Facing the state’s budget gap

LAST week, Gov. Paterson activated New York’s “health-emergency preparedness plan,” as a prudent precautionary measure to deal with a potential swine-flu epidemic.

It’s time to take a similar approach to the state’s rapidly worsening fiscal fever.

Consider: For the first time in nearly 20 years, New York state is running short of cash to pay its bills. Paterson has called the Legislature back to Albany next week to consider his plan for mopping up more than $3 billion in red ink from this year’s budget.

But even if lawmakers enact the governor’s proposals, they’ll still face a gap of more than $6 billion for fiscal 2010-11. That’s triple the shortfall projected just eight months ago. Longer-term budget gaps have mushroomed to $14 billion in fiscal 2011-12 and more than $19 billion in 2012-13

Moreover, in the wake of a historic financial crisis that blew the heart out of the Empire State’s tax base, New York’s budgetary outlook “is subject to many complex economic, social and political risks and uncertainties, many of which are outside the ability of the state to control,” Paterson’s Division of the Budget said in a financial update released Friday.

In short — uh-oh.

If budget negotiations drift along the well-trod path of previous, less serious, downturns, legislative leaders will try to address budget gaps a year at a time. Avoiding real spending cuts or structural budget reforms, they’ll lean heavily on stopgap gimmicks, borrowing and a variety of hidden and not-so-hidden tax and fee hikes — accompanied, of course, by pleas for more aid from a federal government that has already piled up trillion-dollar deficits as high as the eye can see.

Plainly, too many politicians in Albany still haven’t grasped that their old business model — rake in ever-larger tax windfalls from Wall Street and spend like crazy — is broken for good.

Paterson isn’t among them.

While his budget policies over the last year have been inconsistent and ineffectual, he at least recognizes the new fiscal and economic realities. So does Lt. Gov. Richard Ravitch.

So here’s how they can dramatize it:

Announce a fiscal-emergency preparedness plan, including an immediate statutory freeze on all public-employee salaries and wages at every level of state government. The freeze would cover both contractual pay hikes and the automatic step raises many employees get just for staying on the payroll another year.

The freeze would expire in three years — if, and only if, the state has been able to balance its budget in the meantime.

The original precedent for a state-mandated halt on collectively bargained pay hikes is the Emergency Financial Control Act, enacted in 1975 to deal with the New York City fiscal crisis. Similar provisions were put in place under control laws later enacted to rescue other troubled cities, including Yonkers and Buffalo.

Federal courts have twice upheld state-mandated wage freezes for public employees in New York — most recently in 2006, when the US Second Circuit Court of Appeals ruled a freeze of Buffalo teacher salaries was “reasonable and necessary” despite the “substantial impairment” of the teachers’ contract.

In that case, the union argued that the city could have avoided the freeze by raising taxes or cutting services. But the court said, “We find no need to second-guess the wisdom of picking the wage freeze over other policy alternatives, especially those that appear more Draconian, such as further layoffs or elimination of essential services.”

The state government now faces similarly dire choices but on a much larger scale. It has already enacted a huge tax and fee increase of $8 million this year, including $1.75 billion on a regional basis to bail out the Metropolitan Transportation Authority — yet it still can’t fully fund its transit or highway capital plans.

A $10 billion temporary injection of federal stimulus funding over a two-year period has only served to prop up education and health-care spending that the state expanded during the boom years and can’t afford to sustain after the stimulus expires in 2010. Meanwhile, investment losses by public-pension funds will force state and local taxpayer contributions to the funds to double or triple over the next five years.

Statewide savings from a pay freeze in fiscal 2010-11 alone would total roughly $2 billion — including at least $500 million for the state itself, whose employees are otherwise due to receive a 4 percent base-pay hike next April 1.

The greatest relief would be felt by school districts, which on average have three-quarters of their budgets tied up in salary and benefit costs that have been rising by an average of 5 percent a year.

There’s simply no way the state can close its prospective budget gaps without flattening the current-law trend line of aid to public schools, which is on track to rise nearly $5 billion by 2012-13. A salary freeze would make it easier for schools to hold the line on their own spending during this period without big layoffs or local tax hikes.

A freeze would also prevent Mayor Bloomberg from following his worst impulses and granting city teachers the same two-year, 8 percent pay hike he gave other municipal union members last year, despite the Wall Street crash. The avoided cost would come to $340 million in the city’s 2011 budget — enough to preserve the jobs of 5,000 junior teachers.

Holding the line on salaries is just a first step. State officials also need to overhaul public pensions, negotiate less expensive health insurance for government employees and clear away laws that prevent local officials from doing the same.

But, in the short term, a freeze will provide much-needed breathing room for implementing essential reforms, especially in health care, which will take several years to generate significant recurring savings.

Above all, a freeze can be justified on grounds of basic fairness. Government employees throughout New York have continued to receive pay increases at a time when many private-sector workers saw their wages frozen or reduced (assuming they didn’t lose their jobs altogether). Given the problem’s size, a freeze can’t completely prevent layoffs, but it’s a way of preserving jobs and public services that would otherwise be jeopardized.

If the state continues to drift along on its current path — borrowing a little here, cutting a little there, and hammering the economy with new taxes and fees every step of the way — it will build even bigger deficits for the future. This will ultimately force deep and disruptive staff and service cuts at every level of government in the state. And in the end — as when New York City lurched to the brink of bankruptcy in the mid-’70s — public-sector wages will need to be frozen anyway.