The State of the States: Broke

By Richard Lacayo

Here's an axiom of the new budget math for state officials: '80s into '90s won't go. For much of the past decade state budgets were pushed into the black by a buoyant economy that kept tax revenues pouring in just fast enough. In a pinch, states could unveil a new lottery, nudge up the sales tax or practice the kind of creative accounting that shifts one year's outlays into the next. But with the economy slumping and voters raising a fuss at the very whisper of new taxes, the assumptions of the '80s are not working anymore. Now 29 states are facing budget deficits. That may be business as usual in Washington, but most states are obliged by their laws to maintain a balanced budget.

The nationwide economic slowdown has deeply cut into revenues from state corporate and income taxes while also leading to cautious consumer spending that reduces the take from sales taxes. Meanwhile, outlays have been rising sharply for bridge and highway maintenance, prison construction and new schoolrooms for the second wave of the baby boom. The stiffest increases have been in health-care costs. Medicaid spending by states rose 18.4% in fiscal 1990 alone. Thus many of them are struggling with the prospect of big budget cuts and higher taxes, or drawing on reserves. "It's going to be batten down the hatches," says Ray Scheppach, executive director of the National Governors' Association. "The big question is how deep this recession is going to be."

Among those states facing the most serious problems:

CALIFORNIA is suffering the full impact of the taxpayers' revolt of the 1980s. Proposition 13, the 1978 referendum that froze property taxes at 1% of assessed value, depleted county treasuries, leaving the state to pick up the bills for things like schools and welfare services. Now California faces a $1.5 billion budget gap that is expected to swell to $6.5 billion by 1994. Incoming Governor Pete Wilson is refusing to rule out the possibility of higher taxes. But he also wants more freedom from constraints imposed by the state constitution and voter initiatives and laws that earmark much of the budget in advance for such purposes as education.

CONNECTICUT has an 8% sales tax, one of the nation's highest, which once compensated handsomely for the fact that the state had no income tax. With consumers on a buying binge, the state could afford to let spending rise 59% between 1984 and '88. Then recession hit, the shopping spree ended and sales- tax revenue was reduced to a trickle. For this fiscal year, Connecticut is looking at a $500 million shortfall, which is expected to triple in the next. That would amount to 20% of the state's projected $7.9 billion budget for fiscal 1991, proportionately the highest deficit acknowledged so far by any state. Governor-elect Lowell Weicker, who has asked all state agencies to propose budget cuts of up to 20%, is thinking of the unthinkable: an income tax.

NEW YORK was so flush in 1987 that it decided to cut state income taxes over four years. But when the economy began to shrink, Democratic Governor Mario Cuomo did not react fast enough. Facing a $1 billion deficit, the state legislature met in special session two weeks ago to adopt a package of cuts that nibbled at school spending and hospitals. When Cuomo took off for ^ Washington three days later to deliver a speech that warned about federal budget deficits, he may have hoped his troubles were over for a while. No such luck. On the same day Republican state comptroller Ned Regan announced that because revenue projections had been too optimistic, the state was still facing a budget shortfall of $500 million.

Officials from many states complain that Washington is making their problems worse. Two weeks ago, lawmakers who assembled in the capital for the National Conference of State Legislatures claimed that the recent budget compromise between the White House and Congress would cost the states an additional $17 billion over five years. Reason: federal mandates in the deficit-reduction deal direct states to spend money for such things as clean air and improved nursing-home care. The group also predicted that the increase in federal taxes on gasoline and alcohol would make it harder for states to increase their own levies on those products.

"In the long term, there has to be some rethinking of fiscal federalism," says Tony Hutchison, a senior policy specialist with the group. "We need to strike a balance to determine which revenues will fund which services at which level of government." In the short term, state lawmakers -- and state citizens -- will have plenty of opportunity to learn another dismal equation of the new budget math: lower revenues plus higher spending obligations equals big headaches.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Holmes/Telak

[TMFONT 1 d #666666 d {Source: National Conference of State Legislatures}]CAPTION: HOW FAR OFF TARGET?

With reporting by Priscilla Painton/New York and James Willwerth/Los Angeles