Partisan Struggle Waged Over Michigan Deficit : Budget: GOP governor pushes for property tax cut, sharp reductions in welfare. Democratic legislators fight back, causing a stalemate.

It didn’t surprise state Rep. Paul Hillegonds when an angry delegation of parents from his western Michigan district descended on his capital office last Tuesday to protest sharp cuts in state assistance for the care of foster children.

“There are demonstrations almost daily,” said Hillegonds, the House Republican leader, as his aides tried to persuade another contingent of protesters to return later.

That’s the way it has been in Michigan for the last two months as newly elected Republican Gov. John Engler battles the Democratic majority in the state House of Representatives over closing a $1.3-billion deficit in the state’s $8-billion 1991 budget.

In its budget misery, Michigan has plenty of company this year. The constitutional requirements in every state except Vermont for a balanced budget are compelling governors across the country to face excruciating tax and spending decisions that Congress and the Bush Administration have dodged by maintaining the huge federal deficit.

A recent survey by the National Conference of State Legislatures found 30 states--from New York to California and Texas to Maine--leaking red ink in their current budgets, with the problems most intense east of the Mississippi. And many states are preparing austerity budgets for next year.

In no state, though, have the choices been framed more starkly than in Michigan, which has traditionally embraced relatively high taxes to fund extensive public services.

Engler, a former leader of the Republican-controlled state Senate who won an upset victory by a 17,600-vote margin last fall over Democratic Gov. James J. Blanchard, has used the budget crisis to call for a sharp turn in direction: sweeping reductions in government and a supply-side property tax cut to reinvigorate the state’s economy.

Hostilities reached a new peak this week, as Engler’s late February veto of a Democratic supplemental appropriation bill caused deep cuts in many social service programs.

The state slashed checks for welfare recipients by 17% and aid to foster parents by 22%. In addition, it announced that payments to doctors and other health care providers participating in the Medicaid program would shortly be reduced by 18%.

Engler fired another salvo at the Democrats on Thursday, announcing a lean proposed 1992 budget that holds total spending constant after inflation, increases aid to education and again targets social services for substantial reductions.

Overall, Engler’s aides estimate that his combined proposals for this and next year would reduce state spending by a stiff 10% from the plans he inherited.

“The Democrats continue to defend a welfare state that hasn’t worked in Michigan,” Engler said in an interview.

But House Democrats have blunted Engler’s initiatives, setting in motion an intricate legislative chess game.

The duel actually began last December, when outgoing Gov. Blanchard and the lame-duck Legislature cut all state programs (except education) by a uniform 9.2% to meet half of the budget deficit.

In January, Engler proposed to replace those cuts with sharp, targeted reductions, including the virtual elimination of the state’s $250-million general assistance program, which aids 140,000 adults ineligible for any other form of welfare.

The Republican-controlled Senate approved Engler’s plan. But the House Democrats substituted a proposal that retained general assistance, restored funding to other programs facing the 9.2% reductions and closed the remaining budget gap with an assortment of one-time policy and accounting changes and an expanded withdrawal from the state’s rainy-day fund.

Engler and the Senate rejected those funding alternatives. Instead, in a complex maneuver, Engler had the Senate approve the Democratic spending proposal so he could use his line-item veto power to trim most of the additions, particularly in mental health and social service programs.

Once Engler vetoed the additional money, programs such as foster care and welfare fell victim to the 9.2% cuts--which have required even larger reductions because the full savings must be achieved in just the last six months of the fiscal year.

Although political analysts believe voters have not yet focused on the debate, reaction among the affected groups has been sharp. Advocates for the poor are warning that some welfare recipients unable to pay their rent could face evictions. Foster parents are refusing to accept new children until the cuts in state aid are restored.

Because the reductions in welfare payments exceed the maximum permitted by federal law, Washington could cut off the state’s Medicaid funding later this year. Even if the state can construct a legal defense to avoid that--as Engler maintains--Michigan still could be forced to terminate its program of medical assistance for the poor this summer because it will run out of the state money needed to trigger a matching federal contribution.

Among other things, that raises the possibility that some nursing home patients--70% of whom rely on Medicaid--may be forced into the streets.

In his budget for 1992, Engler proposes to fund Medicaid, restore all of the cuts imposed this year on foster parents and return some money to welfare recipients. But that would be funded partly by the other social services cuts that Democrats have already rejected, such as eliminating general assistance for about three-fourths of its recipients.

Economic pressures common in many states have brought Michigan to this precipice. Cuts in federal aid have burdened the state, even as Michigan’s shift from a well-paying manufacturing economy to a lower-wage service economy has squeezed revenue growth.

At the same time, health care and corrections costs have exploded. The recession has sharpened all of these long-term problems to a painful point.

Adding more pressure to the budget is the politically powerful desire for relief from rising property taxes. Depending on the plan, that could cost the state at least several hundred million dollars annually, and possibly well over $1 billion, to compensate local governments for the lost revenue.

Both houses of the Legislature last week passed property tax relief plans, with the Senate approving a measure based on Engler’s proposal. But, with each plan characteristically unacceptable to the other side, most legislators expect continued stalemate.

The wild card, though, is a ballot initiative being pushed by businessman Richard H. Headlee that would cut property taxes by as much as 25% more than the governor’s plan without providing any offsetting revenue. If state authorities certify next month that the Headlee proposal has received enough signatures to go before the Legislature--as is required for initiatives--few here believe the lawmakers will risk voting it down.

The budget debate in Michigan could grow laceratingly sharp as it increasingly pits property tax cuts for largely white homeowners against social services used heavily by minority members in Detroit. “Now what you will have is welfare versus taxes,” said Beverley L. McDonald, executive director of the Michigan League for Human Services. “To me, it’s almost like good versus evil or, at another level, black versus white.”

Engler has vigorously responded to such charges by arguing that his proposals to reduce taxes and overall state spending while increasing investment in education will produce economic opportunities for people now on welfare.

“The Democratic Party is in a poor position to argue fairness when one of the consequences (of current programs) is the maintenance of a very high unemployment level in Michigan,” he said.

As next year’s budget skids into the pileup left by this year’s plan, both sides are bracing for a long and grueling struggle to untangle the wreckage. Democrats here don’t agree with Engler on much, but few reject his contention that Michigan is undergoing a “wrenching re-evaluation” of its priorities.