The Silver Lining in the States' Budget Crisis


Can there be a silver lining, some long-term gain in the fiscal firestorms now raging as deepening recession creates massive budget deficits in more than two-thirds of the states?

Pete Wilson, California's incoming governor, faces a deficit of $1 billion just for the next six months -- and a further shortfall of $4 billion for the fiscal year starting next July.

Lowell Weicker, Connecticut's new governor, must cope with a $500 million short-term deficit. For Lawton Chiles in Florida, the shortfall will be up to $300 million. For William Weld in Massachusetts, up to $600 million. Arne Carlson in Minnesota faces a $197 million deficit. Bruce Sundlun in Rhode Island will have to make up $160 million, 12 percent of the total budget. For John Engler, elected Michigan's governor on a rigid no-new-taxes pledge, the latest estimate is $979 million.

Maryland's current-year shortfall in general funds is $423 million -- plus $521 million by which the state's transportation fund fails to cover projects already authorized.

Pressures to maintain, even increase, spending to relieve the pain of recession will be enormous. But conventional wisdom says tax-raisers get skewered in the next election. Nevertheless, Steven Gold of the State University of New York predicts that the recession will force an overall increase of some 5 percent in state taxes this year, making 1991 the biggest year for tax hikes in a generation.

Where can states cut budgets? For quick fixes, they've been looking to local-aid cutbacks, college-tuition hikes, freezes on public-works spending and massive state-worker layoffs (800 in Virginia, 1,700 in Massachusetts, 10,000 in New York). And -- perhaps most alarming -- aid may be cut to deficit-plagued inner cities.

Yet this ill wind may bring some good. A season of emergency budget cutbacks may provide the best political cover in years for states to cut back on forms of undifferentiated aid to localities, rich and poor alike. A close targeting of state aid to areas of definable, real need (often inner cities and poor rural areas) can save substantial money in good times and help avert local fiscal disasters in a recession.

Thinning of bureaucratic underbrush also comes easier in hard times. Few people would want to see states cut their aid to local schools when the nation is striving to upgrade education standards and the quality of its work force. But, in most states, dismissing half the state-level education bureaucrats would hardly affect classroom teaching.

Prisons and Medicaid have become the twin Pac-Men of state government, growing at dizzying rates. The boom in prisons is less due to real crime increases than to public cries for long mandatory sentences and to our preoccupation with essentially unwinnable "drug war." Prisons are so overcrowded that many states are under court orders to improve conditions. The obvious solution: Release all white-collar criminals to stiff community-based corrections programs. Rethink the mandatory sentencing laws. Except for violent criminals, devise and implement all manner of community-based punishment alternatives that will save us the appalling costs of throwing people behind bars at $25,000 a year.

Medicaid's big problem is that many of the poor it covers live disorganized lives and end up visiting expensive hospital emergency rooms for colds or sprained ankles. A promising alternative, says state-government expert David Osborne, is to move Medicaid patients into prevention-oriented care like HMOs (health-maintenance organizations).

There's a hitch: HMOs aren't exactly keen about taking on thousands of the poor, even if the state pays. A way around that, says Mr. Osborne, is to offer HMOs a combined package. They'd get Medicaid patients, to be sure, but as part of the deal also the more "desirable" pool of state workers. If both groups were HMO-covered, the states could probably register dramatic health-coverage savings.

It's an idea that might not fly in a "normal" year. But in a recession year, with capitols mired in rivers of deficit, it might receive a serious hearing. So might incentive-based pay for government workers that rewards for achieving economies, not building bureaucratic empires. Or the idea of contracting out appropriate government services. Or on the revenue side, extending sales taxes to services ranging from lawyer fees to manicures.

The opportunities to use 1991 for long-term fiscal gain are real. The question to governors and legislatures will be simple: Are you clever enough to seize the moment?

Mr. Peirce writes a syndicated column on state and local government.

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