YEAR OF A SHRINKING BUDGET AND TOUGH CHOICES IN ALBANY

ALBANY -- By all accounts, the 2002 legislative session promises to be one
of the nastiest in memory, as lawmakers confront the financial crisis
caused by the World Trade Center attack.

Not only must Gov. George E. Pataki and legislative leaders close a
multibillion-dollar budget gap, but they must also do it in an election
year in which districts are being redrawn and all are trying to protect
their political futures. The fireworks are set to begin on Wednesday when
Mr. Pataki is to give his State of the State address before a joint session
of the Legislature.

"It looks like it could be a painful year," said the Assembly speaker,
Sheldon Silver. "The shortfall in revenues is going to make things very
difficult."

No one yet knows how big the shortfall might be. Governor Pataki has
predicted revenues could drop $3 billion to $6 billion in the fiscal year
that begins April 1. He has painted a fiscal picture darker than any the
state has faced since the Great Depression.

The leaders of the Assembly and Senate have not yet produced their own
estimates. Privately, senior staff members on both sides of the aisle say
they expect a budget gap that is smaller than the governor predicts, but
one still hefty enough to require major cuts in service. "It's siren time,"
one of the Legislature's budget analysts said.

The inevitable clash over budget cuts does not bode well for other
significant bills. Last year, the Legislature and the governor had high
hopes to overhaul laws on drug crimes, automobile insurance, aid to schools
and women's health insurance coverage. None of the changes happened, thanks
to partisan strife, a protracted budget battle and the effects of the Sept.
11 attack.

Indeed, the 2001 session was widely seen as a great disappointment. The
year's top achievements were a bill permitting up to six Indian casinos to
be built and a ban on holding a cellphone while driving.

Even so, some bills from last year's legislative agenda might have a better
chance of passage in an election year, if a budget deal can be reached
quickly. Mr. Pataki and all 211 seats in the Assembly and Senate will be up
for re-election this fall, and some bills are politically valuable to the
members -- as long as they do not cost much.

"Issues like education and health care and the lagging upstate economy
become more difficult after Sept. 11," said Mr. Silver, a Manhattan
Democrat, "because they involve a lot of dollars. But things like the drug
laws and auto insurance probably become easier in an election year."

Politicians spend more freely in election years when times are flush, but
this year many fear the struggle will be just to save other programs from
the ax. Senator Joseph L. Bruno, the Republican majority leader, also
indicated some programs would have a tough time getting financed in the
current climate. "I'm afraid the budget and the out years are now," Mr.
Bruno said, "with the pain that is there financially going to be an inhibitor."

Pataki officials and legislative leaders all seem to agree that the budget,
and sagging revenues, will preoccupy lawmakers.

Several financial indicators are worrying them. Income tax revenues
flattened out, and barely grew in the first eight months of the fiscal year
that ends March 31, while business and sales taxes dropped off sharply
after Sept. 11, Tax Department records show. Spending, however, has
continued at twice the rate of inflation, and the state appears to be
rapidly spending down the $3 billion surplus it had last April.

As a result, the budget choices facing Mr. Pataki are prickly. He has said
he does not want to resort to layoffs, and last month he met with union
leaders to ask for their help in drafting an early retirement plan, and
talked about a possible hiring freeze and other steps he might have to take
to cut the state payroll. But it is unclear how much money might be saved
through those measures, union leaders say, and the governor has not ruled
out layoffs.

Mr. Pataki has vowed not to increase taxes, with one exception: He is
considering raising the tax on cigarettes to $1.50 a pack, from $1.11. He
may also propose postponing some of the $294 million in tax cuts, mostly
intended to help businesses, that were to take effect next year, though he
has said he is loath to do so.

Once again, the governor is also expected to propose streamlining the
state's cumbersome school-aid formulas to save money, his aides said. This
year, however, the Board of Regents has thrown its support behind the
concept, proposing an even greater simplification, with the cities gaining
at the expense of wealthier suburbs. (About 38 percent of state taxes are
spent on schools.) Mr. Pataki is also likely to try again to reduce
Medicaid costs -- one of five state tax dollars is spent on Medicaid and
other health care programs.

None of these ideas will be palatable to the Assembly's Democrat majority
or to the Senate's Republican majority, especially in an election year.
Voters tend to judge local representatives by how much school aid they
bring home. Cutting health care benefits for the poor is never popular with
Democrats, and raising taxes or putting off scheduled tax cuts are anathema
to Republicans.

"This is going to be a very difficult budget," said the governor's chief
spokesman, Michael McKeon. "The governor has made it clear we are looking
at everyone doing their share to tighten their belts."

Election years tend to focus politicians' attention on popular issues,
lawmakers said. For instance, the Senate Republicans -- always concerned
about preserving their majority in a state where Democrats outnumber
Republicans -- agreed in the last election cycle to several proposals,
among them handgun controls and a hate-crimes law.

Last year, Mr. Pataki offered proposals for easing the state's
Rockefeller-era penalties for drug sale and possession, an idea with great
appeal to the moderate, liberal and minority voters the Republicans have
been trying to court. The Assembly Democrats said the governor's plans did
not go far enough, in part because he did not give judges enough discretion
in sentencing, but talks have continued and a compromise is possible.

Lawmakers in both parties also want to lower the cost of automobile
insurance, an issue so potent, especially among suburban swing voters, that
it nearly toppled Gov. Christie Whitman of New Jersey in 1997. New York is
expected to overtake New Jersey as the state with the highest premiums, not
a distinction politicians want used against them by their opponents.
Republican proposals focus on limiting medical claims and increasing
penalties for fraud; Democrats want to curb insurers' rates.

Both sides are also interested in reviving bills that would force insurers
to pay for cancer screenings for women, contraceptives and infertility
treatments. Talks broke down last year over whether religious institutions
should be exempt from the laws for their employees, but once again the need
for the Republican governor to appeal to female swing voters in the suburbs
might give those measures an extra boost.

Last year, Mr. Pataki's proposal to streamline the state's byzantine
school-aid formulas died in the Legislature. The idea might have renewed
life this year, given that the Regents have endorsed a similar concept, and
that there is a real possibility of cuts to school aid. The debate will
occur in the shadow of a state judge's ruling that the current formulas
yield too little money for urban schools, a decision the governor is appealing.

Mr. Bruno, the Republican leader, said he was disappointed, "more with the
Assembly than the Senate, that we couldn't close on some very, very
important issues" last year. "It all went back to Square 1," he said, "and
here we are."

While the incumbents are cutting programs, their challengers -- starting
with Andrew M. Cuomo and H. Carl McCall, the Democrats running against Mr.
Pataki -- can be counted on to throw barbs from the sidelines, accusing
them of being incapable of passing a responsible spending plan.

To make matters even more complicated, the governor has sued the
Legislature over constitutional questions about which branch of government
ultimately controls the language in budget bills; that suit is expected to
go to trial this spring.

At the same time, based on the 2000 census, the Legislature must redraw the
lines for its own districts as well as Congressional districts, in time for
campaigns leading to the September primaries. The hardest part will be
eliminating 2 of New York's 31 House seats in a year when no representative
is leaving voluntarily. Redistricting almost always leads to fierce
partisan battles that can paralyze progress on other bills.