It was a command performance Jan.14 at the Kitty Carlisle Hart Theatre in Albany as Gov. George Pataki appeared on stage to present his 1997-98 budget address to commissioners, legislators and reporters.

 His opponents long had said this at one-time vaguely defined former state legislator from the Hudson Valley couldn't do what he'd promised: cut taxes by $5 billion, trim the fat in the work force, and cut welfare and Medicaid by hundreds of millions of dollars.

 And yet the governor, standing alongside Ross Perot-sized charts reading "Pataki Tax Cuts Lead the Nation" and "Lowest Property Tax Rise in a Generation," had cut taxes as planned, even implementing the nearly $4 billion 1997 cut three months early. He had trimmed the state's work force "by more than 18,000 positions." The state's welfare caseload had dropped, according to materials he handed out with his budget, by 250,000. For two years in a row, there had been budget surpluses—more than $1.2 billion this budget year alone. And budget gaps were getting smaller.

 All this, and the sky hadn't fallen, as advocates, Democrats, and editorialists predicted just two short years earlier.

 "The naysayers," the governor would say at a forum for business leaders the next morning in New York City, "the naysayers said, 'How could you possibly preserve the programs you have talked about and absorb the tax cut?' But the state is well on the way to turning the tide and leading the nation."

 "I only wish the naysayers had the same confidence in the future of the state as I do," he would add later to a group of reporters.

 Now, back at the Hart Theater, the governor was promising more: $ 1.7 billion in additional tax cuts, $1.7 billion in increased school aid, and only a modest new reduction of 1,400 in the state work force. Of the vast array of areas that had come under the gun in his first two budgets—mental health, welfare, home care, nursing homes, higher education, and mass transit—only two, health care and higher education, the governor was saying, still were facing large reductions of $1.3 billion and more than $300 million, respectively. And those, Pataki was assuring his audience, would come with no pain.

 His economic vision of lower taxes, smaller government, and fewer people collecting benefits, Pataki was claiming, was working.

 Even state Comptroller H. Carl McCall, a Democrat and possible gubernatorial candidate in 1998, acknowledges that, despite dire predictions, the governor's budget has managed not to fall apart. But, the comptroller adds, "The governor has been very lucky. Nothing he has done has caused a surplus. The surplus has been caused by record profits on Wall Street, which has nothing to do with cuts in New York state's personal income tax. The governor cannot depend on that happening forever. And the full impact of the tax cuts doesn't kick in until 1998."

 "The governor declared victory," says Frank Mauro, executive director of the left-leaning Fiscal Policy Institute. "It's a big mistake on his part."

 Is it? Who's right? Has the governor, as he promised in his campaign, been able to help the state grow out of its economic slump through tax cuts, smaller government and tougher standards for public benefit recipients? Or has Pataki been able to succeed on luck and gimmickry, while the poor and middle class suffer more, and while he finances, as advocates claim, a tax cut for the rich? And what does all this augur about the governor's calls for new tax cuts and more cuts in health care and higher education?

 Clues can be traced beginning in February 1995. "Throughout the nation, the American people have demanded spending cuts, tax cuts, government that is more efficient and more effective," the governor said at the time. "The citizens of New York are demanding that their state government join the march."

 On the agenda: slashing Medicaid by $1.2 billion and welfare by $343 million, with the governor's finger-imaging program leading the charge; carving out $2.4 billion from state agencies, with an accompanying 11,400 reduction in the state work force; grabbing $448 million from higher education; and excising hundreds of millions more from mental health, mass transit, environmental conservation and others on the budget receiving line.

 Reaction was swift and loud. Thousands of health care workers, AIDS activists, advocates for the poor, union workers and others protested at the Capitol. Millions of dollars were spent on television advertising campaigns in hopes of winning the public relations war and, ultimately, the budget battle.

 Within weeks of the governor's first budget presentation, McCall came out with his "Fiscal Review of the 1995-96 Executive Budget." The comptroller's report noted, "A variety of the proposed changes used to balance the 1995-96 budget may not be achievable, and thus put the financial plan at risk."

 Among its warnings: "The abbreviated schedule for the early retirement program may reduce participation"; "The budget includes $76 million in savings from enrolling almost all non-elderly Medicaid beneficiaries in managed care by the end of the year. It will be difficult, if not impossible, to attain this level of participation in such a short time frame"; and "The proposal to limit the duration of home relief benefits may result in increased homelessness."

 And the loudest alarm bell of all: "Although this budget includes a plan to reduce personal income taxes through 1998, it does not describe how these tax cuts will be paid for beyond the first year of implementation, nor does it successfully make the case that this is the best tax cut to stimulate business growth and job creation."

