Budget woes batter state governments

ECONOMIC PAINS

By Robert Tanner ~ The Associated Press

The recession may be officially over, but don't tell that to Arkansas college students who won't get scholarships, outdoor lovers in Arizona who will likely see parks shut, or thousands of state workers -- from Iowa to Washington -- who are about to lose their jobs.

For state governments nationwide, last year's economic pain is hanging on like a vicious flu.

April tax returns failed to give a hoped-for boost, and now states are looking at the worst financial picture in possibly two decades. Few state leaders or budget analysts expect the picture to brighten for a year -- at best.

"States have really been slammed. I don't know what other word to use," said Scott Pattison at the National Association of State Budget Officers.

Medical costs continue to rise and unemployment is still demanding heavy state spending, while the past year of steadily weak tax revenues shows few signs of perking back up.

The latest reports show:

States struggled with a total budget shortfall of $40 billion in the current fiscal year that ends, for all but four states, next month, according to the National Governors Association.

n Medicaid costs rose 25 percent over the past two years, and now account for about $1 of every $6 state governments spend out of general funds.

n The fiscal year that begins for most states in July offers little relief, with 37 states expecting another painful gap between spending needs and incoming revenues, according to the National Conference of State Legislatures.

Short on cash

Most legislatures are wrapping up their spending plans for the coming year, and all but a handful are dealing with a cash shortage as revenue estimates continue to drop.

Despite the fiscal fallout, calls for widespread tax increases have gone nowhere. Overwhelmingly, governors and lawmakers have turned to fee increases and targeted tax increases, such as cigarettes, while rejecting new sales or income taxes.

In California, facing a $23.6 billion shortfall over this year and next, Gov. Gray Davis turned to a combination of cigarette taxes and higher vehicle licensing fees to help cover the gap. The Democrat, who is seeking re-election, had earlier pledged he wouldn't raise taxes.

Revenues continue to sag. January-March tax revenues, overall, fell by 8 percent compared to the year before, with corporate income taxes down a staggering 18 percent, according to preliminary data.

The April tax deadline gave scant relief. Higher-than-expected tax refunds, while nice for taxpayers, added to the drain on state coffers.

Each state's economic woes were slightly different: in Washington state, the dot-com fallout helped drive unemployment to the second-highest in the nation; in Hawaii and Florida, tourism soured badly after Sept. 11; New York suffered direct losses from the terrorist attacks.

In South Carolina, where one lawmaker described the past year's free-falling economy as the worst in 40 years, leaders cut a whopping $502 million from this year's budget, nearly 10 percent.

Such wholesale reductions don't come easy. "Everybody agrees you ought to cut the size of government -- until you start talking about the agencies they care about," said South Carolina state Rep. Bobby Harrell, a Republican and head of the House budget-writing committee.

Looking to cut

Most states sought to cushion the blows for top priorities like education, health care and law enforcement. But the first cuts came over a year ago, and the economy continued to worsen and then suffer in the aftermath of Sept. 11.

Now Medicaid and public education, both colleges and K-12, are up for reductions.

Once that began happening, said Democratic New York state Sen. Stephen Saland, "You know the challenges are enormous. K-12 is, if not sacrosanct, among the last things to be touched."

The scaled-back programs will touch seniors on Medicare, students and teachers at school, prison inmates, poor people who need health care and more, said Raymond Scheppach, executive director of the National Governors Association.

Public parks may be shut down in Arizona, Utah and Washington state. In Arkansas, some 4,000 college scholarships have been cut. Medicaid services are being cut back in South Carolina, Illinois, Idaho and elsewhere. Layoffs are in place or likely for state employees in Washington state, Iowa, Illinois, New Jersey and more. Many more states have hiring freezes.

"This current year is going to be the worst year," Scheppach said.

Unless, of course, it gets worse.

So far, states have spent two-thirds of the $50 billion that they had managed to put into rainy day funds during the boom years of the late 1990s, the NGA said. If the economy gets worse again -- the so-called double dip recession -- state governments will have fewer choices.

"A lot of states don't even want to think about that," Pattison said. That would mean severe cuts and a strong likelihood of tax increases, he said.

But the majority view among economists is that the nation's financial strength will continue to build, and states will see a brightening fiscal future as that happens, according to Steve Cochrane, who tracks state economies for Economy.com.

Historically, state economies lag the national economy by a year to a year-and-half, he and others said.

Even the optimists, however, don't expect anything but a slow, hard climb. Said Saland in New York: "It's certainly not going to be an instant solution."