“Wall Street plans to get smaller this summer,” the New York Times reports today.  “Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.”

This would have significant implications for both state and New York City finances, which remain heavily dependent on the financial sector. At the very least, it would equate to more limited upside potential in the revenue projections underlying the state and city budgets.   I wrote about the latter in a Post op-ed today, explaining the risks of using one-shot gimmicks to prevent Mayor Bloomberg’s proposed budget cuts.

While profits have recovered, the securities industry has been transformed in several important respects in the aftermath of the financial crisis, as the Times story explains:

The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.

“It’s a tense environment right now,” said Glenn Schorr, an analyst with the investment bank Nomura.

A “tense environment” on Wall Street will also translate into a tense(r) environment in the state Division of the Budget — which, come to think of it, might want to bring this news to the attention of state employee unions, which have yet to agree to new contracts that would avoid layoff and meet Cuomo’s $450 million workforce savings target. If the unions think rising revenues will lessen the pressure to make concessions, they had better think again.

Marginal growth in state income tax receipts, in particular, has been largely driven in the past by Wall Street bonuses. But the Times piece provides a further important reminder of how the industry’s compensation structure has changed:

And this year there is another reason that is prompting Wall Street to act more swiftly on cuts. Wall Street typically pays out roughly half of its revenue in compensation, and firms often wait until late summer to cull staff when they have a better sense of revenue for the year. The newest cuts are expected to come earlier this year because of recent changes in the way employees are paid.

Traditionally, Wall Street employees get most of their annual pay in the form of a one-time year-end bonus. But after the credit crisis most firms changed the way they compensated employees in an effort to discourage excessive risk-taking, increasing base salaries while reducing performance-related payments. As a result, banks are paying out more compensation as the year goes on, forcing firms to re-evaluate staffing levels earlier in the year because more of their compensation costs are now fixed.