April 9 (Bloomberg) -- New York Governor David Paterson and legislative leaders agreed to a $121.7 billion spending plan, ending a more than weeklong standoff over allocation of education aid and revenue sources.

The budget closed a projected $4.6 billion deficit with $1.8 billion of spending cuts, $1.5 billion in additional revenue from increased taxes and fees and $1.3 billion of one- time transfers. The plan doesn't use the state's $1.2 billion of reserves or increase the top income tax rate on those earning $1 million or more.

Paterson, elevated March 17 after former Governor Eliot Spitzer resigned amid a federal prostitution investigation, said he will push for spending cuts next year to streamline government amid declining revenue and a worsening economic outlook.

``We had a rare combination of a change in government and a very somber economy forecast, and in spite of that we are passing a New York state budget,'' Paterson said at a press conference in Albany today. ``There is going to be a change in culture and a change in course'' in the spending habits of lawmakers and state government, the Democrat said.

Next year's estimated gap was estimated before this year's budget bill at $3.6 billion, and hasn't yet been recalculated.

Spending Rises

Spending on operations, which excludes federal aid and capital investments, will rise by 4.5 percent to $80.5 billion, or $1.1 billion less than proposed in the executive budget prepared by Spitzer in February.

The plan is the ``first time in 10 years that the enacted budget is less than the executive budget,'' said Jeffrey Gordon, a spokesman for the Division of Budget.

The budget includes a 3.4 percent cut in some categories of state agency spending, saving $500 million. Total agency spending will rise only 1 percent, down from a 5 percent average annual increase the past five years.

New York City Mayor Michael Bloomberg called the budget ``good news for our city,'' because the state provided promised increases in education aid and eliminated a proposal to delay school construction funding.

Senate Majority Leader Joseph Bruno said tax increases included in the bill, which he earlier called a ``necessary evil,'' are limited to two or three years. Proposals for boosting the car registration fee, gasoline tax and enacting a new health insurance tax were rejected, he said.

Cigarette, Gambling Revenue

The state's largest sources of expected revenue growth include $487 million from improved tax compliance and hiring of additional auditors, $265 million from an additional $1.25 tax per package of cigarettes, and $250 million from a developer of video slot machines at Aqueduct Race Track in Queens.

New York also expects to collect $57 million from credit- card companies and $50 million from Internet vendors based on their business in New York, and $50 million from eliminating the use of real estate investment trusts to shelter banks' income.

Budget Director Laura Anglin said the state expects personal income growth of about 4 percent this year. That rate is lower than the state assumed earlier this year, though still higher than the 1 percent assumed by New York City, according to a Feb. 26 letter to legislators from the Citizens Budget Commission.

Capital Spending

The budget includes about $1.6 billion of capital spending targeted for businesses and economic development. About $350 million of the capital will be allocated by the Senate and $350 million by the Assembly. About $45 million will go for roads and other infrastructure needed for a new Saratoga County computer chip factory for Advanced Micro Devices Inc.

The $121.7 billion plan was smaller than the $124 billion mentioned by lawmakers and Paterson in the past two weeks because spending last year was $2.3 billion less than expected, Comptroller Thomas DiNapoli announced.

``It was a volatile year,'' DiNapoli said in a prepared statement. The economy may deteriorate, ``and Albany should keep an eraser handy.''

DiNapoli's report showed reserves at the end of the year totaled $2.7 billion, or $128 million more than projected in February.

``The economic outlook for the state is worsening, and needs to be monitored,'' said Elizabeth Lynam, deputy research director at the Citizens Budget Commission, a budget watchdog group advocating government efficiency. She said lawmakers may be forced to look for spending cuts later in the year.

Tax Collections Fall

New York collected $72 million of taxes from its 20 largest taxpayers in the first three weeks of March, down from $533 million in the same period last year, Paterson, a Democrat, said in a speech yesterday to the Association for a Better New York, a group of business and labor leaders.

Even after the reductions in expenditures, Paterson told the group this year's spending plan was ``too big and too bloated.''

Paterson said he might support an increase in the tax rate on those earning more than $1 million `` only as a last resort'' if the state did a better job cutting spending and a weak economy further reduced state revenue. The assembly supported a ``millionaires tax'' rate increase to 7.7 percent from 6.85 percent, to raise about $1.5 billion annually.

Paterson, 53, said last week that passage wasn't possible by the April 1 start of the fiscal year because too many lawmakers were unwilling ``to make serious cuts to our budget.''

School Funding Impasse

Aid to the state's 698 local school districts, the biggest expense, rose by $1.8 billion to $20.8 billion, or $400 million more than proposed in January.

A dispute about how much of the increase should go to Long Island represented by Republican senators was resolved by appropriating additional funds to those schools outside the formulas intended to direct aid to the neediest districts, said Billy Easton, executive director of the Alliance For Quality Education, an advocacy group for school funding.

New York City's total education aid increased $643.3 million, or 8.5 percent to $8.2 billion.

The budget doesn't include a proposal to sell or lease the lottery, whose profit provided about $2.3 billion to schools last year. Spitzer, a Democrat, had proposed a sale or lease of the lottery to create an endowment for public universities.

Medicaid spending, the second-largest outlay, will rise about 1.1 percent to $15.3 billion, or almost $400 million less than sought in January. Including expenditures by counties and the federal government, overall Medicaid expenditures total about $45.6 billion.

Bloomberg News is a unit of Bloomberg LP, whose majority owner is the New York City mayor.

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

Last Updated: April 9, 2008 18:17 EDT