Financial Downturn Creates Risks for State Budget

In remarks delivered today at a forum on budget reform sponsored by the Citizens Budget Commission and hosted by the Rockefeller Institute, Budget Director Paul Francis said recent turbulence in the financial markets is among the emerging risks demanding fiscal prudence in approaching the 2008-2009, for which there already is a projected $3.6 billion gap.

Also today, Governor Spitzer sent a letter to agency commissioners urging them to more carefully scrutinize all hiring and other expenditures in the current year. He said, “We are better off making hard decisions now rather than making commitments that we might be unable to sustain once the budget is finalized.”

In his remarks, Francis said, “New York’s budget is uniquely sensitive to fluctuations in the financial services and real estate industries. For many of the last 12 years, higher-than-expected revenues from these areas of the economy have helped erase potential budget gaps. Unfortunately, all indications are that next year will be very different.”

Francis warned that the recent downturn on Wall Street creates risks for the 2008-09 state budget, which currently includes a projected at $3.6 billion gap. An updated revenue forecast will be available by October 30, when the Division of Budget releases its mid-year update to the state Financial Plan. In January, Governor Spitzer will deliver a balanced budget to the Legislature that will address any potential gaps.

In recent years, Wall Street revenues made up as much as 20 percent of state revenues. Since 1995, except for the two years following the September 11 attack, tax collections from the booming financial services and real estate sectors allowed revenues to come in higher than forecast by an average of $1.4 billion annually. Francis cited the crisis in subprime mortgage lending and the virtual shutdown of the market for highly leveraged financings as two developments that have negatively affected industry sectors that are an important source of tax revenues for the State.

Earlier this summer, Francis instructed agency commissioners to begin identifying savings and greater efficiencies to help close the 2008-09 budget gap.

Francis did note, however, that the developments in the financial markets are unlikely to significantly impact the current year financial plan because the state built up significant reserves and most of these negative developments occurred mid-way through 2007.

Francis praised the “quick start” budget process contained within the Budget Reform Law passed last January as a way to begin a public dialogue about the state’s funding priorities. On November 5, detailed reports forecasting expected revenues and disbursements are due from the Division of Budget, the Comptroller’s office, the Senate, and the Assembly. On November 15, the governor, the Senate majority leader, and the Assembly speaker are required to jointly prepare and release a consensus report with this information.

Copies of Paul Francis’ speech and Governor Spitzer’s letter are attached.

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