The government of New York State has been deadlocked for two months over how to deal with a growing financial crisis. Just over halfway through the fiscal year, the state has a budget deficit of at least $3.2 billion, with shortfalls of billions more projected in the coming years. Governor David Paterson has called the state legislature into special session and demanded that major cuts in education and health care be made to close the current year’s gap.
The budget crisis is primarily the result of a precipitous fall in tax revenues, especially the large decline in tax revenues derived from Wall Street financial activities, which has constituted a large and growing percentage of the state’s income in recent years. Overall, year-to-date 2009-10 personal income tax collections have declined by $4.4 billion, or 22 percent, from 2008-09, according to the NYS Division of the Budget.
The drastic cuts in expenditures demanded by the governor, business interests and the news media would severely affect local school districts and the delivery of medical care to poor and middle-income people. These demands come at the same time as it is being reported that the profits of major Wall Street firms and compensation to the upper echelons of their staffs will meet or exceed the heights reached before the economic collapse of the last year. The rebound in the fortunes of the Wall Street elite is entirely due to the trillions of dollars in various forms of subsidies transferred from the national treasury into these institutions and the renewal of rampant, uncontrolled speculation that this has permitted. The contrast could not be more stark.
While the banks’ profits soar, the official New York State unemployment rate grew to 9 percent in October, up 0.1 percent from the previous month. The rate was 5.9 percent a year earlier.
The arrogant demands for cuts was brought into even sharper relief by the announcement on Friday that Moody’s Investors Service threatened to downgrade the state’s credit rating if it did not take steps to bring down its deficit. A lowering of the credit rating would mean that the state would be forced to pay higher interest rates when it borrows money. The demand by Moody’s goes beyond merely requiring the deficit to be closed. It dictates the method by which this should be accomplished.
Moody’s warned, “The next three months will be critical to the state’s credit rating. If there is no action taken by the state to close the gap, or if action is taken but is largely onetime in nature (therefore increasing the structural imbalance in the out years), and revenue collections in January are close to or below state projections, the state’s situation at that time would likely not be consistent with [the current] Aa3 rating and [a] stable outlook.” The financial elite is, in effect, blackmailing the state government with the threat of financial retribution if it does not deepen the attacks on the working class.
In December, according to State Comptroller Thomas DiNapoli, the state faces an immediate cash flow deficit of $1.4 billion. “The fact is that revenue that was hoped for has not materialized and unless spending cuts are made, the State will have a significant cash deficit next month,” DiNapoli said in a press release. The governor has threatened measures similar to those taken earlier this year in California. “Furloughs, layoffs, borrowing, downgraded credit ratings, delayment [sic] of payments to schools, delayment [sic] of payments to local governments, delayed payments to service providers, delayed payments to the work force,” will result, according to Paterson, if his proposed cuts are not adopted by the legislature. Laying out clear priorities, Budget Director Robert L. Megna said: “The State of New York has and will continue to meet all of its obligations to bondholders. Other expenditures, however, may ultimately have to be delayed past their currently scheduled payment dates in order to prudently manage cash-flow.”
In response to Moody’s dictate, Paterson stated, “The way in which we reduce the deficit has to meet a threshold so that we don’t get a credit-rating downgrade as well.” All of the key players have agreed that there will be no significant ‘revenue enhancements’ (i.e., tax increases), especially with respect to the wealthy. A modest increase for those with higher incomes, going into effect when the current budget was enacted in April, will expire in two years. Paterson and the rest of the political establishment have made it clear that nothing further of this sort will be considered, citing media claims that the wealthy are moving to other states where taxation is lower.
The current deadlock in the legislature is between the Assembly, which has largely accepted Paterson’s proposed cuts, and the Democrats in the Senate, who hold a slim majority. The Senate Democrats have agreed to approximately $1 billion in cuts, but are resisting the proposed cuts in education, instead offering a number of short-term fixes, including that federal stimulus money for next year be brought forward. In view of the fact that the stimulus ends next year, this proposal would result in an even greater shortfall in the future.
The reluctance of the Senate Democrats reflects only a minor tactical difference, but Governor Paterson scolded them for being insufficiently tough. The theme of ‘taking responsibility’ was continued by Comptroller DiNapoli, who warned, “We can’t afford to fall back on the old ways of addressing a long-standing problem with short-term fixes. It hasn’t worked, and it won’t work. A patch today is a problem tomorrow.” It is taken as a given by all that the loss of tax revenue due to the collapse of the great Wall Street Ponzi scheme necessarily means that the living standards of the mass of the population must be decimated.