and the ability to turn around a school, let me introduce Brian Rosenbloom. Brian is now the principal of Chelsea Technical Career High School in Manhattan. Brian has been there for two years and he’s already made a difference. In that time, student attendance has gone from 73 percent to 85 percent and listen to this, the pass rate on the regents went from 31percent to 89 percent. That performance is what we want to incentivize, that performance is what we want to model and that performance is what we want to applaud. Congratulations principal, thank you for being with us today.

I would also propose a consolidation bonus. We’ve been talking about consolidating local government for a long period of time and we’re seeing some progress. I think if we add financial incentives to the governments that actually consolidate, you would see an acceleration in the consolidation process, and have a bonus fund for local governments that consolidate and merge or share services with 50 percent of the bonus money going to direct property tax payer relief for the people of that government.

My friends we have to transform the ethical environment and we have to clean up Albany. We all have seen the headlines, headline after headline, month after month, year after year with no change. Every time there’s another headline, there’s another cut on the body politic, and a little more trust has bled out. And this has gone on, and on, and on. I’m familiar with the situation because many of the cases that were in the headlines, I was involved in. Sometimes, even in Albany, there is a black and white issue and this issue is black and white, there is no gray. The people of this state have lost trust in state government; this government has lost credibility with the people of this state. It’s time to pass ethics reform and it is time to pass ethics reform now.

We will propose a clean up Albany plan with real reform. This is not going to be a situation where the people of the state will have suffered for years and lost trust and now were going to give them a watered down or half baked ethics reform bill. They’re going to have real ethics reform. Were going to end pay to play. We’re going to have full disclosure of outside income. We’re going to have an independent monitor. We’re going to listen to Ed Koch’s warnings. Mayor Ed Koch has been going all over this state and we and we applaud him for it talking about independent redistricting. Congratulations Mr. Mayor.

And we need public financing of campaigns. We must also at the same time once again become the progressive capitol of the nation. Yes, we must deal with these fiscal realities and they are difficult and they will be time consuming. But at the same time we also have to continue to achieve social progress that made this state famous. You should applaud! I spent four years fighting Wall Street corruption and I saw thousands and thousands of consumers victimized by the Wall Street corruption. And the question was where was Washington, where was Washington, where was Washington. Where were all the federal regulators. Where was the SEC and OFHEO that whole alphabet soup of federal regulators. Where are they. It was a good question. There was another question. Where was Albany? Where was our banking department? Where was our Insurance Department? Where was our Consumer Protection Agency. And yes, I believe Washington was primarily responsible but I also believe New York could have done a better job, frankly. I believe our organization, I believe our current organization is not effective because it is not organized the way Wall Street works any more.

These divisions of insurance and banking and consumer protection don’t exist in the marketplace and much of the activity is falling between the cracks of our regulatory entities. We can have a win win. We can consolidate them into a department of financial regulation that better protects the consumer and the consolation will save the taxpayer money by reducing the cost of three separate organizations. We’ve been talking about green jobs and I believe New York has a great future in green jobs. We proposed a $100 million competitive grant program that will go to local private sector partnerships that come up with the best plans to create green jobs, reduce pollution and further environmental justice. Let the private marketplace come in, let them work with the local governments and the local community groups to come up with the best plans. Let’s reward performance. Lets incentivize performance Let competition run, and let us fund the best. That’s the green jobs proposal. We believe in economic opportunity for all New Yorkers, the Minority and Women Owned Business Enterprise endeavor, is a good one, it has a current goal of 10 percent of state business, I want to double that goal to 20 percent of state business. For those of us who are old enough to remember Willowbrook, it brings back very bad memories. When we think about our current juvenile justice facilities, I believe there are echoes of what we dealt with in Willowbrook. You have juvenile justice facilities today where we have young people who are incarcerated in these state programs who are receiving help assistance program treatment that has already been proven to be ineffective; Recidivism rate in the 90 percentile. The cost to the taxpayer is exorbitant.

For one child over $200,000 per year. The reason we continue to keep these children in these programs that aren’t serving them but are bilking the taxpayers is that we don’t want to lose the state jobs that we would lose if we closed the facilities. I understand, I understand, the importance of keeping jobs. I understand the importance of keeping jobs especially in upstate New York. I also understand that that does not justify the burden on the taxpayer and the violation of civil rights of the young person who is in a program that they don’t need where they’re not being treated hundreds of miles from their home just to save state jobs. An incarceration program is not an employment program. If people need jobs, let’s get people jobs. Don’t put other people in prison to give some people jobs. Don’t put other people in juvenile justice facilities to give some people jobs. That’s not what this state is all about and that has to end this session.

