More Conflicts Likely in Era of Empty Pockets : Recent battles may signal the start of a decade of austerity. As taxes rise, governors risk a backlash at ballot box.

In statehouses from Boston to Sacramento, the only commodity more scarce than money this summer is optimism.

After a grueling spring slashing programs and raising taxes to balance budgets for the fiscal year that began July 1, many states are expecting more of the same in the months--perhaps years--to come. Even if the economy recovers more rapidly than now appears likely, experts say, states still face a lasting structural imbalance between demands and resources.

“It’s not a good picture,” says Raymond C. Scheppach, executive director of the National Governors’ Assn. “We’re looking at a difficult transition for at least the next two to three years--and maybe the whole decade.”

It was already difficult enough for most governors this year. With the recession flattening revenues, three-fifths of the states faced deficits in their 1991 budgets and virtually as many prepared lean budgets for 1992. Michigan cut grants to welfare recipients by 9%. Massachusetts reduced state aid to local governments by one-eighth. Georgia placed state workers on one day of unpaid furlough every month. New York hiked tuition at state universities by 30%. California, Vermont and Minnesota raised income taxes on the top earners.

So painful were the choices facing state governments that nine missed their June 30 deadlines for a new budget, and two--Maine and Connecticut--were forced to shut down all but a few essential services. Connecticut and Pennsylvania still do not have budgets, though Maine and California resolved protracted deadlocks this week, and Illinois closed in on a budget agreement Wednesday. Negotiations also continue in Texas, Michigan and Alabama--states whose budgets are not legally due until later this year.

But even in states that have already produced blueprints for 1992, the battles may be just beginning. Sagging revenues forced many states to reopen their budgets for additional cuts totaling about $10 billion through the fiscal year that just ended. If the economic recovery stumbles, that painful pattern could be repeated.

“If revenues don’t pick up in the next month or two,” says Marcia A. Howard, deputy director of the National Assn. of State Budget Officers, “they will be right back in there.”

The chasms of debt that opened under states around the country this year put a jarring end to a buoyant ride through the 1980s. Over the past decade, state spending grew 104%, according to Census Bureau figures.

Critics such as Stephen Moore, director of fiscal studies at the libertarian Cato Institute in Washington, say that states went on a profligate “spending spree” during the 1980s, adding new programs they could not afford. Defenders maintain that federal cutbacks for domestic programs forced states to step into the breach. “Most states absorbed the federal cutbacks and paid for it with the boom years of the 1980s,” says Mitchell L. Moss, director of the Urban Research Center at New York University.

Both sides in this debate agree on one thing: In the 1990s, states are unlikely to continue their heady growth. In the coming fiscal year, for example, Howard estimates that state spending will rise only about 4.5%--less than inflation, and only slightly more than half its rate in the 1980s.

In this austere environment, continued conflict is likely on several fronts. Among them:

EDUCATION: During the past decade, governors of all ideological persuasions raised education spending enough to double inflation-adjusted per pupil spending.

Even the most fiscally conservative chief executives tried to defend those gains against budget cuts this year. But experts say continued austerity will make it much tougher to fund comparable increases in the coming years. “We tried throwing money at education and it didn’t produce very good results,” says Steven D. Gold, director of the Center for the Study of the States in Albany N.Y. “Education is going to have a lot more competition for dollars.”

SOCIAL WELFARE: Only Michigan, California and the District of Columbia actually reduced welfare grants this year. But several states--led by Ohio, Michigan and Massachusetts--sharply cut general assistance programs that provide aid to people not eligible for welfare. And virtually all states did not increase welfare benefits to keep pace with inflation.

That has been the pattern: From 1972 through 1990, the purchasing power of a welfare grant for a family of four declined by 36%. When the cuts imposed this year are factored in, the value of the average welfare grant will be less than it was in 1960, according to calculations by Robert Greenstein, director of the Center on Budget and Policy Priorities in Washington.

