GOVERNOR PATERSON ANNOUNCES STATE MUST ADDRESS
$10 BILLION BUDGET DEFICIT OVER NEXT TWO YEARS

Governor David A. Paterson today announced that the State must address a $10 billion budget deficit over the next two years, including an imbalance of $3.2 billion in the current fiscal year and $6.8 billion in the following fiscal year. He also continued to advocate for swift legislative action at a November 10 special session on his proposed two-year, $5 billion Deficit Reduction Plan (DRP), which would close the current-year gap and cut the combined projected $10 billion deficit in half.

“The fiscal challenge we must address is clear and undeniable,” Governor Paterson said. “Revenues have continued to plummet below already conservative projections and immediate action is needed to restore the fiscal integrity of our State budget. Delaying the tough choices we must inevitably make will do nothing besides make those choices more difficult.”

On October 15, Governor Paterson proposed a two-year $5 billion Deficit Reduction Plan, which included $3.0 billion in current-year savings. The State financial plan assumes the implementation of approximately $200 million in additional current-year gap-closing actions, bringing the overall amount of potential mid-year savings that the governor has put forward to $3.2 billion. These additional savings will be achieved through further agency spending controls; the in-sourcing of information technology activities; and the use of surplus funds (such as excess Workers Compensation funds insurers have indicated they will remit and money currently earmarked for debt management purposes, among others).

A link to the full report (PDF) is available.

Economic/Revenue Forecast

The Division of the Budget has revised its current-year deficit forecast to $3.2 billion, an increase of $1.04 billion from the July estimate of $2.1 billion. This increase reflects downward revisions in projected State revenues of $930 million that are almost entirely related to declines in personal income tax collections, as well as net upward revisions in projected spending of $106 million.

These projected downward revenue revisions primarily reflect continued, persistent weakness in the State’s economy, which has led to lower than expected year-to-date tax collections. Recent data indicates that the New York State economy deteriorated more quickly during the first half of 2009 than originally anticipated in July.

According to the Bureau of Labor Statistic's Quarterly Census of Employment and Wages (QCEW), New York State wages fell 15.0 percent in the first quarter of 2009, the largest quarterly decline in the 34-year history of that data-set. Annual State wages are now projected to fall 5.8 percent by in 2009, which would also be the largest annual decline in the history of QCEW data. Personal income and non-agricultural employment are also projected to decline by 2.8 percent and 2.3 percent, respectively, in 2009.

DOB projects that the current State recession will not end until the second half of 2010. However, there exists significant downside risk to the projected timing and strength of the coming recovery, given the historically unprecedented decline in wages witnessed during the current downturn, particularly among high-income earners. The surcharge on high-income individuals enacted in the State budget is now forecast to produce $3.6 billion in revenue during the current-year, a decrease of $400 million or 10 percent from original projections of $4.0 billion.

Reflecting the continued weakness in the economy, General Fund personal income taxes through the second quarter of the 2009-10 fiscal year were $606 million below July projections. Overall, year-to-date 2009-10 personal income tax collections have declined by $4.4 billion or 22 percent from 2008-09.

The expected decline in Wall Street bonuses for the 2009-10 fiscal year has been revised downward to 22 percent from July projections of 19 percent. While some individual firms are reporting strong earnings due to the low borrowing costs engendered by the Federal Reserve’s historically low interest rate target and other factors, there are several countervailing forces that will likely limit the impact of these results on the 2009-10 State budget. Many bonus payments come in the form of stock that is not taxed immediately. Some firms have disappeared altogether during the financial crisis and will not be paying bonuses. Additionally, efforts are continuing at the federal level to constrain executive compensation

New York State Budget Director Robert L. Megna said: “Based on current revenue trends, there should be little optimism that a rebound in tax collections — from Wall Street or any other source — will bail us out of our budget problems. We need to take responsible action to eliminate our deficit.”

DOB’s revised forecast also includes higher-than projected spending of approximately $106 million in 2009-10. Examples include costs associated with delaying a $960 million State pension payment to its statutory deadline ($30 million) and higher-than anticipated local claims for the General Public Health Works and Early Intervention programs ($35 million), among others.

Multi-year Budget Deficits

The Mid-year Update reflects revised budget deficits of $3.2 billion in 2009-10, $6.8 billion in 2010-11, $14.8 billion in 2011-12, and $19.5 billion in 2012-13 – a cumulative total of $44.3 billion. This represents an increase from the $38.2 billion cumulative deficit projected in July 2009 ($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).

Cash-flow

The 2009-10 Enacted Budget contained a provision that allows the General Fund to borrow from the Short-term Investment Pool (STIP) -- which holds other State funds outside the General Fund, such as dedicated fees and revenues -- to help meet intra-year cash-flow needs. These STIP funds must be repaid within four months or by the end of the fiscal year on March 31, 2010, whichever comes first.

DOB believes that it is possible that, during the period from mid-December 2009 to early January 2010, available daily balances in STIP may not be sufficient to make currently scheduled payments. DOB will continue to closely monitor and manage General Fund cash flow during the fiscal year and expects to continue to take cash- management actions, such as altering the timing of discretionary payments, in an effort to maintain adequate operating balances.

The State is reserving money to make debt service payments on outstanding bonds scheduled for November and December 2009 that are financed with General Fund resources. It also plans to reserve money in January 2010 for debt service payments due in the final quarter of the fiscal year. Funds to pay debt service on bonds secured by dedicated receipts, including personal income tax bonds, continue to be set aside as required by law and bond covenants.

Budget Director Robert L. Megna said: “The State of New York has and will continue to meet all of its obligations to bondholders. Other expenditures, however, may ultimately have to be delayed past their currently scheduled payment dates in order to prudently manage cash-flow.”

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