By Joan Gralla

NEW YORK (Reuters) - New York schools, teachers, superintendents, and other groups sued Governor David Paterson on Wednesday, saying he had "illegally and unconstitutionally" withheld money the legislature approved for schools.

The Democratic governor on Sunday said New York's financial crisis required him to delay $750 million in payments to public schools and local governments. New York state would run out of cash this month if it paid all its bills, according to Patterson and the state comptroller.

Richard Iannuzzi, president of New York State United Teachers, said Patterson lacked any legislative, statutory or constitutional basis to withhold the funds, and was harming children and schools.

"The governor is overstepping his bounds," said Iannuzi, whose federation represents over 600,000 teachers, professors, bus drivers, aides and other workers, in a statement.

SELFISH SCHOOLS?

Since late November, Paterson has warned the state could fall into deficit. On December 9, Budget Director Robert Megna said New York would be $1 billion in the red if it paid all of its bills on schedule.

Paterson criticized schools officials for putting their needs ahead of other state obligations -- health insurance payments, aid for counties, cities and towns, and service providers' bills.

"What they have done is said 'We're not special interests, we're extra special interests' and everybody else can just divide up the crumbs," the governor said.

Paterson did not pin his ability to delay funds owed to schools and local governments on the state constitution. Instead, he cited a provision included in all state budgets since 1995, which "says all of the payments in the budget will be pending based on the (certification) of the budget director."

First included at former GOP Governor George Pataki's request, Paterson said this section "imbues" the governor with the power to ensure the state does not run out of money.

Further, Paterson said his across-the-board cuts should withstand legal challenges, unlike the "selective" trimming done by other governors that courts rejected.

Among groups that sued the governor was The Campaign for Fiscal Equity, a not-for-profit group that previously won a court case that found the state short changed New York City schools by hundreds of millions of dollars.

Though Wall Street, which pays one out of every five state tax dollars, earned $50 billion in the first nine months of the year, Paterson said tax revenues are still forecast to fall.

Politicians who deny that the state has a financial crisis are committing a "dereliction of duty," Paterson said, ruling out a tax increase to solve the cash crunch.