With the fiscal year 2008-2009 budget topping out at a record $121.6 billion amid worries over the economy, Gov. David Paterson (D) pushed through $500 million in cuts through the Program to Eliminate the Gap (PEG) initiative, forcing agencies to slice spending by 3.35 percent before the legislative term ended.

Continuing to deal with the fallout from the budget he inherited two weeks before the deadline from Eliot Spitzer, Paterson has since announced more agency spending cuts in an effort to prevent the state from going into the red.
“We’ve been very satisfied with the plans we’ve received, including some creative savings programs,” said Matt Anderson, spokesperson for the New York State Division of Budget.

Among the little cost-saving measures, Anderson said, were directives to switch the stock of paper in government printers and limit the number of mailings sent to constituents.

Between the larger cuts and the smaller initiatives, Anderson said, “the budget for the current fiscal year is projected to be in balance.”

But other lawmakers have worried that the 2009-2010 budget’s anticipated $5 billion shortfall could hit the state early, making this year’s expenditures unsustainable.

“We believe that the state is facing fiscal challenges,” said Scott Reif, spokesperson for the new Senate Majority leader Dean Skelos (R-Rockville Centre). “We’ve had budget gaps in the past that we faced, and we expect to do so again.”

Reif said that to prepare for a potential shortfall, the Senate has reduced spending by leaving positions unfilled and cutting back on supplies and travel.

Others in Albany did not mince words about their fears for the budget.

“Many of our revenue projections were off, including cigarette taxes and real estate profits,” said State Sen. Diane Savino (D-Staten Island/Brooklyn), arguing that at the time of final budget negotiations, Albany was focused on simply finishing on schedule after Spitzer’s sudden resignation.

She expects the Legislature will be forced to reconvene budget discussions in November, or possibly sooner. Assembly Minority Leader James Tedisco (R-Schenectady/Saratoga) has predicted that the Legislature may need to reconvene to pass tax increases to provide the revenue for allotted spending.

Shrinking expectations for state tax revenues from sliding profits from Wall Street banks and brokerages added to these concerns as the Dow fell 13 percent in the first two quarters of 2008, with some stocks hitting their lowest levels in over 10 years.

Almost as soon as the budget was released, State Comptroller Thomas DiNapoli (D) warned that there were up to $1.5 billion in expenditures based on revenue projections unlikely to materialize.

“The reality is that the economy is in rough shape and the worst may still be around the corner,” DiNapoli warned at the time.

The economy has worsened since, with recent drops on Wall Street igniting new fears of recession.

Several economists in the state considering which areas might be hardest hit if the money runs dry mid-year say the greatest risk is to state infrastructure.

“The state highways and bridges are under-funded,” said E.J. McMahon of the Empire Center for New York State Policy, part of the fiscally conservative Manhattan Institute. “Something has to give. The PEG program is a small down payment in what they need to be doing.”

The Metropolitan Transit Authority’s budget is already ailing. The agency’s revenues through the state mortgage tax have already twice this year missed projections. To deal with the shortfalls, the agency proposed deferring $2.7 billion in planned initiatives, postponing the purchase of new city buses and the renovation of 19 subway stations and the Henry Hudson Bridge toll plaza.

New York City’s transportation hubs could be particularly weakened by the state’s falling revenues.

“There is a day of reckoning that will be coming pretty soon,” said Jonathan Bowles, director of the Manhattan-based Center for an Urban Future.

With the state’s fiscal problems increasingly in focus, New York City passed a $59.1 billion budget—keeping spending close to flat from the previous year, unlike the significant spending increases in the state budget from last year.

Bowles also foresaw the potential for cuts in higher education funding, which might force state and city universities to raise tuition and lose new research grants from the New York State Commission on Higher Education.
New York is hardly alone in being forced to choose from a host of unappealing options if mid-year tax revenues prove insufficient.

A 2008 survey by the Center on Budget and Policy Priorities found that 29 states were dealing with budget shortages totaling $48 billion. Of those states, 17 have proposed cuts in services for children, the poor, elderly or disabled.
New York might be required to consider some of the same grim realities seen by states around the country in 2003, when the states’ total budget shortfall hit $80 billion—up from $40 billion in 2001.

“California was particularly hard-hit,” said Elizabeth McNichol, senior fellow at the Center on Budget and Policy Priorities, a Washington, D.C.,-based think tank studying federal and state fiscal policies affecting low- and
moderate-income people.

The 2003 shortfalls “resulted in hiring freezes and layoffs, and class sizes got bigger. Some people didn’t get the medical care they needed and Medicaid eligibility standards changed,” McNichol said. “A number of states reduced eligibility for childcare assistance and had to postpone maintenance on infrastructure like highways and bridges.”
According to the Albany-based Rockefeller Institute of Government’s latest quarterly report, state tax revenues across the country declined by 5.3 percent for the third quarter in a row and sales tax revenues stayed flat. State tax revenues year-over-year grew by barely one-third of the historical average of the previous nine years.

While many agree that the worsening situation in New York and nationwide may force legislators to come up with some unpopular solutions, there is disagreement about which direction state lawmakers will take. Assembly Speaker Sheldon Silver (D-Manhattan) suggested that the Legislature might have to reconsider a tax hike for millionaires after second-quarter estimated tax returns have been filed.

“The issue is, ‘How much of a pie do we have to slice up before we can figure out the slices?’” said Silver spokesperson Dan Weiller.

Economists on the left join the Assembly speaker in warning that spending cuts could deepen the state’s economic wounds.

Trudi Renwick, senior economist at New York’s Fiscal Policy Institute, said she believes tax hikes must be pursued instead of targeted budget cuts to keep things from getting worse.

“If we cut schools, they need to lay off teachers or librarians, and then their families won’t be able to spend money, which will hurt all the things they spend money on, and it becomes a downward spiral,” she said. “And if municipalities are forced to lay off snow plow drivers, or choose to not repair the roads, or cut local police officers, that would have the same reverberating impact on the economy.”