With Rudy Giuliani seemingly intent on running for the presidency in 2008, and Charles Schumer staying in his U.S. Senate seat, New York attorney general Eliot Spitzer is now the odds-on favorite to become the state’s next governor. But the key question is not whether he can win in November 2006, but whether he can be the type of reform governor that the Empire State so desperately needs right now.

For the government that Mr. Spitzer will likely take over is universally derided as the country’s most costly and dysfunctional. Though nominally divided between a Democratic Assembly and a Republican Senate, the New York Legislature has in fact only one ruling party – the spending and patronage party, which has erected a massive public sector now crushing the state’s taxpayers. With a nod and a wink across the aisle, GOP legislators shovel billions into the state university, suburban school districts, and the state’s hospital system, while Democrats aim their billions at the City University of New York, mass transit, and social services, including by far the country’s biggest Medicaid program. Both parties, meanwhile, have proved ingenious about squeezing ever more money out of the state for this spending, saddling New Yorkers with the nation’s highest state and local taxes and also creating a virtual shadow government of quasi-independent authorities, boards, and commissions that float bonds and spend money outside the official state budget. So precariously perched is this fiscal edifice that the state careens from one budget crisis to another, while each year’s budget brings new taxes, fees, or financing gimmicks.

The situation has become so desperate that a broad array of New Yorkers are now proposing a slew of reform measures, from a state constitutional convention to a guerrilla-style effort to unseat unresponsive legislators.

But these solutions range from the unfeasible to the potentially lethal. The real solution is much simpler. What New York really needs is a reform-minded chief executive who can wield skillfully and courageously the powerful weapons that the state constitution already gives the governor’s office to wrest back control of Albany from the Legislature and its swarm of special interests.

Now the state totters on the brink of fiscal ruin, with Albany burning up money at an astounding pace, even though New Yorkers already pay 26% more of their personal income in taxes than the national average.

New York is also the most heavily indebted state, to the tune of over $40 billion, costing taxpayers some $3 billion a year in interest. The shadow government of unaccountable authorities – now totaling an astounding 600 or more – has collectively amassed another $100 billion in debt, off the state books. Meanwhile, the state faces accumulated budget deficits of more than $10 billion over the next two years.

As a recent poll found, only 25% of New Yorkers have confidence in state government. With cynicism so high, New York has sunk to among the 10 worst states for voter turnout. Instead, New Yorkers vote with their feet.

From 1995 to 2000, New York lost about 1.6 million residents but attracted only 726,477 residents from other states – a loss of 874,248 and the greatest net domestic out-migration of any state.

Those who stay increasingly demand reform, to no avail: Albany legislators have insulated themselves from public accountability by gerrymandering their districts, so that nearly 98% of incumbents who have run for re-election over the last 15 years have won. The nonpartisan Center for Voting and Democracy ranks New York as the country’s least democratic state.

Edward I. Koch, a former mayor, tells a story that crystallizes the entrenched legislators’ arrogant unconcern with the public interest. When Mr. Koch complained bitterly and publicly about a swollen pension hike that the Legislature lavished on city employees, he recalls, “They sent [labor leader] Barry Feinstein to see me. He told me that there was nothing I could do to stop the bill, but that the legislators didn’t like my publicly criticizing them. So he offered to reduce our costs by about $70 million by delaying the legislation for a few months and told me that I should take the offer, because there was nothing else I could do. I hated it, but I knew he was right. These guys are untouchable, so they do what they want to.”

Even more arrogantly, New York’s legislative leaders have now launched a power grab of breathtaking audacity, all the more galling because it claims to be the reform that citizens crave. In an assault on the governor’s prerogative, the Legislature has proposed to give itself the right to set the state’s fiscal priorities and dictate how the budget is shaped in any year in which the state does not pass a budget on time. Such legislation, of course, would encourage the Legislature to stonewall the budget – as it does every year, anyway – so that it could invoke its new powers. It’s unlikely, however, that increasingly disgusted voters will buy this ploy. “I think the voters are finally fed up and ready for reform,” says Republican political consultant Jay Townsend. “I had a meeting with some legislators who asked me how I might run a campaign in New York, and I told them, ‘I’d run against you guys and the way you do business up here.’ That’s what can work now.”

