OPINION: New York has to learn to borrow better

Richard Ravitch is the lieutenant governor of New York.

New York State is in the kind of deep financial trouble that is going to affect citizens' daily lives and immediate concerns. The state has a budget deficit of at least $9.5 billion for this year alone. In coming years, the gaps will get even bigger.

The size of the future deficits depends on how much budget-cutting the state can accomplish this year. We don't yet know the answer to that question because we still don't have a budget, even though the new fiscal year is already a month old.

If you think this political paralysis stems from general Albany incompetence, you're wrong. This year, elected officials in both parties face a situation that many of them have never experienced in their political lives. Politicians build their careers on their ability to do more and get more for their constituents. Today, they have no choice but to do less.

We are now in the business of allocating pain. It is no surprise that decision-makers are having a hard time figuring out how to go about it. They are coming to realize that they have no alternative.

A major complication in this process is the view of some observers that any plan to bring financial stability to the state must be rejected if it includes borrowing. They say that borrowing to cover operating expenses is a bad idea.

These critics are right. But there is no question that borrowing will be part of the budget that the State Legislature finally produces - just as there is no question that the state has been borrowing for years to pay current expenses.

The question is whether this year's borrowing will be like some of New York's past borrowings, which have compounded the state's structural budget imbalance, or whether we will see borrowing with fiscal discipline, which will protect the future of New York's citizens.

In 1975, the banks said they would no longer underwrite New York City debt. That event precipitated a high risk that the city would be driven into bankruptcy. In response, the state enacted statutes enabling the city to borrow for transitional purposes through the Municipal Assistance Corp. and requiring the city to balance its budget within four years in accordance with generally accepted accounting principles, or GAAP. That is, the city would have to start taking its costs into account when it actually incurred them, instead of ignoring the costs until it got around to paying the bills.

This borrowing was accepted by everyone because it was the only way to give the city the time it needed to achieve true budget balance.

Similarly, after Sept. 11, 2001, the state authorized $2.5 billion in debt to help the city make up the shortfall in revenues caused by the attacks on the World Trade Center. Again, everyone accepted the fact of borrowing for operations, because it was understood that the borrowing would be only on a very temporary basis.

New York State's current budget crisis is not a disaster like Sept. 11 or a drama like New York City's in 1975. But the situation is just as fiscally serious. State revenues have declined drastically and will not reach their previous levels for years. The state is reaching the limits of its ability to tax. Meanwhile, state spending has grown inexorably.

The state has often patched its deficits with one-shots, like borrowings and asset sales, that do not deal with the underlying problem of spending growth. These maneuvers are the economic equivalent of borrowing from the future to fund current expenses. It's as if the state had leased an apartment it couldn't afford, then kept borrowing to meet the rent without realizing that the loans were going to have to be repaid with interest.

And now, once again, some politicians are recommending that part of our deficit be solved by borrowing - without any requirement that the state restore its fiscal sanity.

You might expect the bond markets to limit such borrowing. But the reality is that governors and legislators take measures to ensure that the state doesn't lose access to the credit markets. The state appropriates funds for debt service before making other appropriations - and it has pledged its revenue streams, such as the income and sales taxes, to the payment of its bonds, giving debt holders priority over all other state spending.

As a result, investment bankers are willing and eager to help the state devise new ways of borrowing from the future to pay for current expenses. But such borrowing, if not accompanied by an unqualified legal obligation to achieve true structural budget balance, will continue the state on a reckless fiscal path that is simply not sustainable.

Under my proposal to bring New York's budget into GAAP balance over the next five years, an independent review board will determine whether the state is making adequate progress toward balance. The governor will have authority to impound funds to maintain this progress if the legislature fails to act. To fund part of the difficult transition to GAAP, the state may borrow small amounts in the first three years - but only with bond covenants pledging continued compliance with the five-year plan.

That is, as Gov. David A. Paterson has said, there can be no borrowing without the painful choices that lead to budget balance.

The crisis that the state faces today, like the crises New York City faced in 1975 and 2001, requires a combination of short-term debt and the imposition of long-term fiscal responsibility. If there is a better plan to achieve the goal of assuring the public that the state will attain structural balance, I would love to see it, and I'd enthusiastically support it.