Armed with stimulus dollars and a tax increase, New York lawmakers agreed over the weekend on a $131.8 billion fiscal 2010 budget. Lawmakers will begin voting on the budget bills today, a day before the fiscal year begins.
Though the budget is $10.7 billion larger than the budget Gov. David Paterson proposed in December, state spending remains flat. Just last week the governor announced that the state's budget deficit had grown by $3.2 billion since the beginning of February to $16.2 billion for fiscal 2010.
"I would like to tell you that this budget brings about the end of our fiscal crisis, but I can't do that, it would be intellectually dishonest," hesaid.
Paterson said that if the economy contracts further the state may have to reconsider cuts that were restored in the budget and revenue measures that were rejected during the three-way budget negotiations with Senate Majority Leader Malcolm Smith, D-Queens, and Assembly Speaker Sheldon Silver, D-Manhattan.
The negotiators added some new borrowing to the budget as well, including a $350 million student loan program that will be financed through bonds sold through the State of New York Mortgage Agency. A spokesman SONYMA said they expected to market bonds for that program in the fall.
The budget also allocated $435 million of federal stimulus funds for the state clean water and drinking water revolving funds, which will be used for grants and loans to be administered by the New York State Environmental Facilities Corp.
The budget bills do not tally borrowing for the state in fiscal 2010, but the Legislature has appropriated $5.8 billion to pay debt service on $54.2 billion of outstanding debt. In December, Paterson proposed selling $5.6 billion of bonds for capital projects in 2010.
Paterson's December proposal did not include the $7.2 billion of federal stimulus funds that this budget relies on. The inclusion of federal funds is similar to what other states are doing now that they know how much stimulus money they have and that it's not looked at by rating agencies as a one-shot, Moody's Investors Service analyst Emily Rames said.
"One way you can look at it is not so much one time revenues, but as one time revenues matching one time expenses," she said. "Expenses are increasing now because of things that are related to the economy. The need for certain social services programs are increasing because of a downturn in the economy and those short-term costs increases are being matched by these short-term revenue increases."
The budget cuts spending by $6 billion and raises $5.2 billion of additional revenue, primarily through a temporary increase in the personal income tax expected to net $4 billion. The change, which runs through the 2011 tax year, adds two new tax brackets above the current top rate of 6.85%, with the highest at 8.97% for couples and individuals earning more than $500,000.
"They did temporary tax increases in the last downturn as well," Fitch Ratings analyst Laura Porter said. "Last time that raised money. It didn't seem to have any big negative economic impact and it doesn't put them out of line with New Jersey."
New Jersey's top tax rate is 8.97% but Gov. Jon Corzine has proposed a one year increase on for earners making more than $500,000 to 10.25%. Connecticut's highest tax rate, by comparison, is 5% on earners making $20,000 annually or more.
The turmoil in the financial services sector has hit the state hard. New York derives about 20% of its tax revenue from financial services. It's not clear what Wall Street will look like once it recovers and if it will return to the kind of profitability is has experienced in recent years.
"What we're seeing in this downturn is something that is different from other downturns, particularly around the financial industry which particularly affects New York," Rames said. "I don't know whether we're seeing some kind of a structural shift or a cyclical downturn. There is some risk there in terms of where the state ends up a few years from now and where the industry ends up a few years from now-and if it ends up in a different place, how the state adapts to that."