HEALTH CARE: Exploding expenditures on Medicaid, the jointly financed state-federal health care program for the poor, are “the single most difficult problem for most states,” says Paul W. Timmreck, Virginia’s secretary of finance.

The numbers are staggering: From 1981 through 1991, spending on Medicaid soared 257% in Virginia, 167% in New York, 229% in Ohio and 127% in California. Overall, state spending on Medicaid increased 27% in fiscal 1991 alone--that on top of an 18% increase the year before. Medicaid now consumes 14% of state budgets--up from 10% just five years ago--and is expected to consume more than one-sixth of all state spending by 1995.

Most states have tried to trim costs; several have cut back on optional services, tightened eligibility requirements, and assessed hospitals with a special fee aimed at triggering federal matching aid. But, with Congress establishing the broad eligibility criteria for the program and health care costs exploding, states have only limited ability to rein in Medicaid. The likely outcome is greater pressure from the states on Washington to control health care costs and curtail further expansions of Medicaid eligibility.

CORRECTIONS: Tough lock-’em-up policies have compelled states to fund an expensive construction boom in recent years: From 1987 through 1990, states increased their spending on prison construction by almost 75%. But that strategy has run into the fiscal wall: This year construction spending will rise just 1%. Florida has virtually halted new prison construction; Illinois and California are delaying the openings of prisons. “A number of states will put the brakes on the incarceration rate, as some have already done,” predicts Hal Hovey, editor of State Policy Reports, a newsletter.

PUBLIC EMPLOYEES: Battles between governors and public employee unions are raging across the country--particularly, though not exclusively, in states with Republican governors. In Michigan, Republican Gov. John Engler says the Legislature’s rejection of his request to cancel a scheduled 4% pay increase for state workers will mean thousands of layoffs next year--that in addition to 2,000 layoffs and a four-day unpaid furlough this year.

In Massachusetts, Republican Gov. William F. Weld and the Legislature have refused to fund a three-year 13% pay hike negotiated by his predecessor, Democrat Michael S. Dukakis. In New Jersey, the unions decided to accept layoffs rather than reopen their contracts when Democratic Gov. James J. Florio sought givebacks on benefits. “The pressure is not only on new agreements, but whether states will be able to fulfill the agreements” already approved, says Linda Lampkin, research director for the American Federation of State, County and Municipal Employees.

TAXES: When all the haggling is completed, major tax increases are on tap in several states, including California, Pennsylvania, and Connecticut, where Independent Gov. Lowell P. Weicker Jr. is still deadlocked with the Legislature over his attempt to impose a personal income tax. Overall, state taxes will rise at least $15 billion to $20 billion this year, Howard of the state budget officers group estimates.

That could presage more turbulence at the ballot box: Three governors face the voters this fall, 12 next year. Taxes were a major issue in the defeat of all but one of the six governors who lost reelection bids in 1990. “If past is prologue there is no question that the dire fiscal straits of the states is going to make for some political upheaval,” says Mark Gearan, executive director of the Democratic Governors’ Assn.

Surging state spending (State expenditures, in billions, 1990 dollars) . . . 1980: 415 ‘81: 424 ‘82: 425 ‘83: 444 ‘84: 447 ‘85: 481 ‘86: 513 ‘87: 532 ‘88: 544 ‘89: 562 1990: 580 (estimate)

. . . is fueled by growing public employment (State employees per 10,000 population) . . . 1950: 60 ‘55: 65 ‘60: 75 ‘65: 90 ‘70: 110 ‘75: 130 ‘80: 137 ‘85: 125 ‘88: 147

. . . rising investment in education ($ thousands, expenditure per pupil) . . . 1980-’81: $2,489 ‘90-’91: $5,208

. . . and ballooning Medicaid costs. (Medicaid spending as a percent of state budget). ‘85: 10% ‘90: 14% ‘95: 17% Sources: U.S. Bureau of the Census; Advisory Commission on Intergovernmental Relations; National Assn. of State Budget Officers.