Rating analysts responded favorably yesterday to New York's mid-year budget cuts that trimmed $427 million from the current 2009 fiscal year and are expected to save more than $600 million in the next fiscal year.
"You gotta give them credit," said Colleen Woodell, managing director at Standard & Poor's. "Certainly any time a state decides to take mid-year fiscal adjustments, it's a good thing. New York over the last few years has proven itself to be very focused on its financial balance and financial condition. This suggests that that trend is still in place."
The New York Legislature passed the cuts yesterday morning in a special session called by Gov. David Paterson to deal with falling revenue on Wall Street. Paterson signed the bill in the afternoon.
"We've established a cushion that will hopefully tide us over to next year's budget, and we have cut into next year's budget," Paterson said. "There's a lot more to do, but the winds of change have come to Albany."
The Legislature's cuts were less than the $600 million Paterson had requested.
With these cuts as well as $630 million of cuts enacted by Paterson last month, current-year budget growth will be held to the projected rate of inflation, 4.2%, he said. These actions cut the budget to $120.9 billion from the originally enacted $121.6 billion. The cuts would also reduce next year's projected deficit by $1 billion to $5.4 billion. Out-year gaps over the next three years are projected at $25.2 billion.
"It's was pretty clear that the original budget they enacted was overly optimistic and there was going to be work that had to be done, something along these lines was going to be necessary," said Emily Raimes, an analyst at Moody's Investors Service. "The [revenue] numbers that we've seen since the budget was enacted have come down so much that probably the step that they've taken, while definitely positive, will probably be only the first in a series that will be needed in order to close out year gaps."
Paterson said that Wall Street bonuses could fall by as much as 40% in the current fiscal year and that capital gains could fall by as much as 36%, resulting in a $1 billion drop in revenue compared to fiscal 2008. The state derives about 20% of its revenue from the financial sector, making it particularly vulnerable to the current downturn.
"We certainly agree there is downside risk [to Wall Street revenues] - so we view this positively," said Laura Porter, senior director at Fitch Ratings. "It seems pretty responsive to what the facts on the ground are and what's going on with Wall Street."
Porter said that it was unusual for a state to take proactive action to cut its budget before it had to.
"One of the reasons we have a positive outlook on New York state is because of their recent budgeting behavior, and this is consistent with that," Porter said. Fitch rates New York AA-minus with a positive outlook. Standard & Poor's assigns its AA rating with a stable outlook, and Moody's rates the state Aa3 with stable outlook.
Analysts said the state's rating takes into account the cyclical nature of the economy.
The current-year cuts include: $127 million of Medicaid spending; $97 million of local-assistance spending excluding school aid, welfare, and some other mandated programs; $34 million of certain executive and legislative programs; $50 million from slower spending on certain projects, including a statewide wireless network; $50 million from so-called member items, also known as pork-barrel spending; and $51 million of state support to the City University of New York. Some of those cuts are recurring, including a $374 million reduction in Medicaid spending in fiscal 2010.
Analysts said it was less clear how cuts to Medicaid and local aid would affect the health care sector and municipal governments because the law had just been passed and there hadn't been time to study the details.