Nov. 23 (Bloomberg) -- New York Governor David Paterson, in a letter to lawmakers, said education and health-care expenditures must be cut as part of any plan to close this fiscal year’s $3.2 billion budget deficit.

“We simply have no other choice but to make reductions to health care and education if we want to demonstrate that we are serious about putting New York on the road to fiscal recovery,” Paterson said in an open letter dated Nov. 22.

Reducing the deficit without recurrent spending cuts may reduce the state’s bond rating and raise borrowing costs, Paterson, 55, said, citing a Moody’s Investors Service report of Nov. 19. The state will delay payments to school districts and local governments because of a December cash squeeze if the Legislature doesn’t act, he said.

Senate Democrats have agreed to more than $1 billion of spending cuts for state agencies and health care, though not education, Senate Democratic leader John Sampson, a Democrat from Brooklyn said in a letter responding to Paterson. He said school cuts would cause districts to raise local property taxes.

The letters were exchanged as the state continues to be battered by the recession, with unemployment rising one-tenth of a percentage point to 9 percent in October, the state Labor Department said Nov. 19. A total of 32,500 New York City financial services jobs were lost in the past year out of 108,900 total positions cut, the Labor Department said. Lawmakers returned to Albany, the state capital, last week without reaching a decision on closing the deficit.

Growing Deficit

Moody’s said New York’s Aa3 bond rating and stable outlook are in jeopardy “if there is no action taken by the state to close the budget gap, or if action is taken but is largely-one- time in nature” and January revenue is as weak as the Division of Budget projects.

New York faces payments Dec. 18 that are about $1.4 billion more than the cash it expects to have on hand, according to a report Comptroller Thomas DiNapoli issued Nov. 20.

“Revenue that was hoped for has not materialized,” DiNapoli said in a statement. The state will continue to pay interest and principal on its bonds, though other outlays might be delayed, the report said. December sums include $2.5 billion to local governments for property tax relief and $1.6 billion of aid to school districts.

New York’s chronic budget imbalance must be resolved with reduced spending, not one-time actions that close the gap this year and do nothing to reduce future year’s gaps, the Moody’s report and DiNapoli said.

Battling Lawmakers

Since Paterson proposed his plan to close the deficit a month ago, he has battled lawmakers who want to avoid unpopular cuts in spending on education and health care, the two biggest parts of the state’s budget. Paterson seeks at least 40 percent of the deficit reduction to come from reduced expenditures, he said last week and in yesterday’s letter.

The state’s $6.8 billion deficit in the year beginning April 1, 2010, grows to $14.8 billion the following year when federal economic stimulus money runs out and $19.5 billion after than, when a temporary increase in the highest personal income tax rates expires, according to budget documents.

A plan agreed to by Senate Democrats and Republicans would avoid cuts in aid to school districts by using $391 million of federal stimulus money for education this year instead of next year, as scheduled, according to Senate Republican leader Dean Skelos of Rockville Centre, Long Island, and Senator Liz Krueger, a Democrat from Manhattan.

Using next year’s money for this year’s problem was preferable to mid-year cuts in state aid payments because schools would have time to prepare for cuts next year, Krueger said in an interview. Also, the state hopes to collect increased federal aid in coming months, she said.

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

Last Updated: November 23, 2009 00:01 EST