By Dan Weissner and Holly McKenna
ALBANY, New York (Reuters) - After winning swift passage last month of a millionaire's tax increase, New York Governor Andrew Cuomo claimed the process of putting together the state budget was halfway done. The other half may be more difficult.
The budget plan Cuomo will unveil on Tuesday must close a gap of about $2 billion, largely through spending cuts, as Cuomo already has ruled out any new taxes or fees.
A surprise increase in revenue, which would help win the legislature's approval of an austere budget, looks unlikely.
New York's economy has not fully recovered from the recession, and the sagging performance of Wall Street - the state's main economic engine - is crimping tax collections while unemployment hovers just below 8 percent.
"Our challenge for 2012 is this: How does government spur job creation in a down economy while limiting spending and maintaining fiscal discipline?" Cuomo said in his State of the State address last week. He also proposed tapping $25 billion of private capital to spur growth and rebuild infrastructure.
State agencies already have been told to cut spending by 2.5 percent so that Cuomo can increase spending on education by about 3 percent, or around $800 million, to almost $20 billion.
The governor last year faced a bigger challenge, closing a $10 billion budget gap -- roughly 10 percent of the budget -- and agency spending was cut by 10 percent. The 2 percent surcharge for those making $2 million a year or more is expected to raise an additional $1.9 billion in revenue, but no other taxes are expected.
"My understanding is that every agency and authority will be flat or cut, in order to hold education and health harmless," said a financial source familiar with the talks. Cuomo last year promised extra funding for healthcare and schools.
Last year, school funding was slashed by $1.2 billion - prompting thousands of layoffs - but Cuomo vowed to tie future spending to personal income growth.
Cuomo wants schools to use this year's extra funds as a reward for performance and improvement, while others, including Democratic Assembly Speaker Sheldon Silver, are calling for the money to go to the poorest school districts.
Silver represents Lower Manhattan and his preference for aiding urban schools - the seat of his downstate power - in the past has been opposed by the Republican Senate majority leader, Dean Skelos, who wanted to safeguard his party's Long Island suburban stronghold.
One of the bigger conflicts between the governor and the speaker may be teacher evaluations. Cuomo has called for an improved "accountability system" for teachers. The state stands to lose $700 million in federal funding because its current way of evaluating teachers was deemed unsatisfactory.
The United Federation of Teachers, an important supporter of Assembly Democrats, opposes efforts to tie teacher pay to performance.
Cuomo also wants to create a new tier of less costly pension benefits for state workers, pitting him against unions that last year accepted austere contracts amid threats of thousands of layoffs.
The Public Employees Federation's the state's second largest public workers union, with 55,000 employees "will aggressively fight" the proposal on pension benefits, said Darcy Wells, a union spokeswoman.
"We just got a new pension tier which is estimated to save taxpayers $35 billion over the next 30 years, and the reality is tier six would have little impact on pension costs in the short term," Wells said.
This year's budget for Medicaid, the federal-state health program for the poor, also will go up because it will be indexed to medical inflation. The cost of the plan, already about $1 billion a week, could go up by 4 percent.
In his State of the State address, Cuomo barely mentioned the Medicaid program, which counties are eager to see pruned because they bear part of the cost.
"He was ambiguous about Medicaid in his speech but we remain hopeful there will be mandate relief in the budget," said Mark LaVigne, a spokesman for the New York State Association of Counties, which represents county governments across the state.
(Writing By Joan Gralla; Editing by Leslie Adler)