 By June 1995, when the Legislature and the governor came to a budget agreement, the second-latest in history, many of the cuts had been mitigated, mostly through the Legislature convincing the governor that revenues would be $335 million higher than expected and through increased use of "one-shots"—revenue measures that are non-recurring—ranging from "rolling over" school aid payments to a later date to raiding pension funds. But the three-year, $3.9 billion tax cut remained in place largely as the governor had desired.

 Along with the state's budget passage came a new alert from the comptroller: "Many ... social service savings depend on successful implementation of antifraud and abuse programs. These savings ... may not achieve their goals because of the lateness of the budget and lack of experience the state has with anti-fraud programs of this size. The $120 million in state funds savings from Medicaid fraud will require $400 million in all funds savings in less than 10 months."

 By the time the comptroller closed the books in April 1996 (the end of the only full fiscal year Pataki has been in office), spending was indeed down. In fact, according to the comptroller's analysis, spending on welfare, Medicaid, and other forms of local assistance carne in at $193 million less than projected. Head count reductions were on target. The welfare caseload was dropping precipitously, by about 150,000, and with it the number of Medicaid-eligible New Yorkers.

 Though numbers, as one state budget official termed it, "are fungible," meaning the governor can delay or accelerate payments towards the end of the year to make the numbers work out, Pataki nevertheless could claim to have made it through his first fiscal year with less than a 1 percent variance in the $63.7 billion budget. In his final years in office, Gov. Mario Cuomo had to deal with yawning gaps in the billions caused by lower than expected revenues and rising welfare and Medicaid costs.

 Meanwhile, the 1996-97 budget process had broken down almost completely. The governor, in an apparent attempt to box in his opponents should the budget be passed late, as usual, announced his budget a full month early, on Dec.14, 1995. But it contained $2 billion in anticipated federal relief that never materialized. In mid-March, the Division of the Budget released a new "contingency" budget without the assumptions of federal relief just weeks before the March 31 budget deadline. There was more wrangling over spending and revenue assumptions, and more pressure for one-shots. On July 13 the budget was enacted, the latest ever.

 In August, the comptroller again warned that the multiyear tax cut and one-shots could lead to growing budget gaps.

 And again—though the books are not yet closed on the 1996-97 budget and the state is not required to release monthly actual spending reports—preliminary signs indicate the state will meet its goals. Tax cuts originally scheduled for April have been accelerated to January. Two-hundred million dollars in federal welfare aid earmarked for 1996 has been held for the 1997-98 budget.

 Things appear to be working out for George Pataki. But why?

 The governor's partisans argue that lower taxes and smaller government indeed have stimulated economic growth, boosting revenues by nearly $ 1 billion. That growth, coupled with tough anti-fraud measures such as finger-imaging and address verification, they say, also has trimmed vastly the welfare rolls.

 "Pataki has kept government spending growth at roughly one-third the rate of inflation," says Tom Carroll, president of the anti-tax group CHANGE-NY. "He has implemented a 25 percent income tax cut. There has been a drop in the state work force of 20,000, with virtually no layoffs." And, he says, there are 132,000 more private sector jobs now than there were under Cuomo.

 "If you raise taxes, you lose jobs," adds John McArdle, a spokesman for the Republican Senate majority. "If you lower taxes, you gain jobs. There [has] been a growth in tax receipts across the board. And more and more businesses are interested in moving here. All indicators show we are moving in a favorable direction."

 But for critics, McArdle's and Carroll's talk of blazing progress is more like a pile of ashes. It is the Wall Street boom, they argue, that has bailed out the governor, not a spurt in job growth. And. they say, the welfare caseload's drop, while dramatic, has little to do with fierce economic growth or tough antifraud measures. Since no tracking has been done on the reasons why welfare recipients have dropped off the rolls after the introduction of finger-imaging, it's impossible to tell what percentage of the decline is due to fraud, they say.

 "The number one thing that has happened is the economy has continued to grow," says Herman "Denny" Farrell, a New York City Democrat and chairman of the Assembly Ways and Means Committee. And most of that economic growth has come from Wall Street, which boasted $11.7 billion in profits last year—twice what many consider a "normal" year. Much of that profit goes to state tax coffers in the form of a personal income tax on bonuses and a sales tax due to increased consumption.

 In fact, Wall Street has had the longest sustained bull market in any period since the 1920s. Meanwhile, the state's job growth has been sluggish. According to the Federal Bureau of Labor Statistics, New York ranked 41st among the 50 states in job growth in 1996. And under Pataki, the fastest job growth occurred during his first three months in office—before his tax cuts went into effect. The state experienced 1.4 percent job growth that quarter, compared to just over half that at the end of 1996.

