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Now it's states' turn: Most face skyrocketing deficits

WASHINGTON — WASHINGTON -- As he paces his government office in Augusta, Maine, John R. McKernan Jr. tries to imagine what will happen if four of his 20 staff members are laid off.

He has a good reason for believing layoffs are likely. He's the one who will order them.

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"These are horrible decisions," said the Republican governor, re-elected to a second term in November. "You'd never make them if you weren't required to; it's just human nature. People in government are there to help people, not hurt them."

But now, Maine itself is hurting. And like governors and legislators across the country, Mr. McKernan must make tough choices this winter to help make ends meet.

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Nationwide, 31 states confront a combined gap of more than $11.6 billion this budget year. The next budget year, by most indications, will be worse, with a shortfall that could be three times bigger -- and the steps needed to eliminate it that much tougher and more painful.

With a speed that has surprised some financial experts, declining business conditions are sharply reducing the expected flow of tax money to states, which can no longer turn to the debt-ridden federal government for assistance. That, in turn, is prompting a wave of new belt-tightening measures, since every state, except Vermont, must by law balance its budget.

Hard times may mean putting off improvements in public schools, cutting social services to the poor, raising tuition for state college and university students, or creating more traffic jams because of delays in patching roads and bridges or building new ones. There may be less pay for some state workers and unemployment lines for others, and, perhaps inevitably, higher taxes for almost everyone.

Every week, it seems, another state joins the casualty list, while those already in trouble report worsening conditions. The other day, Pennsylvania disclosed a gap of nearly $1 billion; only last month, the state's chief executive, Robert P. Casey, like other election-minded governors, had been campaigning for a second term by depicting Pennsylvania as a rising star with a robust economy.

Virginia announced recently its budget gap had widened by almost $500 million to $1.9 billion over the next two years. In New York, a $1 billion austerity plan had scarcely been finished when budget officials said an additional $200 million to $500 million might have to be cut.

The severity of the emergency varies from state to state. The worst may be Michigan, which must close a gap that amounts to 12 percent of the state budget.

Maryland, whose $423 million shortfall comes to 6.7 percent of the current budget, is in the middle.

Although the East led the nation into the current downturn, it is not alone in getting squeezed. California, hit relatively late, expects a $2.2 billion gap this year, state officials recently told the National Association of State Budget Officers.

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In the past, balancing budgets meant concocting a mix of spending cuts and new taxes.

But this year, the tax option "will be much more difficult for governors to deal with," said Gerald H. Miller, director of the National Association of State Budget Officers.

The expert on state budgets, who gets calls almost daily from "very nervous" new governors, says several factors "clearly changed the political landscape and the notion of what these governors could do." They include federal budget negotiations in Washington, which deepened the anti-tax mood evident in last month's election, and a revolt by New Jersey taxpayers after Gov. James J. Florio pushed through a massive state tax increase.

In all, 26 states, including many of those in financial trouble today, raised taxes last year -- by a record $10.3 billion -- to cover the increased costs of everything from health care to building new prison cells.

"What's different this time is the early response: They're taking those [tax] options off the table," Mr. Miller said.

Some governors, such as Mr. Casey, a Democrat, and Michigan Gov.-elect John Engler, a Republican, are constrained by campaign pledges not to raise taxes. But others are also taking that position, at least for now, including Gov. William Donald Schaefer of Maryland and two Democrats with national ambitions, Govs. Mario M. Cuomo of New York and L. Douglas Wilder of Virginia.

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Mr. Wilder has laid off 800 state workers, proposed early retirement for 4,600 others and canceled a pay raise for the rest. He also ordered state agencies to trim spending by 5 to 10 percent. Ruling out higher taxes was based in part on the governor's recognition that public resistance to tax increases remains strong, particularly at a time of deepening economic distress.

"Having seen so much waste in government and so much unlimited spending, people are saying: 'Show us your best case first [for cutting spending] before [raising] taxes,' " Mr. Wilder said. "I think that's the mood."

Dramatic evidence of the public's attitude on the subject can be found in a recent opinion survey by the Wirthlin Group, which asked voters to estimate how many pennies government wastes out of every tax dollar it spends. The average answer: 49 cents. Polls in the 1950s and 1960s, by comparison, found that only about half as many people as today believed government wasted "a lot" of money.

As state leaders seek solutions that will gain approval from a highly skeptical public, they are operating in a fiscal and political climate unique in the post-World War II era -- one that includes failed savings-and-loan institutions, troubled commercial banks, and a federal government seemingly incapable of stanching the flow of red ink.

