‘Miracle’ Vanishes as Hard Reality of Budget Cuts Grips Massachusetts : Economy: Many in the state are seeing red with the end of boom times. Much blame is laid on Gov. Dukakis, whose popularity is sinking.

Eileen Souza received a letter from the Massachusetts Department of Mental Retardation a few months ago informing her that her 22-year-old daughter, Elizabeth, would soon have to leave Perkins School for the Blind in Watertown.

The commonwealth was $721 million in debt, the letter explained, and it could no longer afford to educate and treat Souza’s blind and mute daughter.

“I’m not capable of giving her the quality of treatment she was getting from the state,” said Souza, the widowed mother of seven grown children. “After all the state had invested for the past four years, now it’s being undone because of the budget cuts.”

Souza was lucky, at least for the time being: She found a place for her daughter in another state program, although it may be threatened by yet another wave of budget cuts.

Souza and her daughter are among the earliest victims of an economic crisis in a state whose prosperity in the 1980s, after a period of hard times, earned the designation of “Massachusetts miracle.”

Throughout New England, in fact, jobs are disappearing and real estate markets are softening. This region depends heavily on high technology, particularly the defense and computer industries, and those sectors are slumping.

“If you were to consider New England as a country,” said David Wyss, an economist at Data Resources Inc. in Lexington, Mass., “New England would be in recession.”

Conditions are not exactly desperate here. Jobless rates and per-capita income levels are still nearly the best in the nation.

Massachusetts’ October unemployment rate was about 4%, considerably better than the national rate of 5.3%. But it is also a long way from the 2.9% that Massachusetts boasted as recently as May of last year.

It has proved enough to throw the state’s high-performance budget into a spin and to send the popularity of Gov. Michael S. Dukakis tumbling practically off the charts. Dukakis took credit for the prosperity during his unsuccessful presidential campaign last year and is now widely held responsible for the downturn.

During the state’s boom years of 1980 to 1987, state revenues increased by 8% to 16% a year, and Dukakis and the Democratic Legislature used the windfall to engineer a vast expansion of social services. By 1989, according to state officials, about 40% of the state’s $12.4-billion budget was spent for social services.

The good times began unraveling in 1988, when tax revenues rose by only 2.1% from the previous year, compared to the 6.8% estimated by state tax assessors. And in 1989, revenues rose only 6.6%, short of the 10.9% estimated at the beginning of the year.

“Budget estimating is a very imprecise science,” explained Betsy C. Houghteling, spokeswoman for the Massachusetts Department of Revenue. “There was no way to anticipate. Literally, we opened people’s (tax) returns expecting to find checks, and there was no money. People were wanting refunds. It was astounding.”

The empty envelopes left the state facing a $721-million deficit in the 1990 fiscal year, which ends next June 30. As recently as Nov. 18, the Massachusetts House of Representatives passed a $308-million package of spending cuts and endorsed another $60 million in savings measures sought by Dukakis, cutting the deficit almost in half.

The Legislation was silent on revenue. Dukakis, who had announced that he would not seek another term as governor next year, also sought new taxes. But state House leaders said they would begin working on a tax package only after the state Senate approved the spending cuts and the governor signed them into law.

The failure to raise taxes prompted Moody’s Investors Service to reduce Massachusetts’ credit rating from “A” to “Baa1,” dropping the state into a tie with Louisiana for the nation’s lowest-rated bonds.

Such a distinction, in addition to hurting the state’s pride, makes the commonwealth’s bonds more difficult to sell and will drive up the cost of borrowing because investors will demand higher interest rates on the bonds.

In announcing the lowered credit rating, Moody’s stated: “The magnitude of the projected deficit is made all the more onerous by the apparent lack of consensus on how to deal with it.

“A major tax increase was proposed at the beginning of the year and was soundly rejected by the Legislature, which expressed a preference for expenditure reductions to achieve budget balance. As the enacted budget was significantly trimmed by the Legislature and later by gubernatorial veto, the prospects of eliminating the potential deficit through further cuts alone seems remote.”

Dukakis’ political opponents charged that he deliberately concealed the extent of the state’s budget crisis during his 1988 presidential campaign, lest it damage him politically. The governor and his staff roundly deny the charge.

Mindy Lubber, Dukakis’ press secretary, said state officials did not hide or alter state revenue figures during Dukakis’ failed presidential bid. The numbers should not have come as a great surprise, she said, because officials published revised estimates as soon as they became aware of them.

“People are angry that Dukakis didn’t win and are taking out their anger in a number of ways,” Lubber said. “We had gotten used to the sky being the limit. It’s a shock to many people to see such a radical slowdown to such good programs. Nobody likes good programs taken away from them.”

Human Services Secretary Philip W. Johnston said it was time for the state’s leaders to raise the taxes to pay for the necessary services.

“Enough already,” he said. “On with the show. Most reasonable people know there has to be a tax package.”

Johnston, who served in the state Legislature from 1975 to 1983, said he understood the political pressures against increasing taxes. But vital services are at stake now, he said.

“I believe that most people in Massachusetts don’t want to see us cut vital services for the most needy people we serve,” Johnston said last month in announcing $42 million in cuts in programs run by his department. “And if there is any way to avoid doing it, I will find it.”

Those cuts came on top of $345 million in previous reductions, and Johnston is still seeking to cut another $30 million.

During an interview in his office, which is filled with photos of Franklin D. Roosevelt, John F. Kennedy and the Rev. Martin Luther King Jr., Johnston conceded that the cuts had “a major impact on poor and disabled people.”

“I made it clear that I was opposed to doing this,” he said. “I know from the response I’ve received that the average person in this state is concerned about destroying all we’ve built up.”

Some 30,000 students at the University of Massachusetts have protested higher tuition and fees and reduced student aid.

“It’s clear that we’re creating a situation where poor and minority students, and others who need the help most, are not going to go to school,” said Charles F. Desmond, vice chancellor for student affairs at the Boston campus of the University of Massachusetts. “Since minority people don’t have access to the political system, they are disproportionately affected by these downturns.”

But the prospect remains chancy for a tax increase to maintain existing social services or to restore those that have been cut. The entire state House of Representatives, which has blocked new taxes so far, is up for reelection.