Living Beyond Their Means

By Janice Castro

Nearly half the states are with Uncle Sam in the fiscal sick ward

With the Federal Government all but drowning in red ink, scant attention has been paid to the fiscal health of the states. Now two studies show that there is cause for concern. While not nearly as badly off as Washington, the states are busting their budgets at an alarming rate. The Bureau of the Census reports that, while state revenues rose 12.2% to $310.8 billion last year, spending increased at a faster rate (13.1%) and overall indebtedness jumped 10.6% to $134.8 billion. Seven states (Massachusetts, Kentucky, Indiana, South Dakota, South Carolina, New Jersey and New Hampshire) could not balance their books. And according to the National Conference of State Legislatures, the situation is growing worse. High unemployment and the recession have hit the states with the force of a one-two punch, swelling welfare and unemployment expenditures while sharply reducing the income, sales and business taxes needed to pay for them. Just a few months into their new fiscal years, at least 22 states are already slashing spending in the face of ominous revenue shortfalls.

Unlike the Federal Government, all states except Vermont are required by their constitutions to balance their budgets. Nowhere has this been more difficult during the current recession than in the hard-hit industrial heartland. With the nation's highest unemployment rate (15.9%), Michigan barely made it through the past two years by laying off 8,000 state workers, wringing $20 million in pay concessions from its remaining 60,000 employees, slashing spending in every area, and raising income and cigarette taxes. Michigan is only one month into an austere fiscal 1983 budget of $4.6 billion, and already it looks as if the state will come up short by $100 million. In Ohio, where joblessness is running at 12.5%, the current biannual budget of $13 billion was only three months old when officials realized that they might face a $1 billion shortfall. "We kept looking at it to make sure we were not mistaken," said Budget Official Edgar Troyer. "You can't imagine how tense it was." To cope with the deficit, state officials cut all spending by 10%, imposed a temporary 50% surcharge on state income taxes (for a maximum rate of 7.5%), and raised sales taxes from 4% to 5%.

Parts of the South are in similar straits. In Alabama, a 15% reduction in the general fund was ordered in September, just four months after the fiscal 1983 budget of $496 million was adopted, when Governor Fob James realized that the declining state economy and a 14% unemployment rate had opened a $50 million hole in the budget. Even Louisiana, long buoyed by oil and gas taxes, has that sinking feeling. Reason: the oil glut has depressed prices, and thus tax revenues. Fearing that its $6.3 billion budget could be $100 million out of balance by the end of the fiscal year next July, the state has frozen hiring, is deferring maintenance on state buildings and has canceled $500,000 in new equipment orders. Now state legislators are talking about a tax hike. Says Budget Director Ralph Perlman: "We've run out of windfall from Washington. We've run out of exotic tax measures. Our economy has run out of gas, and in Louisiana, when you run out of gas, you run out of money."

New Jersey Governor Thomas Kean won office last year partly on a promise to cut taxes. He may not be able to deliver. State legislators are already predicting a $50 million shortfall in this year's taut $6.2 billion budget; some think the deficit will be much worse. Says State Treasurer Kenneth Biederman: "We are not seeing a recovery in terms of revenues. I do not know of any state that is." Last week Kean said he was considering drastic action. For this staunch backer of Reaganomics, that probably means a tax hike.

New York legislators overrode Governor Hugh Carey's attempts to veto millions in spending last July, but now face a deficit that could go as high as $1 billion in this year's $27 billion budget. For the first time since 1975, the state may have to borrow money to bridge the gap. A special session of the legislature is likely in December.

Even California, once recession-proof, is suffering. The state that started the tax-cutting craze in 1978 is facing a shortfall of between $500 million and $1 billion in a $25.2 billion budget. Oil severance taxes, spending cuts and short-term outside borrowing are among the remedies under consideration. Says State Finance Administrator Mary Ann Graves: "We're on the razor's edge. And if the economy doesn't turn around, we're clearly over the edge."

California's deficit is trifling compared with Oregon's, which will be at least $400 million and could reach $1.6 billion (the latter total would be more than 50% of the state's $3 billion budget). Reason: Oregon's lumber-based economy has all but collapsed in the housing slump. With unemployment at 10.1% and personal income and business taxes plummeting (the state has no sales tax), legislators will meet in January, their third attempt in a year to devise emergency measures. Possible solutions: a stiff income tax surcharge and new "sin" taxes on cigarettes and liquor, coupled with deep budget cuts.

Caught in this crunch, many state lawmakers are quick to blame Washington, Reaganomics and a recession that went on longer and cut deeper than almost anyone expected. To be sure, the President's New Federalism initiatives have placed added burdens on local finances by reducing federal aid to states and localities, from $94 billion in fiscal 1981 to $91 billion in fiscal 1982, with a further drop to $81 billion proposed for next year. But there is plenty of blame to go around: in more than a few states, politicians of both parties framed their current budgets with purposeful optimism rather than raise taxes or cut social spending in an election year. The results are just now emerging, and the economic blight is still spreading. Says Steven Gold, an analyst at the National Conference of State Legislatures: "My guess is that by the end of this fiscal year, as many as 40 states will have to trim spending or raise taxes."

--By Janice Castro. Reported by Christopher Redman/Washington and Peter Stoler/New York

With reporting by Christopher Redman, Peter Stoler

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