`Impossible' Paladino Cuts May Be Inevitable to Close New York's Deficit

One of Carl Paladino’s prescriptions for New York’s chronic budget deficits, spending cuts of at least $7 billion in his first year as governor, may be imposed whether or not the underdog Republican candidate wins in November.

The nation’s third most-populous state faces a projected $8.2 billion gap next year, only three months after legislators closed a $9.2 billion deficit for the current fiscal year. Paladino’s Democratic opponent, Attorney General Andrew Cuomo, also says reduced spending is needed.

Paladino, 64, a Buffalo property developer and Tea Party supporter, says he’ll veto spending increases and force lawmakers to choose between reduced outlays or New York’s first- ever government shutdown. Cuomo, 52, who opened his campaign by calling for a cap on expenditures and freezing taxes, says he’s building a coalition to “get the state’s fiscal house in order.” He hasn’t said how much he would lower spending.

“We’re going to cut taxes every year during my administration,” Paladino said in an interview on CNBC today. “We’re going to cut spending every year during my administration.”

Whoever wins the contest “is going to have to make cuts of the magnitude Paladino describes, or raise taxes,” said E.J. McMahon, director of the Albany-based Empire Center for New York State Policy, which advocates less government spending.

Talking Tough

“We’re not just going to tweak government, we’re going to change the culture,” Paladino told the Business Council of New York State in a Sept. 29 speech in the Lake George resort town of Bolton Landing. If he’s elected, non-unionized state workers can expect an immediate 10 percent pay cut “to illustrate to unions what we’re expecting” when their contracts expire in April, he said. He has also targeted Medicaid and school spending.

The other side of Paladino’s program -- 10 percent cuts in personal-income and business taxes -- may enlarge future deficits, and, under state law, can’t be forced on lawmakers the same way as spending reductions.

“Everybody talks about what they’re going to do when they get into the executive branch, then when they get there the Legislature shuts them down,” said Governor David Paterson, 56, a Democrat and 20-year senator who isn’t on the Nov. 2 ballot.

Paterson forced $5.3 billion of spending cuts through a reluctant Legislature earlier this year by threatening a government shutdown and using a first-ever series of emergency spending bills. Paterson also vetoed outlays that exceeded his plan and withheld lawmakers’ paychecks. Even with those actions, the budget wasn’t enacted until four months into the fiscal year that began in April.

Shutdown Threat

Paladino, who trailed Cuomo 37 percent to 55 percent in an Oct. 1-5 survey of likely voters by the Quinnipiac University Polling Institute, said in an Oct. 5 speech in New York that he will threaten a shutdown March 31. To prevent the Legislature from overriding his vetoes, he would count on Republicans in the 62-member state Senate. The minority party now holds 29 seats, enough to deny Democrats the needed two-thirds majority.

Pushing through tax cuts is harder, because a governor can’t reduce levies without lawmakers’ approval and can’t use a veto to override a “no” vote on such reductions. Paladino has promised to block any extension of higher personal income-tax rates that are set to expire at the end of 2011.

Cuomo, the son of former Democratic Governor Mario Cuomo, has proposed capping local property-tax increases, limiting state spending growth to the rate of inflation and freezing state taxes.

$7 Billion Cuts

Josh Vlasto, Cuomo’s spokesman, didn’t respond to e-mails and a telephone call asking whether the attorney general plans to extend expiring income-tax rates if he wins.

Paladino’s description of his spending plan has varied. In early statements and on his website, the Republican said 20 percent would be slashed in his first year. In the Sept. 29 speech, he called for two annual reductions of $7 billion in spending from the state’s general fund, its main account.

The state’s general fund spending is estimated at $66 billion next year, and Paladino would lower it to $59 billion, or $5.5 billion more than projected this year.

Michael Caputo, Paladino’s campaign manager and spokesman, didn’t respond to telephoned and e-mailed requests for comment.

In the bond market, New York’s debt ratings were unscathed by the four-month-late budget, with general-obligation bonds graded third-highest at Aa2 by Moody’s Investors Service. The state sold appropriations-backed bonds due January 2015 last month at 1.42 percent, down 71 hundredths of a percentage point or 33 percent, from a sale in May.

‘Too Early’

“It’s too early for the market to be making any judgments about the candidates’ possible impact on state debt,” said Richard Larkin, a senior vice president in Iselin, New Jersey, for Herbert J. Sims & Co., a securities firm.

The governor’s veto power won’t be enough to reach all the reductions Paladino has proposed, Democrats say.

Paladino’s goal of saving $10 billion in state and local Medicaid expenses “is almost certainly impossible to achieve” while complying with health-care laws, according to Paterson. Cutting $20 billion of combined federal, state and local spending, as Paladino has proposed, may result in the closing of dozens of hospitals and nursing homes, Paterson said.

Optional Medicaid services that Paladino would eliminate, such as paying for eyeglasses, “can’t be zeroed out without legislative approval,” said Melissa Mansfield, a spokeswoman for Assembly Speaker Sheldon Silver, a Democrat from Manhattan.

On Oct. 5, the candidate called Silver “a criminal,” saying he protected insurers to benefit his private law practice. “I will not get into the gutter with Mr. Paladino, nor dignify his comments with a response,” Silver said after the remark.

$14.2 Billion

Reducing health-care payment rates has drawn fire from service providers, whether proposed by Democrats or Republicans. Payment rates aren’t the primary problem, said William Van Slyke, a spokesman for the Healthcare Association of New York, an Albany-based advocacy group for hospitals and nursing homes. Medicaid enrollment surged 56 percent in New York from 2000 to 2008, while spending jumped 64 percent, he said.

The state’s Medicaid expenses are projected to reach $14.2 billion this year, along with $7.3 billion in spending by local governments and $31.1 billion by the federal government.

State and local education spending, 67 percent above the national average per pupil, is another Paladino target.

“My aim is to bring school aid, school spending in line with the national median,” he said in the Sept. 29 speech, without saying how much he would cut in his first budget.

‘Lack of Depth’

It would take a 40 percent cut in New York’s per-pupil spending, which led the nation at $17,173 in the school year ended 2008, to reduce it to the national average of $10,259 in 2008, according to U.S. Census data.

“That’s impossible,” said Richard Iannuzzi, president of New York State United Teachers, a union representing 525,000 current or retired school workers. Even a 20 percent cut in state aid would “significantly harm children” and “shows a serious lack of depth on the candidate’s part,” he said.

Paladino’s agenda includes many items, in addition to tax cuts, where his veto power won’t be enough. Caps on local and state government spending have been proposed often and have never passed the Legislature, where Paladino says “crooks” practice “blatant corruption,” keeping state expenses high.

“Government is a lot more complicated than renovating a building,” said Jerry Kremer, a Democrat and former head of the Assembly’s Ways and Means Committee. “There are things a governor might want, like changes in programs or taxes, that need legislative approval. If the relationship is poisoned, a lot might not get done.”

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

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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