Nov. 10 (Bloomberg) -- Legislative leaders met with New York Governor David Paterson to narrow an estimated $10 billion two-year budget deficit with the rank-and-file members standing by.

The Senate and Assembly met, as the governor asked, then quickly recessed while leaders’ talks continued to resolve the budget gaps and cash squeeze the state faces in December.

“At some point it will come to both sides giving up something,” said Senator Martin Dilan, a Democrat from Brooklyn. Reduced spending on school aid and health care aren’t popular, “but there has to be some recurring cuts,” he said. “We can’t rely entirely on one-time revenues.”

Paterson said last night “there has been progress” after addressing lawmakers in a special joint session of the Senate and Assembly and declined to say when he expects an agreement.

Senate Democratic leader Senator John Sampson of Brooklyn, and Assembly Speaker Sheldon Silver represent lawmakers in the negotiations

Paterson’s $5 billion plan to close this year’s $3.2 billion deficit and make a $2 billion down payment on next year’s $6.8 billion gap has been slow to gain support because of likely reductions in school aid and health care, the two largest parts of the state’s $133.2 billion budget.

Paterson yesterday repeated the plan he proposed Oct. 15 to raise $1.2 billion with of one-time revenue measures, including a tax-penalty amnesty and $3.8 billion of spending reductions over two years.

On the Table

“Everything is on the table,” said Assembly Speaker Sheldon Silver, a Democrat from Manhattan. Silver hasn’t commented publicly on Paterson’s plan except to agree that the deficit is real and pledge to help close it.

Sampson balked at midyear reductions in school aid and the Medicaid health insurance program for the poor. While he suggested the state raise $500 million by refunding bonds backed by payments from tobacco companies and the state’s credit, he wouldn’t commit to education and health-care compromises.

Paterson has twice rejected Sampson’s tobacco-bond proposal in public meetings and has ruled out using the state’s $1.2 billion of reserves to shrink the deficit.

Staking Career

“I will mortgage my political career on this plan,” said Paterson, 55, who supported increased spending on education and health care as a state senator. “I will not mortgage the state of New York.”

Paterson’s popularity is near a record low, with 61 percent of voters viewing him unfavorably, according to a Siena Research Institute poll last month with a margin of error of plus or minus 3.9 percentage points.

Spending cuts recommended by Paterson include $480 million in aid to local school districts and $287 million to Medicaid. He called in his speech for lawmakers not to raise taxes or resort to borrowing or unrealistic revenue assumptions to close budget deficits.

New York, the third-largest U.S. state by population, was hard hit by losses and firings on Wall Street, where bank and securities firms lost $42.6 billion in 2008 and year-end bonuses fell 44 percent to $18.4 billion. In past years, the state relied on financial companies and their workers for 20 percent of its taxes.

Joint Session

Paterson asked to speak to the joint session after weeks of talks with legislative leaders failed to produce a budget agreement.

While Republicans, a minority in both chambers, support the idea of spending cuts, Senator Dean Skelos of Rockville Centre, Long Island, objected to Paterson’s plan to impose the biggest reductions in education aid in the wealthiest school districts.

The budget gap for the year ended 2012 is projected at $14.8 billion as increased federal aid provided under President Barack Obama’s stimulus program is scheduled to expire.

Ending the extra federal aid would be “cataclysmic” and should be opposed by New York and other states, Lieutenant Governor Richard Ravitch said last month.

The state estimates it will have a cash balance of about $2 billion in early December, less than the $5.1 billion of payments owed at mid-month to school districts and local governments, Paterson told lawmakers Oct. 21. Budget Director Robert Megna said payments to bondholders are not threatened, though other payments could be delayed.

The state isn’t planning to sell short-term notes to provide extra cash, according to Matt Anderson, a budget spokesman.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net.

Last Updated: November 10, 2009 16:40 EST