October 3, 2008
CONTACT: Jeffrey Gordon


Recent Turmoil on Wall Street Creates Significant, Current-Year Deficit

Paterson Says State Must Continue to Rein in Spending, Make Government More Efficient

Governor David A. Paterson today called for a November 18 special session of the Legislature to close a potential $1.2 billion current-year budget shortfall related to the recent turmoil on Wall Street. He made that announcement at a public meeting in New York City of the leaders of the state Legislature, attended by Senate Majority Leader Dean Skelos, Assembly Speaker Sheldon Silver, Senate Minority Leader Malcolm Smith, and Assembly Minority Leader James Tedisco. The meeting was also attended by State Comptroller Thomas DiNapoli.

Governor Paterson additionally announced he would deliver his 2009-10 Executive Budget on December 16, 2008, which is more than one month earlier than the January 20, 2009 constitutional deadline. This accelerated budget process will give the state a head start on closing its substantial future budget gaps and help ensure that a balanced budget is enacted well before April 1, while still providing appropriate time for public and legislative input.

“Since the day I took office, I have expressed consistent concerns about the fiscal challenges we face, but the impact of the unprecedented events that have occurred in the economy in recent weeks are worse than anyone imagined,” Governor Paterson said. “While we have significantly reduced state spending over the past six months, I am calling for another special session because it is clear that we have no other option but to make further difficult choices to ensure a balanced budget in this time of extraordinary financial and economic turmoil.”

Governor Paterson said, “Moving up both the starting gate and the finish line for next year’s budget process is a prudent approach to getting our state’s fiscal house in order. It will allow us to get a jump start on addressing our budget problems, but still provide appropriate time for public input and legislative deliberation.”

At the request of Governor Paterson, the Division of the Budget (DOB) today delivered a preliminary report on the impact that the recent turmoil on Wall Street will have on the current-year state budget. A copy of this report is attached.

Highlights of the report:

Business Taxes: Tax payments through September were dramatically down. Through the first two quarters of the fiscal year, the amount of taxes paid by 16 of the state’s largest banks was down nearly two-thirds compared to one year ago, from $333 million to $111 million. The amount paid by New York’s top 20 largest corporate taxpayers dropped by a precipitous 38 percent (over $80 million).

Personal Income Taxes. While personal income taxes, which make up two-thirds of state revenues, were generally on-target compared to projections, collections to date do not reflect the impact of recent development in the financial services sector. Revenue declines are expected to appear over the coming months as events continue to unfold on Wall Street.

Timing of Collections. DOB believes that the impact of these seismic changes on Wall Street will begin to be felt most acutely in the fourth quarter of our fiscal year, from January through the end of March – a time when the state receives nearly a third of its tax revenue, or $18 billion, more than any other quarter. Part of the reason for this is that it coincides with bonus season on Wall Street. While the financial services sector accounts for 20 percent of overall state revenue, it accounts for over 30 percent of fourth quarter revenue, or approximately $6 billion.

Projected Declines in Bonuses. DOB is now forecasting a 43 percent decline in financial sector bonuses, more than double the 20 percent decline they projected in July before the fallout from last month’s events. Additionally, DOB believes capital gains tax collections on profits derived from the sale of stock or other assets will be down 35 percent, a significant change from its previous estimate of a 24 percent decline. Also, the Division of Budget projects more than 40,000 jobs will be lost in the financial services sector during the current downturn.

Revised Revenue Forecast

Declines in tax collections. Based on its initial projections, DOB is forecasting that state tax collections in the current year will be $1.3 billion lower than previously anticipated.

Transactions Unlikely to Materialize. Financial transactions expected to bring in $300 million in additional revenue, including the conversion of GHI/HIP to a for-profit company ($200 million) and the sale of certain state properties ($100 million), will likely not occur during the current fiscal year because of adverse market conditions.

Declines Offset by August Reductions. In August, Governor Paterson worked with the Legislature to enact $427 million in spending reductions, which will partially offset these revenue declines. The combined net effect of these changes to the state financial plan forecast is that, unless further savings measures are implemented, the state will end the year with a deficit of at least $1.2 billion.

Out-Year Budget Deficits

In August, the Division of the Budget projected that the state faced a $5.4 billion deficit in 2009-10 and cumulative deficit of $24.4 billion over the next three years. DOB is still evaluating this projection in light of the recent events on Wall Street and will report back to the public about them when its Mid-year Update to the state financial plan is released on October 30. It is clear, however, that these deficits will be revised substantially upward at that time.

The Division of Budget’s preliminary analysis is available at: Preliminary Analysis of Recent Budget Developments (PDF)