* Spending projected to increase 1.9 percent
* Cuomo plans to close two prisons
* More money for education
By Hilary Russ
Jan 22 (Reuters) - New York Governor Andrew Cuomo proposed on Tuesday a $136.5 billion state budget for fiscal 2014 that boosts education spending and closes a $1.3 billion gap without raising taxes.
The spending plan, which would be a 1.9 percent increase, or $2.5 billion, from the current fiscal year, must be approved by state lawmakers.
The state's fiscal year begins April 1, three months earlier than most.
To close the gap, the state would save some money by keeping total spending increases below 2 percent for a third straight year, while tax collections are projected to increase by $3.5 billion, or 5.4 percent from fiscal 2013 estimates.
New York could save nearly $974 million because of government cost control efforts, including by shrinking planned spending increases for some programs and agencies, Cuomo said.
Included in that figure are some closures and consolidations of excess facilities - including an empty prison - as well as controls on hiring.
Cuomo's proposed budget would reduce spending for public safety agencies by 10 percent in fiscal 2014, mostly due to a retroactive labor contract settlement for correction officers in the current fiscal year.
Cuomo, a Democrat, also proposed shuttering what he said were the two least efficient prisons in the state. One, the Bayview Correctional Facility in Manhattan, which remains vacant after being evacuated during Sandy.
Prison closures would eliminate more than 432 beds and save $18 million in fiscal 2014 and $62 million in fiscal 2015 if the state can sell the Bayview prison, according to budget documents.
The state also hopes to save an estimated $755 million over five years as it continues consolidating back-office operations, like business services, into a central location.
In September, New York State Budget Director Robert Megna ordered state agencies to plan for "zero growth" in their budgets for fiscal 2014.
Excluded from the spending freeze were two areas that are subject to different caps on growth: school aid and Medicaid.
Some other states have also begun clawing their way out of the post-recession funk, with California Governor Jerry Brown saying on Jan. 10 that his state's deficit is gone after years of financial troubles. He proposed increased spending on education and healthcare.
And on Jan. 16, Massachusetts Governor Deval Patrick proposed raising the commonwealth's income tax rate and lowering sales taxes as part of a plan to invest nearly $2 billion in education and infrastructure. He is slated to present his budget on Wednesday.
In New York, Cuomo's budget plan would fund an array of new housing, economic and other initiatives he proposed during his annual State of the State address on Jan. 9. And it would increase money for education by $889 million, up 4.4 percent from current levels.
It also includes $21 billion in appropriations for recovery, rebuilding and mitigation projects after Superstorm Sandy ripped into the coastline on Oct. 29.
The state expects to receive about $30 billion of a $60 billion federal relief package that is still being finalized in the U.S. Senate, with neighboring New Jersey to get most of the rest.
Cuomo also said that the so-called "design-build" approach - a kind of public-private partnership being used to build a new Tappan Zee Bridge - should be expanded to all state agencies and authorities.
Design-build projects call for the same private firm to design and build a public project, rather than having companies bid on the different phases of construction separately, which critics say can make projects take longer and cost more to build.
And Cuomo proposed a five-year extension to the $420 million annual tax credit for the film and television production industry, beginning in calendar year 2015.
New York State Comptroller Thomas DiNapoli, also a Democrat, said his office would provide a detailed analysis of Cuomo's budget in the coming weeks.
"Our budget has only stayed in balance because the state limited spending and used one-time windfalls," DiNapoli said about the current budget. "We face stubbornly slow growth in our economy, significant out-year budget gaps and a debt burden that is among the highest in the nation."