 The reason, argues the Fiscal Policy Institute's Mauro, is that a $3.9 billion tax cut doesn't mean that New Yorkers have $3.9 billion more in their pockets. Because state taxes are deductible, he notes, for a New Yorker in the 39.6 federal tax bracket, every $1000 in state cuts result in only $604 more in that taxpayer's wallet. "All we're doing is disaggregating capital into small bits and pieces and nobody has much under their control," he says. "And we have no job creation ratchet in our tax incentives."

 Others argue that while the personal income tax has been cut, local taxes and fees have risen. In December 1996, Sen. Franz Leichter, a Manhattan Democrat, issued a report entitled "A Tax By Any Other Name: Increasing Cost of User Fees Eclipses Paltry savings from Pataki Income Tax Cuts for Most New Yorkers." Looking only at 1995, Leichter claimed that increases in "local fees, fares, tolls and tuition" cost New Yorkers $515 million—three times as much as their tax savings that year.

 While Leichter's report assumes those hikes affect all New Yorkers—which they do not, uniformly—and doesn't look at 1996, when the tax cut was significantly larger, it's indisputable, as Farrell says, that since Pataki took office. We have kids paying $3,200 … in college tuition, we did end up in New York City with a 25 cent [mass transit] fare increase, we did end up with commuter fare increases throughout the state."

 Daniel Walsh, president of the Business Council of New York; State, argues that the state only has begun to see the effects of what he calls the "turnaround" in attitudes toward business in New York state. "One of the reasons companies are coming back to New York, and one of the reasons [the] telecommunications industry has found New York City a good location for business activity, is that the governor has changed the attitude about business in the state," Walsh says. "He treats business as the customer, not the adversary." Democratic Assembly Speaker Sheldon Silver doesn't buy the businesses are-coming-back to New York scenario. New York, according to a 1997 Dunn & Bradstreet report, lost a net 75,000 jobs to other states between 1991 and 1995—more than any other state during that period, Silver said shortly after the governor's budget address.

 Meanwhile, other budgetary relief has come from a precipitous drop in the state's welfare caseload by 250,000. That drop has contributed to an easing not only in welfare, but in Medicaid costs.

 In fact, the drop in the welfare caseload may have bailed out the state's Medicaid budget. Early predictions that the state would not be able to quickly move the entire Medicaid population into managed care have proved accurate.

 The governor's second budget, for example, mandates managed care for what would amount to almost 2.5 million Medicaid recipients. But because of the state's inability, as of yet, to get a federal waiver that would allow the state to make managed care mandatory, and because of the system's inability to absorb so many people so fast, the state has transferred only 600,000 Medicaid patients into managed care.

 Moreover, about 70 percent of the welfare caseload cut, analysts say, came from New York City, and much of that can be attributed to the aggressive— some say harsh—actions of Republican New York City Mayor Rudolph Giuliani, not anything George Pataki has done. Although, Carroll argues, "Pataki gave Giuliani the tools he needed, such as finger-imaging."

 "There are three reasons why the welfare caseload has dropped," says Liz Krueger, associate director of the Community Food Resource Center. "First, people left because they did get jobs. Second, because of all the roadblocks that are thrown up, fewer people can maneuver the system and just give up. And three, there's the musical chairs caseload exercise. At any given time, people who are eligible are thrown off and attempting to get back on, but that makes the total caseload smaller at any moment in time."

 The result, advocates say, is an increase in human misery. Krueger notes that in the last three years in New York City, 150 new soup kitchens have formed, and that the number of hungry people seeking meals who were turned away rose to 62,000 in 1996. "In New York City," says Shelly Nortz, legislative director for the state Coalition for the Homeless, "there has been a 17,18,19 percent increase in demand for shelters. In Albany, that number has reached 30 percent. In Poughkeepsie, shelters report turning away three people for every one they serve."

 In New York City, Housing Works, which provides services for homeless people with AIDS, notes a rise in demand for emergency services, "from 20 [to] 25 needy people a week to 30 [to] 40 week," according to staffer Michael Kink.

 And at the City University of New York, the number of students on welfare has dropped by 8,300 in the last three years. At the same time, overall enrollment, which had been increasing until three years ago, has dropped from 208,000 to 203,000. "We attribute this to three factors," says Vice Chancellor for University Relations Jay Hershenson. "All of them are economically related. First, the $750 tuition increase, second, the change in [city workfare] rules"—which require students to perform work assignments off-campus—"and third, the 10 percent reduction in the state Tuition Assistance Program"

 The governor, of course, has a different view. "This plan," he said during his budget address, "promotes personal responsibility and fosters independence by freeing those trapped on welfare." Boasted Pataki: "We provide a stronger, more reliable safety net for the poor than ever before." But neither the state nor local governments can provide statistics on how many of those removed from the welfare rolls actually have jobs.