Mr. Spitzer’s public statements make clear that he knows this. Accordingly, if he wants to govern successfully, he should campaign in a way that gives him a mandate for needed reform. Without credible opposition, without the political need to sell his soul to Democratic special-interest groups, ambitious, smart, and rich enough to resist corruption, Mr. Spitzer is ideally placed to run as a new broom who will sweep away Albany’s costly and undemocratic conspiracy against the taxpayers. He can stress that he has not come up through the corrupting legislative ranks, dominated by free-spending representatives of public-sector unions and government-funded nonprofits.

Though his judgment is not infallible, he can boast of having helped bust mob-run operations in the garment district and, like his fellow prosecutor, Mr. Giuliani, having blown the whistle on Wall Street wrongdoings. He can point to his drive, along with state comptroller Alan Hevesi, to scrutinize the state’s hundreds of authorities and boards to make them more accountable. He would do well to step up this push now, to show just how serious he is about taking a fire hose to Albany and washing it clean.

Once in office, Mr. Spitzer could work miracles with only a few commonsensical measures. He would first of all have to use the power that a new governor wields within his own party to oust the current legislative leadership and install his own supporters. Since only the governor can submit a state budget, he will be able to set the agenda of how much money the state will spend – and on what. The Legislature can participate in the budget process only by adding or reducing individual appropriations, and the governor can veto any of their individual changes without throwing out his entire budget.

Mr. Spitzer can therefore cut back on the state’s ruinous Medicaid spending – more than No. 2-ranked California’s and No. 3-ranked Texas’s combined – and he can push through a plan for a state takeover of the localities’ share of Medicaid’s cost, to discourage state legislators from profligately spending tax revenues that the localities currently have to collect. This crucial move will require a tough prosecutor’s nerves of steel: when Westchester County executive Andrew Spano announced plans in November to inform county residents of just how much the state’s Medicaid tab was costing them, powerful health care union czar Dennis Rivera darkly hinted political consequences, and Mr. Spano quickly backed down.

Mr. Spitzer should then start consolidating the 64 mostly mediocre campuses of the state university system and making them accountable. He also needs to put the brakes on the state’s budget-busting aid to local school districts, spiraling up at two to three times the rate of inflation. Though supporters argue that such aid holds down local tax increases, in fact municipalities usually raise taxes whether the state ponies up more aid or not. Finally, Mr. Spitzer needs to inject cost-saving competition into New York state government. One place to look is the free-spending Metropolitan Transportation Authority, which, despite big state and city subsidies, is bleeding red ink and soaking riders with ever higher fares. Transit systems around the country have lowered costs by bidding out everything from bus routes to operation of train systems. Not the MTA.

The governor must reject the fiscal gimmicks increasingly used to finance big spending hikes. He should prevent the funneling of more and more of the state’s spending into off-budget accounts: for example, the 1999 Health Care Reform Act, financed by tobacco-settlement revenues, cigarette taxes, and surcharges on hospital bills that generate up to $2.5 billion a year in spending that does not appear on the official state budget, thus concealing the true size of the state’s spending.

Mr. Spitzer should slash the number of independent authorities and make the borrowing and spending of those that remain subject to voter approval. Such authorities have “borrowed money to air-condition a Tonawanda golf dome, move 47 graves in a Dryden cemetery, open an Adirondack museum with a fake river and buy vans for a Brooklyn youth circus,” the Syracuse Post-Standard reports – as well as to fund the yet-to-open National Museum of Catholic Art & History in East Harlem, not associated with the Catholic Church and run by an ex-Playboy bunny. Not surprisingly, these patronage mills have often been accused of nepotism, cronyism, and misspending funds.

Audits of the former Harlem Urban Development Corporation found millions of dollars missing or squandered, for instance, and most recently, the New York Racing Association agreed to install a court-appointed monitor to settle federal charges of conspiracy to commit tax evasion.

Finally, Mr. Spitzer should campaign to strip the Legislature of its power to redistrict itself and the state’s congressional seats. New York needs a constitutional amendment to institute nonpartisan redistricting, as in Iowa or Arizona, where independent panels draw legislative districts objectively, without regard to political affiliation or incumbency. In Iowa, the process has produced districts of equal population and plain, rectangular boundaries that are among the most competitive in the country. And the state also needs vigorous ethics-rules reform for both legislators and lobbyists.

Whatever his message, Mr. Spitzer will probably win. The question he must ponder now is: Does he want to win – and govern – in a way that goes down in history? All New York will be hanging on his answer.

Mr. Malanga is a contributing editor of the Manhattan Institute’s City Journal, from whose Winter issue this is adapted.