New York Gov. David ­Paterson proposed an all-funds $134 billion fiscal 2011 budget yesterday that keeps spending growth below 1%. The proposed budget would close a $7.4 billion deficit primarily through a series of cuts, but also through tax and fee increases.

Most of the budget-closing actions — 92% — are on recurring spending and revenue enhancements. All-funds spending would increase by 0.6% over the current year and state operating spending would increase by $745 million to $79.9 billion, a 0.9% increase.

“The mistakes of the past, the squandering of surpluses, the papering over of deficits, relying on gimmicks to finance unsustainable spending increases, has led us to the breaking point,” Paterson said in his annual budget address to the Legislature. “Our revenues have crumbled and our budget has crashed and we can no longer afford this spending addiction.”

Without recurring cuts and additional federal funding, general fund deficits would rise to $20.7 billion by fiscal 2014, according to the budget presentation.

New York would sell $5.9 billion of debt to finance capital projects in fiscal 2011, a

$233.9 million increase over fiscal 2010, under the executive budget proposal. Overall capital spending would increase to $10.8 billion from $9.99 billion and the state’s outstanding debt would rise by $2.7 billion to $57.5 billion.

Most of the state’s bonds, $5.27 billion, would be sold through public authorities rather than as general obligation bonds. Pay-as-you-go capital spending would increase to $2.25 billion from $1.84 billion. New York’s fiscal year begins April 1.

In October, Paterson rejected a proposed $25.8 billion, five-year bridge and highway capital plan as unaffordable. The latest budget calls for a $7 billion, two-year bridge and highway capital plan.

“What we didn’t want to do was commit to a plan that was clearly not funded,” said budget director Robert Megna. The dedicated highway taxes that fund the state’s bridge and highway plan are insufficient to maintain level spending in fiscal 2011, requiring the state to dedicate $750 million of general fund money, he said.

“Clearly that’s not sustainable because that share of general fund contribution goes up over time,” Megna said. “What we’ve put forward in this environment is a two-year plan we can commit to … as we figure out a way to fund a plan over a longer period of time.”

Paterson also proposed allowing public-private partnerships on State University of New York campuses. Megna said that allowing SUNY to lease properties for P3s would not replace the traditional capital program but would be used more as an economic development tool to bring private-sector employers onto campuses to partner with academia.

The budget would reauthorize the Empire State Development Corp. and the Dormitory Authority of the State of New York to sell personal income tax bonds for any eligible purpose. Under a proposal to consolidate state agencies, the ESDC would be merged with the Department of Economic Development and be renamed the Job Development Corp.

The proposal would also reauthorize the issuance of mental health bonds on the state’s PIT credit, which is rated higher than the state’s mental health facilities revenue credit, which had been the debt vehicle for the bonds. Using PIT bonds for mental health projects will reduce debt-service costs on planned issuance by $20 million to $30 million. The authorizations were first enacted last year. 

Over the long term, Paterson called for capital spending cuts and an increase in pay-as-you-go spending relative to bonded debt. The capital reduction plan would reduce projected bond issuance by $1.77 billion over five years, according to the proposal.

Those decreases would first take effect in fiscal 2011, reducing projected spending on certain projects by $238 million. Once fully implemented, the plan will reduce projected annual debt-service costs by more than $130 million.

One of the fastest areas of spending growth in fiscal 2011 is debt service, which will increase by $844 million to $6.4 billion, a 17% increase over fiscal 2010. One of the main reasons for the increase is the result of a 2005 restructuring of dedicated highway bridge trust fund debt. In August 2005, the New York State Thruway Authority restructured $2.8 billion of trust fund debt.

“About five years ago, we did some shortsighted borrowing techniques, which kind of pushed costs off into the future, and that future is today,” Megna said. “That’s a fixed cost we can’t avoid, but what we can do is try to reduce that problem in our out years and get our borrowing under control.”

Debt service won’t rise as much in the out years, but it will still increase rapidly, he said.

Paterson’s budget would cut $1 billion from health care and $1.1 billion in school aid. The two sectors together constitute the greatest portion of state spending. Health care accounts for $53.2 billion of all funds spending in the budget proposal, while school aid would total $20.5 billion.

Paterson also proposed new taxes on cigarettes and sugary sodas to raise $650 million in fiscal 2011 that would be dedicated to health care spending.

“It’s a tough plan in response to a very tough budget and economic situation that we’re in,” said Comptroller Thomas DiNapoli. “We just need everybody to recognize that New York’s economy continues to be weak and we need to make some tough choices.”

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