NY governor says legislature must deal with Medicaid deficit

NEW YORK (Reuters) - New York's legislature will be recalled before November's elections to close the deficit after Congress failed to approve extra Medicaid dollars that were promised, Governor David Paterson said on Tuesday.

One day after the legislature finally enacted some of the last planks of a $136 billion budget that was due on April 1, Paterson said he would veto all of the hundreds of millions of dollars of spending lawmakers added.

For example, the Democratic-led legislature inserted an extra $600 million for schools, slicing Paterson's proposed cut to $800 million. The Senate and Assembly also approved more funds for tuition assistance and homeless shelters, a spokesman for Assembly Speaker Sheldon Silver said by telephone.

Referring to the budget, Paterson told cable television station CNBC: "I'm vetoing all of the spending to make sure it's balanced." The vetoes include $193 million of member items, or pork, though all were previously approved.

Legislators, who all stand for election in November, rejected several tax increases the Democratic governor proposed, including a soft drink tax, a plan to let grocers sell wine, and a cap on property taxes.

New York, like most states, counted on extra federal aid for Medicaid, but the bill succumbed to a GOP filibuster in the U.S. Senate, along with extended unemployment benefits.

New York has a $9.2 billion deficit and it had expected to get about $1 billion for Medicaid, the state-federal health plan for the elderly, disabled and impoverished.

Though some cash-starved states came up with contingency plans in case Congress never approves the extra Medicaid funds, New York's speaker said that strategy could backfire.

"If we were to show the federal government we don't need that money, that we can deal with it, we can kiss that money goodbye," Silver said.

Paterson disagreed with Silver: "It is unfair to try to manipulate the public or scare people by saying that having a contingency plan, which is fiscally responsible, will cause us to kiss that Medicaid money goodbye."

The budget state legislators enacted is out of balance by $400 million to $500 million, Paterson said. The total deficit is $1.5 billion if the missing Medicaid dollars are included.

"There's kind of an understanding that the governor will not call the legislature back during the elections, and I will, and the reason is that they left this hole," Paterson told WBEN radio.

On Thursday, the legislature is expected to approve a bill that raises about $1 billion from a variety of measures, from assessing state income taxes on hedge fund managers who commute to jobs in the state to ending the exemption on the 4 percent sales tax on clothing that costs less than $110.