Oct. 28 (Bloomberg) -- New York Lieutenant Governor Richard Ravitch predicted states across the U.S. would face deficits totaling as much as $500 billion in 2011 after the federal government stops paying them economic stimulus grants.

Ravitch, 76, a real estate developer and former chairman of New York’s Metropolitan Transportation Authority, said the looming nationwide fiscal crisis would first become apparent as states’ credit ratings falter, making it more expensive to borrow money.

“I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year,” Ravitch told about 200 people gathered at New York University’s Robert F. Wagner Graduate School of Public Service. “You’re going to begin to see cracks in the municipal bond market well before then, because that’s an inexorable casualty of unfundable state deficits.”

Ravitch, who became lieutenant governor in July through an unprecedented appointment by Governor David Paterson, estimated the state’s current deficit at about $4 billion, about $1 billion more than the state Budget Office’s calculation. He predicted the gap would be $7 billion to $8 billion next fiscal year and then $15 billion to $18 billion the following year after payments under the federal government’s $787 billion American Recovery and Reinvestment Act of 2009 stop flowing to states.

“These are numbers that are unprecedented,” Ravitch said, adding that the current recession is unlike any in the nation’s history, with unemployment continuing to rise, “banks are falling like autumn leaves, and nobody is projecting any significant growth in 2010.”

Special Session

Paterson intends to meet with leaders of the state Senate and Assembly in New York City tomorrow to discuss how to deal with the deficit that he’s said is at least $3.1 billion for the fiscal year ending March 31. The governor intends to present recommendations during a joint session of the Legislature Nov. 9, and ordered lawmakers into a special session Nov. 10 to consider spending cuts or revenue increases.

Congress enacted and President Barack Obama signed the stimulus program into law in February intending to help the U.S. economy with tax cuts, expansion of unemployment benefits, and help for the states to pay costs of public education, Medicaid and infrastructure building and repair.

“Health-care costs are rising six to eight times faster than the rate of inflation,” he said. “Those of us who care about the obligations of the public sector to the economy, the growth and the stability of this society, we face a very difficult set of choices.”

People Leaving

Ravitch, who as lieutenant governor holds the power to cast a tie-breaking vote should the Senate be deadlocked, said the Legislature faces “a terrible dilemma.” Tax increases would be counterproductive, he said, because “anecdotal evidence suggests” people are making “locational decisions,” moving out of state, based upon property, income and business taxes they perceive as too high.

“It’s not fun to be there when you have to conjure with the question of do you cut health care? Do you cut education? Do you cut public transportation investment?” he said. “So it’s an interesting task and I hope we’ll begin to deal with it and begin to turn it around. There’s no magic answer.”

New York’s $133.5 billion spending plan, including U.S. aid, is 9.8 percent larger than a year ago, the Budget Division said in July. Excluding federal funds, the budget grew 3.4 percent, to $86 billion.

Spending Cuts

Paterson proposed a $5 billion deficit reduction plan Oct. 15. The program included cuts of $1.8 billion in spending before the end of the fiscal year, and raising $1.17 billion in cash through one-time actions, such as a tax penalty amnesty program and a bond sale by the Battery Park City Authority. About $1.3 billion of the cuts would require legislators’ approval.

New York faces a cash squeeze in December, when it expects to have $2 billion on hand and faces more than $5.1 billion of scheduled payments to schools, local governments and other groups, Paterson has said.

The governor’s plan would reduce spending by $2 billion next year, change the pension system and impose a cap on spending in subsequent years. Pension fund changes and a spending cap haven’t been approved by lawmakers.

To contact the reporter on this story: Henry Goldman in New York City Hall at hgoldman@bloomberg.net

Last Updated: October 28, 2009 14:02 EDT