 Meanwhile, work force reductions, state workers unions say, have gone as far as they can go. "The governor can fairly claim that he has reduced the work force in a more humane way [than his predecessor]"—including early retirement and the ability to transfer more easily to other agencies—"but that misses the forest for the trees, because the downsizing has been so much more dramatic," says Steve Maderas, a spokesman for the Civil Service Employees Association.

 "You don't do more with less, says Public Employees Federation Communications Director Denyce Duncan Lacy "You do less with less."

 Some of those who accept that state government should be smaller nonetheless have found fault with Pataki's downsizing. "The governor has made considerable progress, but he hasn't been aggressive enough in restructuring state government," says Cynthia Green, vice president for state studies at the Citizens Budget Commission (CBC), a business-funded group. "Around the country, huge savings have been achieved by introducing competition into services like highway maintenance, building maintenance, data processing, printing. It's surprising that Gov. Pataki has done so little in this area."

 There are other areas in which the state has done little to restructure service delivery. Mental health advocates have been clamoring for more community based services, for example. The state hasn't shuttered huge hospitals, which, according to Philip Saperia, executive director of the Coalition of Voluntary Mental Health Agencies, "cost an unnecessary $1 billion a year but which are popular because of the jobs they tend to provide." According to an analysis by Saperia's organization, the state has continued to spend 50 cents of every state dollar on costly institutions that provide less than 10 percent of the care.

 State government has gotten smaller, but it has not, Green and Saperia argue, gotten much smarter.

 What does all this bode for the future? It depends.

 There are several areas, critics say, where gimmickry or proposed cuts could lead to budget trouble down the road. The CBC's Green—despite the governor's claims that he's been right over the years while she's been wrong—is sounding the drum over the governor's use of one shots. This time it's the $1.2 billion surplus rolled over into next year's budget.

 Advocates still are arguing that the proposed cuts are too harsh and could lead to increased costs down the road. The welfare budget, for example, which on paper appears to contain no cuts, doesn't provide for categories of recipients no longer receiving federal assistance, such as legal immigrants. Nor are planned cuts in the grant—by 45 percent over 5 years and to non-cash assistance, which, advocates for the poor calculate, will amount to only $215—livable amounts for the poor, they argue. All this could increase pressure for emergency assistance funds.

 Moreover, picking health care as one of his biggest budgetary targets may mean the governor has taken on a losing battle. Ken Raske, president of the Greater New York Hospital Association, vows to fight what he sees as $1 .5 billion in cuts ($700 million in cuts imposed last year plus $800 million in new ones). "This is the worst year ever for health care, ever," Raske says. "We are being asked to close two-thirds of the budget gap." And that, he claims, comes in an industry that has lost nearly 10,000 jobs since 1994.

 College students also are up in arms about proposed tuition hikes of up to $400 a year, with an accompanying $126 million in reduced tuition assistance. Picking another vocal target with lots of legislative defenders also may mean the governor will have to look for significant savings elsewhere.

 There's the same problem with a proposed $1.7 billion multiyear tax cut, this time for property taxes, which, like the personal income tax cut, is backloaded. As with the personal income tax cut, whose full effect is yet to be felt, the proposed property tax cut likely would be implemented with no accompanying spending plan.

 Finally, the budget assumes another $11.6 billion of profit this year on Wall Street. In New York City, Giuliani's $34 billion budget assumes less than half that level of growth, or $5.2 billion.

 On the plus side, the governor certainly can argue that he's heard all these criticisms before and that the budget hasn't, as critics predicted, caved in to the pressure. Tax revenues, as they have for two years, could continue to rise, taking care of pressures that appear elsewhere. Welfare and Medicaid costs may continue to drop.

 And there are other straws in the wind. The recently passed $1.75 billion environmental quality bond act will pump $500 million into the economy in 1997 and 1998. When all the money is spent, the governor has estimated. 80.000 jobs will be created.

 Hundreds of millions more will be funneled through the Empire State Development Corporation. The recently inked New York City-upstate watershed agreement, which curtails harmful development around the watershed, provides hundreds of millions of dollars for environmentally sound programs and land acquisition. And it's possible that, as Pataki has claimed all along, his tax cuts and regulatory reforms in the future will generate increased job growth in the state—all good news for a governor who hopes to grow his way out of budget problems and into a second term. 

Andrea Bernstein is a reporter for the New York Observer.