NY's Cuomo slashes spending, freezes taxes in budget

New York Governor Andrew Cuomo presents his 2011-12 budget proposal in Albany, February 1, 2011.

NEW YORK (Reuters) - New York Governor Andrew Cuomo proposed laying off nearly 10,000 state workers and cutting billions from education and Medicaid as he laid out his first budget on Tuesday designed to close a $10 billion deficit.

The Democratic governor proposed no new or increased taxes in the $132.9 billion budget plan, which would shrink the current budget ending March 31 by 2.7 percent. If the budget plan holds, it would mark the first spending decrease since 1997.

"New York state is functionally bankrupt. We have to think in terms of restructuring because New York doesn't work anymore," Cuomo told legislators, who must approve the budget plan.

New York is one of many states battling multibillion-dollar deficits due largely to the sluggish economy, which has created a nationwide fiscal crisis that has added risk to the historically stable $2.8 trillion U.S. municipal bond market.

Cuomo said New York's finances have been hammered by a budget process that he labeled a "sham," with automatic increases for expensive programs such as education and Medicaid, the state-federal health plan for the poor that led to runaway spending.

"In a down economy, this is a death spiral and that's where we are now," Cuomo said. "If the state continues doing what we're doing, we're heading down the road to ruin."

Cuomo's budget proposal includes spending cuts of $1.5 billion from education and $1 billion from Medicaid, as opposed to previous automatic increases of 13 percent that would have amounted to additional spending of $2.85 billion each.

The austere budget plan could enhance Cuomo's standing as a fiscal conservative nationally at a time when growing deficits and dwindling tax receipts are affecting states and cities across the country.

Cuomo had vowed to make New York "a business-friendly state" shortly after taking office on January 1.

His austere approach to his first budget prompted a comparison to New Jersey Governor Chris Christie, who has emerged as a national Republican leader by promoting spending cuts and putting a cap on taxes.

Cuomo "is taking a page from Christie, which is interesting given that he's a Democrat. I think it's a positive if it materializes," said Evan Rourke, a portfolio manager with Eaton Vance in New York.

The Cuomo budget, which requires legislative approval, could strengthen his position with the Republican-controlled Senate.

The Democratic-controlled Assembly, however, might reject the spending cuts. Democrats may also seek to derail Cuomo's plan to let expire a temporary income tax surcharge on millionaires, though any Assembly bill to extend the tax would likely die in the Senate.

New York City would be hit particularly hard under the budget proposal, with a $580 million reduction in school aid. The cut is less than the $1 billion reduction that Mayor Michael Bloomberg had feared. Bloomberg had said a $1 billion cut would translate into 15,000 teacher layoffs.

"There's going to be balancing the budget on the backs of local communities," said Howard Cure, managing director for municipal research at Evercore Wealth Management LLC in New York. "This is just the beginning of what I would expect would be a long negotiation."

Cuomo revealed little during last year's low-risk election campaign in which he faced a weak opponent, though he had called for an end to waste and fraud in state government while saying taxes were too high and spending needed to be cut. Since Cuomo's January 1 swearing-in he has taken a decidedly conservative bent.

Cuomo is the son of former New York Governor Mario Cuomo, who was a liberal hero during the era of Republican President Ronald Reagan.

(Additional reporting by Dan Wiessner; Writing by Daniel Trotta; Editing by Leslie Adler and Andrew Hay)