"When we've had these recessions [before], we've always had sound financial institutions," said Mr. Wilder, a 20-year veteran of state government. "There isn't any standard . . . to guide us in this period of time."

In previous recessions, states generally tried cutting spending first, then turned to temporary tax increases as a last resort. Despite the anti-tax rhetoric of some, other governors -- including Republicans -- are too pragmatic to say that the pattern won't be repeated.

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"We raised taxes last year . . . with no repercussions," said Delaware Gov. Michael N. Castle, a Republican. "The tides of public opinion go in and out [on taxes], but if the issue is approached cautiously and intelligently, [taxes can be raised with] no political downside."

Another Republican, Gov. James G. Martin of North Carolina, who may have to close a $1 billion gap over the coming months, said more taxes may be the only way "to continue to move forward on education, prison construction and environmental protection."

"Taxes are off the table this year for us," said Mr. McKernan in Maine. "You don't raise taxes when the economy is in terrible shape." But he quickly added that he was "willing to look at taxes over the long term."

Regardless of political party or their differences over taxes, governors speak with one voice in saying that an out-of-touch government in Washington is part of the problem. With considerable justification, state officials claim that they are the ones making the real decisions today.

"We're used to making them, and Washington doesn't know how to make them," declared Mr. McKernan, whose wife, Olympia J. Snowe, is a Republican congresswoman.

State officials complain that the federal government continues to impose additional spending requirements, known as mandates, on state governments without providing the money to pay for them. New health care mandates, for example, will increase state spending for Medicaid by $5.5 billion over five years.

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"Every time the federal government makes a decision that allocates our resources, we don't have an opportunity to allocate our own resources," said Missouri Gov. John D. Ashcroft, a Republican.

Democratic Gov. Bill Clinton of Arkansas calls this an unauthorized use by the federal government of the states' "credit cards."

"Federal turn-backs and mandates [have] increasingly made state government the pressure point where the demand for government services rests," he told a congressional committee recently.

But even as they loudly proclaim themselves the victims of irresponsible federal policies, governors and state legislators are dumping some of their financial problems on increasingly hard-pressed cities and counties, which are fast amassing budget shortfalls of their own that run into billions of dollars nationally.

"If you can do something that the taxpayers want and you can get somebody else to pay for it, you do it," said Frank Shafroth, director of federal relations for the National League of Cities. "The feds pass it to the states, and the states pass it to the local governments, and the local governments look around and there's nobody else to eat it."

States' budget shortfalls

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In descending order, by size of budget deficit.

State........... '91 budget......Estimated shortfall

1. California... $42.0 billion......... $2.2 billion

2. New York...... 29.8 billion.......... 1.2 billion

3. Pennsylvania.. 12.3 billion.......... 959 million

4. Michigan....... 7.7 billion.......... 918 million

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5. Florida....... 11.3 billion.......... 811 million

6. Virginia....... 6.6 billion.......... 728 million

7. Connecticut.... 6.5 billion.......... 600 million

8. New Jersey.....12.1 billion.......... 600 million

9. Texas......... 17.1 billion.......... 443 million

10. MARYLAND.......6.3 billion.......... 423 million

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11. Georgia....... 7.8 billion.......... 343 million

12. Missouri...... 4.4 billion...........332 million

13. North Carolina.8.0 billion.......... 320 million

14. Ohio..........10.1 billion.......... 300 million

15. Massachusetts 13.8 billion.......... 234 million

16. Minnesota..... 7.2 billion.......... 151 million

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17. Tennessee..... 3.8 billion...........133 million

18. Maine..........1.6 billion.......... 120 million

19. Mississippi... 2.0 billion.......... 105 million

20. Rhode Island.. 1.5 billion.......... 100 million

21. South Carolina.3.6 billion........... 97 million

22. Arizona........3.5 billion........... 86 million

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23. Alabama....... 3.5 billion........... 78 million

24. Vermont....... 0.6 billion........... 50 million

25. Delaware...... 1.3 billion........... 50 million

26. New Hampshire..0.6 billion........... 45 million

27. Colorado...... 2.7 billion........... 43 million

28. Iowa.......... 3.1 billion........... 40 million

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29. Illinois......13.6 billion....... Not available*

30. Indiana....... 6.0 billion....... Not available*

31. Wisconsin..... 6.3 billion....... Not available*

TOTAL.......... $256.7 billion........ $11.6 billion

SOURCES: National Assn. of State Legislatures, National Assn. of State Budget Officers

* Illinois, Indiana and Wisconsin are expected to have deficits, but figures are not available. The 19 states not listed are not expected to have deficits.


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