States face hard budget choices

Sunday, July 21, 2002

For state governments, worries on Wall Street are adding uncertainty to a brand-new budget year that is already signaling a worsening of cuts and layoffs that made last year so painful.

Shortfalls for the fiscal year beginning in July are emerging in states scattered from Maine to Utah, even as planners hope a stronger economic recovery will let them avoid tough choices.

"It's hard to budget on hopes," said Wisconsin's Senate Majority Leader Chuck Chvala, a Democrat. With cuts and tobacco money, Wisconsin closed a $1.1 billion shortfall that should get the state through this fiscal year -- if the economy doesn't worsen.

Other states are in tougher shape:

Maine, facing an estimated $180 million shortfall, is shutting down non-essential state government for three days scattered throughout the year. Among the programs facing potential cuts are schools and youth programs.

Montana, short an estimated $45 million, is calling lawmakers back for a special budget-cutting session next month. On the table is a proposal to trim lawmakers' salaries by 10 percent.

Nebraska saw its estimated budget shortfall nearly double this week from $125 million to $233 million. For the first time since 1981, the state ended the fiscal year with less money than it brought in the previous year.

With corporate accounting scandals driving the recent drop on Wall Street, governors made their concerns about the weak economy public last week at their annual meeting. They want help from the federal government to ease rising costs of Medicaid, one of the fastest-growing portions of state budgets.

If this year does turn out to be as dire as some fear, it comes as a double whammy: Last year, states overall made cuts to plug an estimated $40 billion in shortfalls.

The shortfalls follow a string of surplus years, when states cut an estimated $35 billion in taxes between 1995 and 2001. Last year, preliminary estimates figure taxes were increased by $7 billion.

With the fiscal year just three weeks old, there is scant comprehensive data on states' finances overall, according to several groups that track state finances.

Anecdotally, there is reason to worry.

"The general mood is unfortunately fairly pessimistic," said Scott Pattison, executive director of the National Association of State Budget Officers. "You can really feel it in discussions with budget officers across the country."

Pattison said that 16 states have told his group the latest revenue is falling short of projections that had already been sharply scaled back. He would not release a list of the 16 states because the information was provided informally.

So far, Maine, Montana and Nebraska all are planning special legislative sessions to find ways to handle budget shortfalls. Utah held its special session earlier this month, approving cuts and delayed spending to cover a $173 million shortfall.

One particular concern is cash reserves. As states sought to avoid cuts to programs, many tapped surplus accounts, or so-called rainy day funds, that were strengthened during the economy's boom years in the 1990s.

Those funds have now been sharply depleted. In fiscal year 2000, state reserve funds overall were estimated at 10.4 percent of total budget spending. By the end of the last fiscal year, reserve funds had dropped to 3.4 percent, according to a recent analysis by the National Association of State Budget Officers.

"They've done the easy stuff," said Arturo Perez, a senior fiscal analyst at the National Conference of State Legislatures. "(Fiscal year 2003) will look like fat city compared to '04. There's a lot of concern about '04 right now, and even '05."

"I frankly am pretty pessimistic," said Wehrbein, in Nebraska. "The future's here and we haven't turned around."

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