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Paterson proposes new budget powers ; Plan would benefit future governors

Future New York governors would have sweeping new powers to rescue state budgets from deficits while a hodgepodge of gimmicks used to mask financial shortfalls would be restricted under legislation proposed this weekend by Gov. David A. Paterson.

The governor and lawmakers would be required to not only legally certify that an adopted budget has been legitimately balanced, but that the state's finances stay in balance during the year according to strict accounting rules.

And if a budget's red ink is not resolved during a year, the state would lose the authority to borrow under a new bonding program that would ban borrowing to close deficits and operating costs of government. The measure would give holders of these new bonds extraordinary new powers to sue the state over bond covenants prohibiting the state from ignoring deficits.

While he leaves office at the end of the year, Paterson in his two years as governor has faced extraordinary financial pressures during the economic downturn. But he has warned that the tools at his disposal are dangerously limited, as seen this past year when reluctant lawmakers in December refused to close the full amount of the deficit at the time.

"This bill is all about fiscal discipline," Peter Kiernan, the governor's counsel, said in an e-mail in response to questions about the new legislation.

With talks over resolving the final components of the late 2010 budget at a critically sensitive point in the next few days, Paterson aides say the governor is not demanding the new plan be agreed to in the new budget. But Paterson has said he wants future governors to have a freer hand than he has to deal with budget problems -- which are coming next year when another soaring deficit is already projected.

The new measure requires the governor and the leaders of the Assembly and Senate to legally certify new budgets are balanced. If no such certification is agreed to, state-backed borrowings would be blocked.

If a budget becomes unbalanced during a fiscal year, as has happened often over the past decade, broad new powers would be assigned to a governor to erase the red ink. Unlike a plan proposed in March by Lt. Gov. Richard Ravitch to create an outside board to advise on certain budget matters, the Paterson plan would leave it to the governor to declare a budget has become unbalanced during a year.

If that occurs, the Legislature and governor would have 10 days to agree on the size of the deficit. If there is no deal, the state comptroller would provide an opinion on the deficit estimate.

Setting new timetables for closing midyear gaps, the governor and Legislature would have 30 days after a governor declares a deficit to come up with a solution. No longer would state leaders be permitted to let months go by where deficits are allowed to grow without swift action, as they did this year.

In a broad new power for a governor, if the sides cannot agree, the governor would be given authority to "uniformly" reduce all remaining appropriations during a fiscal year, except for debt service and certain health and safety spending.

Currently, once a budget is adopted, Paterson can only really reduce spending later in the year in budget areas he directly controls, such as administrative costs of state agencies. While Paterson has, for instance, delayed payments to public schools, he ultimately could not unilaterally reduce the school payments.

The Paterson measure calls for a "structurally balanced" budget to better bring the state's long-term spending in line with revenues. It does not, though, place a cap on spending, and there is nothing in the plan to actually reduce spending levels, which have busted through inflation levels. Spending, for instance, has grown from $62 billion in 1994 to what could end up being a $135 billion budget this year when talks over a final 2010 budget conclude, possibly in the coming days.

Unlike the plan by Ravitch, who called for up to $6 billion over three years to help close projected deficits, the Paterson effort creates a new way to finance borrowings. It limits how the proceeds can be spent to capital expenditures, such as the state's infrastructure needs, and bans borrowing for deficit reduction. The new bonds would be stopped if a budget deficit that arises is not addressed.

The measure calls for creation of a new Sales Tax Revenue Bond Tax Fund, which would direct a penny of every sales tax dollar to finance the borrowings. Paterson aides said the plan does not call for the program to begin this year.

The bonds would not be issued by the state, but by the state's Urban Development Corp. or the Dormitory Authority, two off-budget accounts now used as vehicles for borrowing. The state uses personal income tax revenue bonds and general obligation bonds to now finance many infrastructure projects, and Paterson also wants to legally limit state-supported debt for capital purposes only for assets owned by the state, local governments or public benefit corporations.

But the plan, according to a copy of the measure, also calls for a "trapping event" for the bonds during deficit periods. If the budget is not certified as balanced, bondholders could sue to force the budget to be balanced. Moreover, if bond covenants demanding budget balance were violated, the sales tax revenue money would be placed into a "lock box" -- unable to be touched for purposes other than to retire the bonds.

"In effect, no cuts, no capital," Kiernan said.

The state by 2013 would also have to start doing its budget according to what are known as generally accepted accounting principles. GAAP budgeting is a more fiscally honest way to track finances to prevent such common steps as the state simply bouncing payments for a current year's obligations into the next fiscal year in order to make the books look balanced.

The plan also would reduce "special" funds, which are accounts created outside the regular budget but which are often dipped into or "swept" -- as seen routinely over the past year -- to help balance the general state budget.

Paterson's bill would also dramatically increase the percentage of funds steered to the state's rainy day fund -- an account used for fiscal emergencies.

Some lawmakers have voiced reluctance about ceding as much power as Paterson envisions to governors to, for instance, close a midyear deficit. On the other hand, this would remove lawmakers from the politically difficult chore of reducing spending for popular programs if a deficit pops up, as witnessed again this past year, not long after they adopt an annual budget.

"The Legislature has talked about adopting these types [of] fiscal measures. Now, we will see," Kiernan said.


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