ALBANY — Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
As word of the plan spread, some denounced it as a shell game and a blatant effort by state leaders to avoid making difficult decisions, like cutting government spending or reducing pension benefits.
“It’s a classic Albany example of kicking the can down the road,” said Harry Wilson, the Republican candidate for comptroller, who holds an M.B.A. from Harvard.
Pension costs for the state and municipalities are soaring, a result of enhanced retirement benefits for public employees and the decline in the stock market over the past two years. And, given declines in tax revenue and larger budget shortfalls, the governments are struggling to come up with the money to make the contributions.
Under the plan, the state and municipalities would borrow the money to reduce their pension contributions for the next three years, in exchange for higher payments over the following decade. They would begin repaying what they borrowed, with interest, in 2013.
But Mr. Paterson and other state officials hope the stock market will have rebounded to such a degree by that time that the state’s overall pension contribution burden will have been reduced.
The maneuver would cost the state and local governments about $1.85 billion in interest payments, according to an estimate by the State Senate, though a number of factors could drive interest payments up or down.
Another oddity of the plan is that the pension fund, which assumes its assets will earn 8 percent a year, would accept interest payments from the state that would probably be 4.5 percent to 5.5 percent.
This would be only the second time the state has borrowed money from its pension fund, and it would involve much more money than the previous time, which occurred in the aftermath of the Sept. 11 terrorist attacks. New York State faces a $9.2 billion deficit this fiscal year, which began on April 1, and the budget is already more than two months late. The governor and legislative leaders are under pressure to make structural changes that will bring new discipline to state spending, but few expect them to do so.
Instead, they are expected to rely heavily on borrowing, tax or fee increases and an array of one-time maneuvers, like tapping the coffers of public authorities.
The governor and Comptroller Thomas P. DiNapoli back borrowing against the pension system, and a tentative agreement to do so was reached after negotiations on Thursday among key lawmakers and the governor’s representatives. The plan excludes New York City, which has its own pension system.
The initial plan in the governor’s budget called for the borrowing of up to $9 billion over the next six years.
Under the agreed-upon plan, the state would be authorized to borrow $1.5 billion to $2 billion over the next three years, according to forecasts provided by the governor’s office and the Senate. Municipalities would be allowed to borrow nearly $4 billion, according to a Senate estimate.
Senator Diane J. Savino, a Staten Island Democrat who negotiated the agreement for the Senate, said she pushed for a limit.
“There’s a question as to whether or not we should do this,” she said, adding, “I didn’t want to leave it open-ended, because six years is too long. The temptation is too great to do it over and over again.”
As part of the plan, the state and municipalities will have to make higher minimum payments into the pension system during bull markets to mitigate the impact of market crashes.
The governor’s plan, which was included in his executive budget in January, only highlighted the savings that the plan would reap over the next few years and included no mention of the long-term costs.
The amount borrowed would depend on various factors, like the stock market’s performance, which has fallen sharply since the fiscal year ended in March. The plan also allows state and local governments to choose whether to borrow from the pension fund each year, so much depends on whether future leaders choose to do so.
But with pension-contribution rates expected to climb over the next few years, political pressure is likely to be high to defer payments in a climate in which budget problems are coming from many directions.
Those pushing the plan are taking pains to avoid describing it as “borrowing,” saying they are seeking to amortize or “smooth” pension contributions. That is in part because they have distanced themselves from a plan proposed by Lt. Gov. Richard Ravitch that would have the state borrow as much as $6 billion for general operating expenses over the next three years in exchange for budget reforms.
“We’re not borrowing,” said Robert Megna, the state budget director and one of the governor’s top advisers.
Mr. DiNapoli, the comptroller, said: “We would view it more as an extended-payment plan.”
Asked about the pension plan, Mr. Ravitch said, “Call it what you will, it’s taking money from future budgets to help solve this year’s budget.”
Mr. Megna, when reminded that the plan envisioned delaying an obligation today and eventually paying it back with interest, softened his view in the process of a lengthy interview.
“I’m not going to sit here and characterize it as not a borrowing,” he said. “But it is an annual, relatively small borrowing we’re doing this year that were doing to get a modest savings.”
In 2004 and 2005, the state borrowed $655 million from the pension fund; it still owes more than $400 million.
Budget negotiations are expected to continue through the weekend, as state leaders push to reach a broad budget deal. What has become clear is that substantial borrowing will be part of the budget, leaving only the question of the amount.
This week, Mr. Paterson called borrowing “a last resort,” but added, “I have never said I wouldn’t borrow.”
