New York Gov. David Paterson doesn't want to cut capital spending, but delaying projects may be inevitable, he said in an exclusive interview with The Bond Buyer.

"Our plans may have to be altered if we don't have the resources," Paterson said. "We're going to have to, as do most companies or businesses that are put in the same situation, cancel some expectations until such time as the revenues start to come back."

The state's capital needs are vast — last year's capital plan assumed the state would spend $9.81 billion on capital in fiscal 2011 — and the recession has hurt New York's coffers. This limits the state's flexibility as the governor and his staff prepare to close a $6.8 billion deficit in next year's budget that will be proposed next month.

"Right now we have bridges that are condemned," Paterson said. "One bridge that connects New York to Vermont is not even usable right now. We're having to rebuild it."

Paterson has hammered the Legislature to cut spending in the face of falling revenue caused by the worst economic downturn in a generation. After the Legislature this month approved a $2.7 billion plan to reduce a projected $3.2 billion deficit in the current fiscal year, he took the extraordinary step of withholding $750 million of scheduled aid to municipalities to make up for the difference.

"The real long-term strategy I would hope is to reduce spending to a point where we don't have to get into this situation because obviously capital development requires investment and to invest you need to borrow, and that's what capital plans are all about," Paterson said. "We're so hamstrung from borrowing that that's why we are where we are — we wouldn't do this if not for the fact that the state's out of money."

Those withheld payments, which are being challenged in court, could become permanent cuts as part of his budget proposal next month, he said.

A year ago, Paterson proposed a $121.1 billion fiscal 2010 budget a month early. By the time the budget was enacted and federal stimulus funds were added, it had grown to $131.9 billion. Stimulus money dries up after 2010, leaving open the question of how the cash-strapped state will deal with the loss.

"When we run out of stimulus money ... we are going to be in a heap of trouble," Paterson said.

Moody's Investors Service last month said the state could face a downgrade or outlook change if it didn't address its deficit or if it used too many non-recurring actions. Paterson has sounded the alarm about what a rating change would mean to the state, but it hasn't gained a lot of traction with the public or the Legislature.

"They don't see that this translates into real dollars," Paterson said. "You multiply that over a period of time and a series of payments and it adds up to large amounts of money, money that otherwise could be designated for programs or for deficit reduction itself."

In October, the governor refused to approve the Metropolitan Transportation Authority's $28.08 billion, five-year capital plan and the State Department of Transportation's $25.8 billion, five-year plan as being unaffordable.

"We don't have the money to advance capital to accomplish some of these endeavors," Paterson said. "What makes it even more aggravating is that there's some stimulus money that we can use to this end but we just don't have enough of it for a whole plan, so we are engaging projects on a case-by-case basis."

Paterson said there was not yet a concrete plan to deal with the MTA's budget woes. Even with optimistic assumptions about increased federal aid, the MTA's plan had a $9.91 billion shortfall.

"It was intellectually dishonest to put a plan out that is not backed in cash, and so I refused to do it," Paterson said. "Perhaps the necessity will move us into better ways to raise revenues, but we are just in a place where we're going to have to find creative solutions."

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