States Cut Deeply as Surpluses Disappear

After six straight years of good times, the state budget crunch is back. Across the nation, legislators accustomed to comfortable surpluses are staring at red ink.

In the last fiscal year, only one state had to reduce its budget spending midyear. This time around, 16 have.

Slumping tax revenues and soaring expenditures--a potent double-whammy--are crimping transportation projects and education spending, health care programs and social worker training.

“When things go bad, they usually go bad fast,” said Nicholas Jenny, a senior policy analyst at the Rockefeller Institute for Government in Albany, N.Y.

The first hints came just after New Year’s. It had been a slow holiday buying season. Shoppers had been frugal. In state after state, budget planners examined sales tax receipts and moaned.

It soon got much worse. Income tax takes slid as well. And costs for health care, especially Medicaid, continued to spiral.

“There was a pretty dramatic turnaround right at the end of last year or the beginning of this year,” Jenny said. “All the [economic] forecasters, public and private, suddenly said ‘oops’ and lowered their revenue forecasts considerably.”

Many have lowered them further still in the ensuing months.

The result: At least seven states are imposing across-the-board spending cuts. Several others are trying to hold the line with hiring freezes. And some have tapped money from the settlement with tobacco companies--a onetime windfall often earmarked, with much hoopla, for public health--to cover the routine costs of keeping schools open and potholes filled.

A few states have not yet been able to pass balanced budgets. The choices are just too tough.

North Carolina Gov. Mike Easley went on television Thursday to prepare his citizens for the worst: a budget that, if he gets his way, would cut deeply into public services and raise the sales tax by a penny. “We are facing a financial crisis,” he warned, “unlike any our state has seen in recent history.”

In New York, the pinched finances have caused such chaos that Gov. George Pataki filed suit Friday against the state Legislature. He is trying to block the austere budget lawmakers approved, arguing that it cuts from the wrong programs.

To be sure, there are some bright spots, especially in the West and Southwest, where a few states are cashing in on the energy boom with banner years. Wyoming, for instance, gets much of its revenue from mineral taxes; with oil and gas exploration soaring, there’s a $220-million budget surplus.

And though tax revenues are down in California, the state still has enough money to shore up its rainy-day fund. The budget passed last month set aside $2.5 billion as a reserve.

But the Midwest and South, which tend to rely more heavily on sales and manufacturing taxes, are facing grimmer times. Tennessee may be an extreme example: Sales tax receipts, which economists there count on to increase 6% a year, have risen just .75% so far this year.

State budget analyst Gerald Adams’ assessment of that statistic: “Ugh.”

“It’s horrible,” he added. “All the fiscal people are very concerned.”

And the sales tax slide is not the only concern for budget analysts. The plunging stock market has wiped out so many capital gains that personal income tax receipts are much lower than anticipated. Creeping unemployment has also cut into income tax projections. With all the layoffs, dot-com closings, mergers and moves, corporate tax revenue has been volatile as well.

Plus, lawmakers were generous in the good years, often spending instead of saving, handing out tax breaks that are now starting to pinch.

Missouri alone refunded $1.7 billion in taxes during the late 1990s. The state could not build a rainy-day fund, even if legislators had the discipline to do so, because a constitutional amendment caps the amount of revenue the government can take in. Any excess has to go back to the taxpayers.

“When there were good times, the state certainly wasn’t able to live off the fat, and now, with the recession, it’s taken a bad hit,” said Dave Robertson, a political scientist at the University of Missouri in St. Louis.

Thus, less than two months into the current fiscal year, Missouri Gov. Bob Holden has asked every state agency to prepare to cut its budget by 18%. He has characterized the cuts as “withholdings,” money he’ll restore at the end of the year if the economic picture brightens. His spokesman makes that point, then snorts a pained chuckle and mutters, “Yeah, right.”

Holden has not yet specified every program that will take a hit. Already, though, the fallout is evident across the state.

The Division of Family Services, which handles child abuse cases and other social work, has 400 vacancies it cannot fill. There’s a hiring freeze. Some caseworkers are struggling to keep on top of 50 families. As they burn out and quit, they will not be replaced.

