March 11, 2010 2:00 am
New York state may have to borrow to smooth a path back to financial health over the next few years, its lieutenant governor said yesterday, highlighting the severity of the fiscal trouble facing US states in the wake of the financial crisis and economic recession.
David Paterson, governor, last year tapped Richard Ravitch, whose work with New York city during its financial crisis in the 1970s cemented his credentials as a hard-nosed budget hawk, to draft a turnround plan for the state.
The plan outlined by Mr Ravitch comes amid political uncertainty for Mr Paterson, who recently announced he would not seek another term. However, Mr Ravtich's reputation ensures that the initiative will be taken seriously by the state legislature, a notoriously fractious body.
Included in the plan are measures that lock the state into paying down a so-called structural deficit in five years, create a five-member oversight board to assess the budget situation quarterly and authorise the governor to make cuts if lawmakers fail to agree on gap-closing measures within a limited time.
Long-term planning would accompany future annual budget talks and the state would have to set aside more rainy day reserves.
"The current economic crisis did not cause New York's budget troubles," Mr Ravitch said. "It merely exposed them."
New York has a chronic mismatch of revenue and spending that it had glossed over with the use of cash accounting, allowing for "one-shot" budget fixes, he said. Accounting practices vary by state.
The budget deficit is projected at more than $9bn (£6bn) for the fiscal year 2011, starting on April 1. But Mr Ravitch estimated the structural deficit was more like $13bn. He predicted that, without reform, the structural imbalance would surge in five years to $60bn, a gap that could only be closed with "horrendous taxes".
His plan includes a shift to GAAP accounting, the accepted standard for US corporations, as well as a change in the start of the fiscal year to July 1 in line with most states.
The sombre budget news out of New York could be a sign of what is to come nationwide as lawmakers grapple with the latest round of budget deficits.
The ripple effects of the recession have decimated state tax revenues. That has meant several years of budget deficits and painful cuts to staff and services throughout the country. State lawmakers closed a cumulative budget gap of $145.9bn for the fiscal 2010.
As details of Mr Ravitch's plan have leaked out concern has arisen over the inclusion of deficit borrowing, a practice that has always been controversial but has become a hot issue after Greece's debt crisis.
Mr Ravitch argued it might be unrealistic to close bulging gaps with spending cuts alone. Under his plan, borrowing would come only with strict limits and controls on spending and revenue balance.
The proposed legislation would authorise up to $2bn annually in short-term borrowing secured by personal income taxes to balance the budget in the first three years of the plan.
Please don't cut articles from FT.com and redistribute by email or post to the web.