New York's Paterson Seeks Emergency Session as Deficit Balloons

By Henry Goldman and Michael Quint

July 30 (Bloomberg) -- New York Governor David Paterson called the Legislature back to work for emergency session next month to tackle a ballooning budget deficit caused by a slumping economy led by New York City's faltering financial sector.

``We're going to end the New York state legislators' vacations and bring them back to Albany to reprioritize the way we manage New York state's finances,'' Paterson said in a five- minute address televised statewide. ``For too long, we have done less with more and paid more for less.''

Paterson didn't specify what spending cuts or revenue enhancements he would seek when lawmakers return Aug. 19. Budget Director Laura Anglin will outline details of the state's plight at a news conference this morning, the governor's press office said. Spending cuts of 5 percent to 10 percent may be necessary for the year beginning April 1, 2009, he said in an April 8 speech.

Paterson, 54, who assumed office March 17 following Eliot Spitzer's resignation, previously reduced the spending plan Spitzer proposed by $1.1 billion.

The deficit next year will grow to $6.4 billion from a previously projected $5 billion, Paterson said. The cumulative projected deficit the state faces over the next three years has grown 22 percent since May, to $26.2 billion from $21.5 billion, he said. The current budget is $80.5 billion, excluding capital projects and federal aid.

The fiscal peril creates a potential conflict between lawmakers favoring spending cuts over tax increases and those who have called for higher levies on the state's wealthiest taxpayers, said Douglas Muzzio, professor of urban politics at Baruch College, a branch of the City University of New York.

`A Bad Spot'

``Paterson's in a bad spot, and given the accidental way he took office, this is his big test as to whether he has the ability to discipline the Legislature to act,'' Muzzio said in an interview.

Assembly Speaker Sheldon Silver, a Manhattan Democrat, said he would oppose spending cuts to schools, care for the elderly and affordable housing. He called upon the federal government to increase aid to cities.

``If it is our intention to ask working families to shoulder the burden of these cuts, we must ensure that our most affluent citizens share that burden,'' he said.

His counterpart in the Senate, Republican Majority Leader Dean Skelos of Long Island, called for a constitutional amendment to limit annual spending growth to 4 percent or 120 percent of the inflation rate, whichever is lower. The proposal, which the Senate passed this year, hasn't been taken up by the Assembly. Skelos also called for a cap on local property tax increases, which the Assembly has blocked.

Wall Street

On Wall Street, where workers and businesses historically provide about 20 percent of state tax revenue, financial firms posted more than $468 billion in writedowns and credit losses since the start of last year, stemming from the collapse of the subprime mortgage market.

Among them, Citigroup Inc. has taken $54.6 billion in losses and slashed more than 14,000 jobs, while Merrill Lynch & Co. has lost $51.8 billion and cut 5,220 jobs, according to data compiled by Bloomberg.

A 20 percent drop in securities industry bonuses this year will cut tax revenue by $700 million. Including levies collected on real estate transactions, there may be a $1.6 billion drop in collections from the financial sector, the governor, a Democrat, said.

`Damage on Wall Street'

``The damage on Wall Street is affecting all of our communities and its effects on our New York state finances is devastating,'' Paterson said.

The governor should seek cuts in Medicaid reimbursements for long-term elderly care; aid to affluent school districts, and health and pension benefits for state workers, said Charles Brecher, research director for the Citizens Budget Commission, a business-funded group that monitors state and city finances.

``The real challenge will be whether he can put together a program of spending cuts that will win acceptance from unions and the Legislature,'' Brecher said.

The Fiscal Policy Institute, a union-supported policy group, rejected Brecher's prescription and called for tax increases on the state's wealthiest residents, similar to ones temporarily instituted in 2003.

Higher Taxes

``Increasing taxes on higher-income people is less harmful than cutting government spending,'' Renwick said. ``It should be a balanced approach that doesn't put increased stress on people who can least afford to pay.''

American Federation of Teachers President Randi Weingarten, saying her union would cooperate with the governor, warned against cuts to schools. ``We have to be careful to avoid being penny-wise and pound foolish,'' she said.

New York Mayor Michael Bloomberg applauded Paterson's message and his challenge to the Legislature.

``Tonight's speech was an urgent call to action, and the governor has my support,'' said Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP.

New York State has $50 billion of outstanding debt. Ratings range from AAA for bonds backed by personal income taxes or sales tax, to AA for state general obligation debt and AA- for bonds that require appropriations by the Legislature, according to Standard & Poor's.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net; Henry Goldman in New York at Hgoldman@bloomberg.net.