The other day, DiAnne Mueller, director of a nonprofit organization that helps parents in crisis, called Family Services to report that four siblings were apparently being beaten by a relative. It took several days for a caseworker to respond. When he did, he talked to the children--who had welts and spoke of beatings--then said he could not intervene, Mueller reported. She blames the crushing caseloads social workers carry, and she fears even slower response times in the future.

“I can remember the days when, within a couple of hours of a report, caseworkers would be here, ready to take action,” Mueller said. “The system is already overloaded. We are very worried that this budget puts kids at greater risk.”

Deborah Nored is also worried. A secretary in the suburbs north of St. Louis, she is serving as the foster parent for her grandson, Andrew. Nored earns less than $25,000 a year. Yet the state has cut her foster-parent payments by 25% and has stopped subsidizing Andrew’s day care.

Andrew turns 1 this week. He is just learning to walk. He loves to roll on the floor, rough-and-tumble, hooting with laughter. Nored will not even think of giving him up. Yet she doesn’t see how she will make it.

She is two semesters away from a bachelor’s degree in business, but she can no longer pay for tuition or for a baby-sitter while she’s in class. “The only thing I have left to cut out of my budget is my life insurance, which is $24 a month,” she said. “And what good would that do anyone?”

Such stories of hard times echo across Missouri as the belt-tightening takes hold.

In the old mining town of Bonne Terre, a new $135-million prison is sitting empty, its promise of 600 jobs unfilled, because the state can’t come up with the money to open it. In the capitol, Jefferson City, Gov. Holden has grounded his state plane in favor of car-pooling on official business, though it’s at least a two-hour drive to St. Louis and Kansas City.

Canceled is a $1-million pilot project to train counselors to reach out to battered women in counties that have no domestic violence services.

Elementary schools are putting off computer purchases. Universities are deferring faculty hires. And aging dogs in the state police canine unit may have to postpone their retirements; there’s no money for replacements.

Such sweeping retrenchment “is not something I would say I gleefully support, but I really don’t think the governor has any other choice,” state Sen. Wayne Goode said. “I don’t think there’s any option.”

That’s become a familiar statehouse refrain. Budget directors with long memories point out that today’s shortfalls are nowhere near as bad as those in the early 1990s. But in this era of term limits, many lawmakers are new to the whole concept of a budget crisis. And after a string of good years, often featuring tax rebates, many citizens are in no mood to talk shortfall.

The mere suggestion that Tennessee might consider imposing a state income tax drew hundreds of protesters to Nashville last month. In a fury, shouting “no means no,” they broke windows at the state Capitol. Lawmakers backed away from the income tax idea, though Tennessee’s budget has a $230-million hole. That means there are no funds to cover 5% of appropriated expenditures.

“It may not sound like a lot,” said Adams, one of the governor’s budget advisors, “but it’s a big deal when you’re on the margin.”

Although most of the focus in state capitols has been on declining tax revenues, budget analysts note that out-of-control spending also has been a critical factor in the recent crunch. The biggest culprit is Medicaid, the health insurance program for the poor.

Medicaid accounts for about 20% of all state spending, according to the National Assn. of State Budget Officers. And costs for the program are projected to grow at an average annual rate of 8.6% for the next 10 years.

Many economists were surprised at how quickly Medicaid costs escalated; the National Conference of State Legislatures found that 23 states underestimated Medicaid expenses in their budgets last year.

Economists in several states also made major gaffes when calculating the cost of new programs, from tuition subsidies in Louisiana to tax credits for some new cars in Arizona to a prescription drug benefit for seniors in Missouri that was expected to cost $20 million but ended up costing more than four times that.

As Missouri faces its $220-million budget shortfall, Holden has little reason for optimism.

In the space of three months, revenue projections for the state have been cut in half. (He expected 5.8% growth for the upcoming year when he signed the budget in May; the newest estimate is for 2.9% growth.)

“To be quite candid,” spokesman Jerry Nachtigal said, “he doesn’t think, unless there’s a national economic uptick, that next year will be any better.”

In his first address to the Legislature after taking office in January, Holden spoke nostalgically of the thrifty values he learned in his tiny hometown of Birch Tree, Mo. “I learned how to make a dollar go a long way, because we didn’t have a lot of them.”

It’s a lesson that’s surely coming in handy now.

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Times staff writers Jeffrey Gettleman in Atlanta, Julie Cart in Denver and John J. Goldman in New York contributed to this story.