When Gov. Paterson delivers his annual message to the Legislature tomor row, “the state of the state” will be painfully obvious.

New York is broke.

After growing reliance on taxes inflated by a historic fi-nancial bubble that began to pop in 2007, the revenue side of the budget has sagged to a level from which it will only slowly recover. Yet Albany’s spending in the last two years has risen, propped up by reserve funds, one-shot gimmicks, temporary federal aid and huge tax hikes.

The Legislature dug itself into a deeper hole last month, by refusing to approve any of the budget cuts Paterson had sought to reduce a projected deficit for the current fiscal year. The resulting year-end cash shortage would’ve been worse if the governor hadn’t acted to stop the bleeding, by unilaterally delaying some state aid payments.

How big is the problem? Paterson’s Executive Budget will update the numbers in three weeks, but consider: New York’s budget gap for fiscal 2010-11, which starts April 1, was already pegged at nearly $7 billion before the Legislature fell $400 million short of Paterson’s deficit-reduction target for 2009-10.

Even if the Legislature had rubber-stamped the governor’s plan, the fundamental problem would remain: The state faces enormous budget gaps over the next several years, because spending is projected to grow much faster than revenues.

New York has no choice. Spending must be cut without compromising essential services. What’s more, it can be done.

To provide examples of how to do it, we at the Manhattan Institute’s Empire Center have developed a comprehensive budgetary blueprint that begins with a 30-point plan for reducing projected spending by $30 billion by 2012-13.

Key options and three-year savings targets in that plan include:

$8.5 billion from reducing school aid by 7.5 percent and then capping its growth for two more years (which would still leave K-12 school funding at 14 percent above its 2006-07 level).

$7.8 billion in Medicaid and other health-care reductions, including programmatic reforms and higher Medicaid fraud-recovery targets.

$3.8 billion in lower state workforce costs from a longer workweek and higher employee contributions to health-insurance premiums.

$1.2 billion from giving the State University of New York and the City University of New York greater flexibility to set their own tuitions and manage their own affairs.

$976 million from capping growth in School Tax Relief benefits.

$708 million from freezing and capping the state’s “nonpersonal” spending on contracts, equipment and other expenses.

$661 million from welfare Reforms.

$567 million from closing Prisons.

And $450 million from cutting the Legislature’s budget and eliminating unspent pork-barrel appropriations.

The blueprint also calls for eliminating or consolidating a half-dozen state agencies, reducing capital spending, streamlining state agency purchasing and back-office functions and returning the judiciary and State Police payrolls to the levels of a decade ago. This isn’t an exhaustive list, but it’s a start.

More long-term savings could come from privatizing assets, including ski areas, golf courses, housing developments, Off-Track Betting operations and the State Insurance Fund, encouraging public-private partnerships and repealing laws that raise capital-construction costs, such as the Wicks Law, requiring use of multiple subcontractors, and the law requiring prevailing union wages on public construction projects.

But reducing state spending alone isn’t enough. Rather than simply passing costs along to local taxpayers, state budget actions need to be coupled with structural reforms that help New York City, other municipalities and school districts to reduce their own expenses.

Imitating Albany’s approach to the city fiscal crisis of the mid-’70s, the governor and Legislature should formally declare a financial emergency and impose a three-year freeze on all public-sector wages. This would provide local governments with welcome breathing room to deal with the combined effect of weakened tax revenues and reductions in state aid. For school districts outside New York City, a wage freeze in the 2010-11 school year would offset 70 percent of our blueprint’s aid-cut proposal.

The state also needs to instill more transparency, accountability and long-term planning into its budget process. The blueprint recommends a series of budget-making reforms, including constitutionally binding caps on spending and debt, shifting to a two-year fiscal cycle starting on July 1 rather than on April 1, requiring that the budget be balanced according to the more demanding Generally Accepted Accounting Principles and requiring the Legislature to develop and release more information on the final budget a minimum of 72 hours before a vote.

Last but not least, the blueprint outlines tax reforms to put New York in a better position to grow its way out of the budget hole. In the short term, the top priority is to allow last year’s personal income-tax hike to expire on schedule at the end of 2011 and to stop stealth tax hikes by “indexing” income-tax brackets, exemptions and standard deductions to inflation.

Over the next three years, we estimate the state could also raise $1.1 billion in revenue — without harming growth — by taxing sales to non-Indians on Indian reservations and by eliminating inequitable or inefficient tax credits.

In the long term, New York needs lower tax rates applied to broader tax bases, with flatter tax-rate structures and simpler tax rules. This will produce a more stable source of revenue and a more competitive economy.

Reducing the state budget and enacting broad, fundamental reform is a tall order. But the governor can take a big step in the right direction tomorrow. He should dispense with the traditional State of the State laundry list of trivial initiatives and instead focus on fixing what’s broken.