ALBANY - The Spitzer administration warned Thursday that declining revenues will make the 2008-09 state budget now being crafted difficult because of a projected $3.6 billion deficit and Gov. Eliot Spitzer's promise of no tax increases.

But the budget Spitzer will present in January will still likely increase spending by more than 5 percent before it goes to the Legislature, which traditionally increases the governor's plan.

Budget reform measures pushed by Spitzer and adopted earlier this year will speed the budget process and give the public a rare chance to weigh in. Public hearings around the state will be scheduled after fiscal forecasts including projected deficits are made public in early and mid-November.

Spitzer Budget Director Paul Francis said Thursday he hopes to keep increased spending at no more than 5.3 percent, which Division of Budget economists pegged to be the rate of personal income growth in New York.

He said the inflation rate of about 3 percent, which is often used by critics of high government spending, is an unrealistic measure.

Francis told the Citizens Budget Commission, a good government group, that if the state capped spending at the rate of inflation, local governments would have to make up the shortfall in state aid by raising local taxes.

The current budget increased spending in the operating budget by the more 7 percent over the last Pataki-era budget.

By comparison, Francis noted the last Pataki-era budget increased spending by almost 11 percent.

And Francis wants to use the operating budget figure - about $80 billion - as opposed to the all funds budget of $120 billion that includes federal funds and capital borrowing.

E.J. McMahon of the fiscally conservative Empire Center for New York State Policy agrees with Francis the operating budget is a better judge of state spending.

And he doesn't dispute the 5.3 percent figure for personal income growth. But he says that's not a good goal.

“That means, ‘We're going to spend all the money you make,”' McMahon said.

McMahon said spending commitments in the current budget, including a multiyear historic increase in school aid, will make the current budget session difficult. It's already threatened by a downturn in Wall Street revenues - which Francis said can account for 20 percent of state revenues - and the collapse of the sub-prime mortgage market and the tax revenue from it.

Francis said that in past years revenues have usually risen between the time the governor submits his budget and the April 1 start of the fiscal year.

“The windfall of added revenues has largely absolved the Legislature from having to make hard decisions when it comes to the budget,” Francis said. “But all indications are that next year will be different.”

The Legislature usually adds $1 billion to $2 billion to the budget. That means the governor's executive budget proposal every January can be about 99 percent of the final product, whenever it is finally passed by the Legislature.