It is unlikely that New York State will have a balanced budget in place by the start of the new fiscal year on April 1. Of course timeliness is not the only criteria; quality matters, perhaps more so this year than usual because of the implications of this budget for the next 3-4 years of potentially catastrophic deficits. So where do things stand and where should State leaders go from here? Each house of the legislature has passed its own budget resolutions and the Governor has said that he plans to put the State on austerity status in his bills to temporarily extend spending authorization after the April 1 deadline comes and goes. Here is a quick review of each resolution’s approach.

Spending Control

The Senate leadership deserves credit for acknowledging that serious spending reduction is necessary in order to balance the budget. No one enjoys cutting the State budget but school aid and health care must be part of the solution - together they comprise more than half of the spending supported by State revenues.

Less credit goes to the Assembly, which chose to restore a large portion of the school aid and health care reductions proposed by the Governor and replace the reductions with deficit financing. The Executive Budget would reduce per pupil spending around the State a mere 2 percent on a spending base that has doubled in just 10 years. It is hard to imagine that these reductions would be so draconian as to merit use of borrowed funds that will have to be repaid by the taxpayers in the years ahead.

A big downside in both plans is that neither placed any additional emphasis on concessions from the employee unions, who are poised to get 4 percent raises on April 1. Employee compensation is expected to jump by $3.3 billion over the four-year term of the financial plan.

Revenue Measures

No credit is due either house for removing the cigarette and sugary beverages taxes and replacing them with speculative revenue “plugs” from higher fraud recoveries in Medicaid and sales taxes to be collected from Indian reservations. Both of these items are highly speculative and do not pass muster as realistic gap-closers.

Borrowing

The Assembly plan proposes too much, too easily, while the Senate uses extremely poor judgment. The Assembly was quick to rely on the full $2 billion of deficit financing proposed in the Lt. Governor's five year fiscal plan. Last year all funds spending increased by nearly 10 percent fueled with restorations and increases compliments of the federal government's bailout package. The stimulus funds were supposed to provide a bridge to more sound fiscal practices. Instead, solid and substantial spending reductions are again being avoided.

Restructuring the tobacco bonds, as the Senate proposes, is a bad idea. It would only stretch out the repayment of bonds taken on to finance operating expenses in the last downturn in 2003-04. Those bonds were supposed to be paid off on an accelerated 12-14 year schedule to minimize the costs of this borrowing. If this transaction were permitted, it would serve as a lesson about all that can go wrong with the Ravitch Plan - the lesson being that what is promised to be short run borrowing to cover deficits ends up being refinanced at greater expense to future New Yorkers.

The Road Ahead

New York's Governor has strong budget powers. The Executive Budget is a powerful tool - the Legislature must act on it before it can pass its own appropriations bills so they are limited in what they can do alone. The line item veto is also available as is the right to suspend funding on State operations as it becomes unaffordable. These tools can be used to bring spending under control and strike a deal that is better than either resolution on the table now.

To keep government going without a budget in place the Governor can submit temporary extender bills. Governor Paterson has indicated that he plan to use these as a way to create an austerity plan if the Legislature does not do so in cooperation with him. If revenues are falling and spending continues even at current levels, later in the year there will be a reckoning. He must stick to his guns on this issue to make sure that the State can finish the year without facing a massive deficit.

Items to add to the final deal include achieving the full $5.1 billion worth of spending reductions in the Executive Budget, dropping the overly optimistic claims to high fraud recoveries and tax collection on Indian Reservations, and getting the borrowing total for this year down well under the Ravitch Plan's $2 billion maximum. The Governor should also make sure that the reforms in the Ravitch Plan -a balanced budget requirement and better accounting - go along with ANY agreed-upon borrowing.

By Carol Kellermann and Elizabeth Lynam