ALBANY STRIKES A BUDGET DEAL AIDING SCHOOLS

ALBANY - Gov. George E. Pataki reached a tentative agreement with
legislative leaders tonight on a state budget that would add about $515
million to state aid for schools and restore cuts the governor had proposed
to college scholarships.

But the agreement did not settle the question of how to give Mayor Michael
R. Bloomberg control over the New York City schools. Those decisions will
be left to further negotiations between the mayor and the Assembly Speaker,
Sheldon Silver, who has opposed giving the mayor absolute power, lawmakers
said.

The governor and legislative leaders refused to release any details about
how they planned to make up for a shortfall in tax collections in April
that has created a $1.1 billion hole in the state's finances. People with
knowledge of the accord said the state would spend almost all of its
savings and reserve funds this year as well as at least $500 million in
unspent money earmarked for special purposes. And officials said there
would be no layoffs of state employees, although they planned to reduce the
state work force through attrition.

The governor and legislative leaders were tight-lipped about most of the
details of the agreement. They said they would not tell the public what
they had agreed to until they had told their fellow lawmakers. And they
maintained they did not know how much the agreement would add in overall
spending to the governor's $89 billion proposal in January.

This is one of the earliest agreements on a state budget in the last 18
years, in which lawmakers have routinely missed the April 1 deadline. The
governor and the Legislature were under increased pressure this year to
forge a deal early, because all of them are up for re-election.

Still, they all claimed they had protected schools and provided seed money
for economic development despite desperate financial straits. "It's a
miracle, in my mind, that under the circumstances that we find ourselves
in, that we are able to put together a package that is going to do a lot of
good for a lot of people with limited resources," the Senate Majority
Leader, Joseph L. Bruno, said.

Governor Pataki said it would take a week and a half to draft the new
budget bills and refine the figures. "There's still a lot of work to be
done, working out the details and doing the initial numbers, but we do have
the framework to have the budget done," he said.

It remained unclear tonight what precisely the governor and legislative
leaders had agreed to do for New York City. Mayor Bloomberg had asked
lawmakers for $250 million in additional school aid.

He also wants the authority to raise revenues in a number of ways,
including a steep cigarette tax and higher parking fines. The mayor has
said he may be able to forestall cutting the city's school budget if the
Legislature can provide him with about $850 million in new revenue.

Lawmakers said privately that the mayor would be allowed to raise the
cigarette tax, though half the proceeds would go to the state. Mr. Silver
also said tonight's agreement would provide the mayor with enough new
revenue to avoid cutting the school district's budget. "I am confident
that, when the details are worked on and reviewed in a cooperative fashion,
the mayor will be comfortable and will not cut the schools," Mr. Silver
said, declining to provide any details.

The tentative accord also includes several measures intended to spur the
economy, among them a sweeping expansion of tax-free business zones, known
as Empire Zones, and seed money for high-technology industries. It also
includes a raise for tens of thousands of nurses and others who care for
the sick at home.

The agreement was also notable for problems it left unresolved. Negotiators
could not agree on an early retirement program. In addition, the governor
had wanted to weaken cleanup standards for toxic waste sites and provide
incentives for businesses to develop blighted areas. But he could not
persuade the Assembly Democrats to accept either proposal.

Nor did the budget agreement resolve the long-standing dispute between the
governor's office and the Assembly Democrats over how to lighten the
state's penalties for drug offenses, even though some lawmakers had
speculated that issue would be included in the budget.

The governor and legislative leaders returned to the bargaining table late
in the afternoon after a morning session that ended in acrimony. Aides to
all three negotiators thought an accord was so imminent they prepared
Franklin Delano Roosevelt's old office in the Capitol for a news conference.

But Governor Pataki emerged from the meeting with a sour expression, and
announced there were "a number of issues that aren't resolved."

Lawmakers with knowledge of the talks said later that the meeting had
fallen apart over a disagreement on how to structure an early retirement
program for state and local government employees. Mr. Pataki had advocated
a single policy for all workers, but the Assembly Democrats preferred a
buyout controlled by managers.

The speaker suggested the governor might consider layoffs if he did not
like the idea of a targeted buyout. The governor asked why he should play
the villain, and ended the meeting a short time later.

"The budget process in this state is dysfunctional," Senator Bruno said
after the meeting.

The Republican governor and the Democratic speaker also butted heads over
the proposal to expand Empire Zones. But they finally reached a compromise
that would raise the number from 62 to 72.

The talks today took place against a dismal financial backdrop during the
month of April, in which the governor's budget experts underestimated the
amount the state would pay out as people filed their tax returns and
settled up with the government.

Both the Assembly's ruling Democrats and the Senate's Republican majority
had been pushing for at least $515 million more in state aid for schools
above what the governor had proposed.

In his January budget proposal, Mr. Pataki froze school aid at last year's
level, about $14.2 billion.

The legislative leaders succeeded in persuading the governor to restore
several of the cuts he proposed in January, among them a proposal to make
students at state universities forgo a third of their scholarships until
they graduate. The proposal, billed as an incentive to encourage students
to study harder, would have saved about $182 million.

In January, the governor had proposed an $89 billion budget that would have
averted deep cuts by spending the state's savings and attempting to shift
many costs usually borne by the state to the federal government. Most of
that plan is intact.

Mr. Pataki's plan had also called for reducing the state work force through
a hiring freeze and early retirement buy-outs of about 5,000 people, but he
could not reach an agreement on the program with the Legislature.

He also proposed sweeping money out of several state bank accounts fed by
special taxes and dedicated to specific purposes to get an extra infusion
of $562 million in cash. He proposed, for instance, taking $100 million
from the Environmental Protection Fund, which pays for land acquisition,
and using it for general state spending. Most of those actions still stand,
lawmakers said.

In his budget proposal, Mr. Pataki tried hard to find financing for
programs that used to be paid for by state taxes outside of the budget.

In January, the governor proposed, and the Legislature passed, a massive
expansion of the Health Care Reform Act, which uses tobacco taxes and
hospital surcharges to pay for medical programs. The expansion not only
provided raises for hospital workers but paid for several state
initiatives, like $194 million to subsidize drugs for seniors and a $60
million cancer research program.

The budget is now a month late, though that is not unusual. This year,
howev er, the governor and lawmakers had several incentives to conclude a
deal. All face re-election in districts that have been redrawn, and they
would prefer to campaign rather than to stay in Albany for a protracted
budget battle.

Another late budget would not be good for Mr. Pataki's campaign either.
Earlier today, B. Thomas Golisano, a Rochester billionaire, announced that
he will run again for governor, as he did in 1994 and 1998. Mr. Golisano,
who could play the role of a spoiler in a tight race between Mr. Pataki and
a Democrat, has consistently attacked Mr. Pataki for late budgets, among
other things.

Another spur for the talks was the fear that tax collections might worsen
as the year wears on. Legislative leaders and the governor said they
believe the economic turnaround the country saw in the first quarter of the
year would eventually push incomes in New York up as well.

But in the uncertain environment after the terrorist attacks last
September, few lawmakers were willing to play a waiting game and bet on
that trend.