The State of New York is in serious financial trouble. In the fiscal year that ended March 31, 2002 it incurred a deficit of $4.4 billion, paying for rapid spending growth in a year of recession and traumatic terrorist attacks by using the reserves accumulated during the preceding national economic boom. In the current fiscal year spending expanded even further, despite the declining economy, and the gap between outlays and recurring revenues will exceed $5 billion. With dwindling reserves, the State will have to rely on some form of borrowing to finance its operations in the current fiscal year.

Governor George Pataki’s Executive Budget for the fiscal year beginning April 1, 2003 does not solve the problem. While discipline finally is imposed on spending with cuts of $5.6 billion, this is not adequate to balance the budget. Under the Governor’s plan, the State would incur another annual deficit of about $2.5 billion, including the sums to be borrowed through an “off-budget” entity that draws on future revenues from the national settlement with tobacco companies. Moreover, the deficits would continue beyond fiscal year 2003-04, recurring as far as any official projections go.

Unfortunately, the State’s legislative leaders are not offering meaningful alternatives. Their debate with the Governor revolves mostly around how to borrow (tobacco bonds versus other instruments) rather than whether to borrow or to close the deficit. The debate ignores the basic problem, and seeks only to avoid its short-run consequences by postponing difficult choices. This paper presents an alternative framework for addressing the State’s fiscal crisis. It suggests three interdependent guidelines for the Governor and the members of the Legislature:

1. Bring the budget into balance over three years by reducing expenditures to what the current revenue system supports by making productivity gains and by cutting services in a way that protects the neediest New Yorkers.
2. Close the gap between spending and revenues in the three-year, interim period by imposing a temporary and declining tax and by avoiding borrowing. This “disappearing” tax should be authorized only if there is a credible plan for bringing the budget into balance by fiscal year 2005-2006.
3. Make these decisions in a more accountable and transparent budget process.