GOVERNOR PATERSON WILL DELIVER ECONOMIC AND FISCAL RECOVERY PLAN TO ADDRESS $2.1 BILLION CURRENT-YEAR BUDGET DEFICIT

The Division of the Budget today released its First Quarter Update to the State Financial Plan, which includes updated information on revenues, spending, and other financial indicators. Based on operating results through the first three months of the fiscal year and updated economic projections that indicate continuing weakness in the overall economy, the State must eliminate a current-year deficit of $2.1 billion in 2009-10, which will grow to $4.6 billion in 2010-11. 

To address this issue, Governor David A. Paterson today announced that he will work with Lieutenant Governor Richard Ravitch to develop an Economic and Fiscal Recovery Plan that will eliminate the current-year budget deficit and improve the State’s long-term fiscal health. The Governor’s plan will be released in September.

“New York, like virtually every State in the nation, continues to experience historic economic difficulties, and further action is needed to control spending,” Governor Paterson said. “However, in addressing the State’s immediate fiscal issues, we cannot neglect the critical long-term reforms that are necessary to return New York to economic prosperity and national leadership. Along with the help of Lieutenant Governor Richard Ravitch, I will continue to push for a broad, bold agenda to help improve the lives of everyday New Yorkers and I urge the Legislature to join me in that effort.”

First Quarter Update to the State Financial Plan

The largest factor driving revisions in the Division of the Budget First Quarter Update to the State Financial Plan is continued weakness in the economy, which has resulted in lower-than-projected year-to-date tax receipts.  Highlights include:

• Continued Revenue Declines. Through the first quarter of the 2009-10 fiscal years, overall General Fund revenues were $305 million below initial projections. This figure, however, includes several one-time cash management actions that do not impact the State’s underlying economic and revenue base. During the first quarter, the State recovered $387 million in past overpayments to the City of New York for their local personal income tax collections. It also accelerated $121 million in transfers from special revenue funds to the General Fund, which were expected to take place later within the same fiscal year. Without the impact of these one-time cash-management actions, General Fund revenues would have been $813 million below projections.
• Personal Income Taxes. Compared to 1Q2008-09, General Fund personal income tax collections declined by $4.2 billion or 35 percent to $7.7 billion in 1Q2009-10. This is $584 million below initial financial plan projections, reflecting persistent difficulties within the broader economy.
• Sales Taxes. Compared to 1Q2008-09, General Fund sales and use tax collections declined by 6 percent or $160 million to $2.6 billion in 1Q2009-10. This is $159 million below initial financial plan projections.  DOB estimates that the economic base underlying the sales tax declined by roughly 14 percent during this time period.  This decline is unprecedented, exceeding declines following 9/11 and recessions of the 1980s and 1990s.
• Wage Declines. State wages are projected to decline 4.8 percent in 2009, the largest decline ever recorded. This historic deterioration, combined with other factors, is projected to have a severe impact on the base of virtually all of the State’s revenue sources over the Division of the Budget’s four-year forecast horizon. 
• Continued job losses. Since the beginning of the State recession in August 2008, New York has lost 236,000 jobs. Employment declines are expected to continue into 2010, and the State unemployment rate is expected to peak at 9.1 percent in the first quarter of 2010.  New York private sector employment is projected to fall 2.7 percent in 2009 (the largest annual decline since 1990), followed by a further decline of 0.5 percent in 2010. Employment in the financial services sector and professional services sector, both of which are particularly important to the downstate economy, are projected to fall by 5.2 percent and 6.2 percent, respectively.

“Although the budget enacted in April took substantial action to close a combined $20.1 billion budget gap, the fact remains that revenues have continued to fall, and this will force us to make further difficult choices,” Governor Paterson said.  “Last year reflected a fundamental transformation of our economic base, but we believe the worst deterioration of our economy may be behind us.”

Revised Budget Deficits

The First Quarter Update reflects revised budget deficits of $2.1 billion in 2009-10, $4.6 billion in 2010-11, $13.3 billion in 2011-12, and $18.2 billion in 2012-13 – a cumulative total of $38.2 billion. This represents an increase from the $24.6 billion cumulative deficit projected in May 2009 ($2.2 billion in 2010-11, $8.8 billion in 2011-12, and $13.7 billion in 2012-13), but is still substantially below the $85.2 billion cumulative deficit projected before 2009-10 Enacted Budget savings actions.

In 2009-10, General Fund receipts are now projected to be $1.97 billion or 3.6 percent below Enacted Budget projections. The largest revenue declines are concentrated in personal income taxes ($1.1 billion) and sales taxes ($410 million). The balance of the 2009-10 deficit is the result of $151 million in increased General Fund disbursements, including higher than expected fringe benefit costs ($90 million), a settlement with the federal government related to School Supportive Health Services ($33 million), and others.

The increased deficits projected over the course of the Division of the Budget’s forecast period are primarily related to the current economic downturn and its powerful negative effect on tax receipts. Additionally, however, several revisions to the General Fund spending forecast will also impact the State’s budget gap projections, many of which are also related to persistent weakness in the economy. These include growing public assistance caseloads and child welfare claims; substantial increases in State pension costs due to decreased investment returns that will occur without legislation to enact Tier V reform and amortize the transition to higher rates; additional payments to school districts to reflect both increases in their actual spending and decreases in lottery aid; costs to support preschool special education; and others.

Spending Growth

In May 2009, the Legislature enacted a fiscal rescue plan for the Metropolitan Transit Association that helped protect commuters by mitigating drastic service reductions and fare increases. This rescue plan included a Mobility Tax, which, although it provides no benefit to the State financial plan, passes through the State budget and is provided in its entirety to the MTA.

Excluding the impact of the Mobility Tax, State Operating Funds spending growth from last year is nearly flat and expected to total $78.8 billion – an increase of 0.9 percent or $680 million compared to 2008-09. When this pass-through funding is included, State Operating Funds spending is expected to total $80.5 billion, an increase of 2.9 percent or $2.3 billion.

Workforce

Consistent with the Enacted Budget, the Financial Plan reflects $460 million in savings over two years from workforce reductions and related initiatives. The plan assumes these savings from a combination of severance payments, vacancy controls, voluntary reduction in work schedule, and other measures.

Additionally, also consistent with the Enacted Budget, the State workforce subject to Executive control is projected to total 128,803 at the close of 2009-10. This figure will be revised in the Mid-year Update to the Financial Plan pending implementation of the above workforce actions.

National Context

New York is not alone in addressing a mid-year budget shortfall. Over the last two-months, since May 16, at least 14 other states and Washington DC have announced mid-year deficits totaling $30 billion.

Additionally, according to the Center on Budget and Policy Priorities, at least 48 states have addressed or still face shortfalls in their budgets for fiscal year 2010 totaling $163 billion or 24 percent of state budgets.  

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