We believe in justice for all, then let’s pass marriage equality this year once and for all. We’re going to propose a program called the urban green markets program which will be a win win. We’re going to set up green markets in urban areas all across the state to get good food to inner city communities and these markets will be a host for the New York agricultural products. Last point, we must seize this moment of opportunity. New York is not alone in this situation. As a matter of fact there, are eight states with fiscal conditions that are worse than New York. This is going to be a time of national transition. This is really an economic recalibration for states all across the nation. And that’s what’s really happening as the economy has retrenched, states now have to recalibrate.

There have been other times in our history where there have been transition periods, the agricultural transition, the industrial transition, high tech transitions. In all those transitions, New York led the way and New York came out first. Why? Because we were faster. We were more facile, we were more sophisticated, and we won in the transition. We can win in the transition again. And we can make, we can make January 5, 2011 the day that we seize the opportunity and the State of New York strikes back. I want to leave you with one personal point if I may as the new Governor. To my colleagues in the Legislature, one point in my life, I went and joined the Clinton administration. I was a lifelong New Yorker and Bill Clinton took office and I had the opportunity to join the Federal government and I did and it was a good experience. I needed it. I was one of those people who thought the New Yorker cartoon was the accurate depiction that the west coast was really New Jersey.

You know, I was a real New Yorker. So I went down at the beginning of the Clinton administration, assistant secretary at department of housing and urban development and I became a member of President Clinton’s cabinet and it was a fascinating experience and I got to work literally in every state in the nation. Many times when you’re in the President’s cabinet, your main utility is the President can’t make an event, they scramble for a surrogate and they send someone from the Cabinet to be a surrogate. That was actually a very tough duty, by the way. Can you imagine, having to go out to Kansas to substitute for President Bill Clinton and get before a group that was expecting to see the President of the United States, Bill Clinton and instead they get the HUD Secretary Andrew “Cucamo.”

But it was, it was a learning experience for me and literally every state I would be talking about every topic and almost invariably, somehow they would figure out that I was from New York, I’m not really sure how because I never told them but they would figure out I was from New York and at the end of the event they would come up to me and almost without exception whatever the topic they would say what are you doing about this in New York? It could be health care it could be immigration it could be taxation what do you do in New York and their eyes would be open wide. What do you do about this in New York? Why? Because we are New York and because our history our legacy was we took these difficult problems and we solved them first and the rest of the nation learned from us.

The other state governments looked to New York and they learned from us. I was running HUD, the housing economic development, most of the federal programs were modeled on state programs. Why, because the New York government was the best. We were the most sophisticated the most complex the problems developed here first we resolved them here first we had the most caliber in our government we were just the best and we were the model for the nation. That’s the history and the legacy of New York this has been an aberration this recent past. The dysfunction of Albany, the gridlock of Albany, the corruption of Albany, this is not the true story of the New York State legislature. It’s not who we are, it’s not what we do, it’s not why we’re here. The New York State Legislature is the best legislature historically in the nation the most talented people, that’s, that’s who we are.

That is who we are and that’s who we can be again. When I hear your leaders speaking about your cooperation in a positive vision and change and doing things differently, I am so excited. Because the people of this state desperately, desperately need it. They need the government to work in a way they haven’t needed the government to work in 20 years. They’ve seen the ugly, they’ve seen the gridlock, they’ve seen the corruption. Let them see how beautiful the government can be when it cooperates and it’s enlightened and it’s functioning and it’s performing and it’s putting the people above the special interest. Let this legislature be the legislature that stands up and says yes we’re democrats but we’re New Yorkers first, yes we’re republicans but we’re New Yorkers first, yes we’re from downstate but we’re New Yorkers first, yes we’re from upstate but we’re New Yorkers first, and that matters most. And we’re here as New Yorkers not as democrats not as republicans not as independents we’re here as New Yorkers to serve the people of the state of New York and help this state through this crisis.

Let this 234th legislature stand up and write a new page in the history book of New York State government. Let this 234th legislature solve these problems at a time of crisis and bring this state to a place that it’s never been. We’re not just going to build back we’re going to build back bigger stronger than ever before. That’s what we’re going to do together. Thank you and God bless you.