ALBANY -- New York's stable credit rating could be hurt if the Legislature fails to heed Gov. David Paterson's calls to cut spending and eliminate a $3.2 billion deficit, Moody's Investors Service said Friday.
The warning by the credit-analysis firm came as Paterson and lawmakers continued to negotiate how to address the deepening budget gap, an issue they have been discussing since September.
At issue are Paterson's proposed cuts to school aid and health care, two issues protected by powerful lobbyists who provide millions in campaign donations and other resources to lawmakers. All state offices are up for election next year.
Moody's said that failing to make cuts in major spending areas within the next three months will likely increase the state's costs for borrowing money.
School aid and health care represent 55 percent of all state spending.
Moody's projected that if no action were taken on the deficit, the state's general fund would be $150 million in the red by the end of November and $1.1 billion in debt by the end of December.
"The next three months will be critical to the state's credit rating," Moody's said Friday, saying "recurring cuts in major programs are needed."
New York is rated Aa3, the lower end of a Moody's category that indicates very strong creditworthiness for long-term municipal debt.
A downgrade would make its routine borrowing, which is above average for states, more expensive. Moody's said New York has more than $53 billion in tax-supported debt, a $13 billion increase from five years ago.
Senate leaders have refused midyear reductions in school aid and would only support smaller cuts to health care than those proposed by Paterson. Republican and Democratic senators argue the cuts would be too disruptive to schools, hospitals and communities and prompt even higher local property taxes.
The Assembly's leaders say they haven't ruled out anything.
Both chambers would have to agree with Paterson on a deficit-reduction plan for it to be enacted. No deal was struck Friday, and they are due back in Albany Monday.
"I think this is a lot more serious than the interest of some of the legislators who would rather go home and be heroes, saying, 'I didn't cut school aid,' or, 'Look, I didn't cut health care,'" Paterson said Friday.