Gubernatorial Races Hinge on Fiscal Fitness

After 14 years as lieutenant governor, Republican Scott McCallum finally inherited Wisconsin’s top job in February, when Gov. Tommy G. Thompson joined the Bush administration as secretary of Health and Human Services.

Along with a nicer office, McCallum inherited something else: a gaping state budget deficit that could stretch to as much as $1.3 billion. Now, even after two rounds of across-the-board spending reductions, McCallum is bracing the state for stinging new budget cuts he plans to submit this month.

Slashing popular programs isn’t the way McCallum wanted to launch his campaign for a full term in November’s elections. His only solace may be that he has plenty of company in his misery.

Across the nation, state officials are scrambling to close sudden budget shortfalls caused by the recession. This fiscal tumble is forcing governors to choose among unpopular options: cutting spending, deferring new initiatives and, in rare cases, raising taxes. And that promises to make the 36 gubernatorial races on tap for 2002 the most volatile in years, especially compared to the late 1990s, when governors of both parties largely waltzed to reelection.

“The budget squeeze is going to have a huge impact,” says Democratic pollster Mark Mellman. “If you look at the national picture, it is going to be the determining single factor in these governors’ races.”

Republicans have the most to lose simply because they must defend more seats--23 governorships held by Republicans will be at stake in November, compared with 11 for the Democrats. (Two more are held by independents, in Maine and Minnesota.)

But Democrats aren’t immune to the undertow: Among the governors most threatened by darkening budget situations are Democrats Jim Hodges in South Carolina, Donald Siegelman in Alabama and Gray Davis in California.

All of this is a head-spinning reversal from the last half-decade. With the booming economy swelling state revenues in the late 1990s, governors of all ideologies handed out tax cuts for state residents and spending increases for favored programs, such as education and children’s health care.

The result was soaring approval ratings and reelection rates that approached those of one-party nations in the old Soviet bloc. From 1996 through 2000, just three incumbent governors were defeated, while 33 won reelection. By comparison, 12 governors were ousted in the slump years from 1990 through 1994.

Now, though, the good times are over. Revenue is running below expectations in more than 40 states, according to the National Conference of State Legislatures.

In New York, Gov. George Pataki is warning that state receipts could drop $3 billion to $6 billion in the fiscal year that begins this spring. Michigan staggered through a $1-billion shortfall in the current fiscal year and confronts a $1.4-billion deficit next year. Minnesota projects a $2-billion hole in the two-year budget that began in July. Arizona’s Legislature just completed about $650 million in cuts for the current fiscal year--and still faces a $1-billion deficit in the 2003 budget it will begin debating this month.

California’s situation may be the bleakest. Scrambling to close a budget shortfall estimated at $12 billion or higher, Democrat Davis could become the poster child for the deficit dilemma facing governors.

From one side, the three Republicans competing to oppose him in November are poised to attack any tax increase; from the other, key legislative Democrats are warning him not to try to balance the budget with spending cuts alone and are floating possible tax hikes on affluent families.

Davis has talked about closing the gap primarily with spending cuts and borrowing. He will not propose tax hikes himself, he said last week in his State of the State speech. But he avoided any commitment to block increases pushed by legislators.

Other governors similarly are steering clear of tax increases to address budget deficits. Instead, they are mostly relying on reserve funds, squeezing programs and diverting money states received from their legal settlement with tobacco companies, said Arturo Perez, a fiscal analyst at the National Conference of State Legislatures.

Perez warns that governors may not be able to avoid raising revenues indefinitely: “If the situation continues to worsen for states, it may be beyond their ability to cut spending and tap reserves to balance their budget.”

So far, only a few governors have seen their approval ratings slide along with their state’s bottom line. Among those suffering the biggest declines have been Davis, Massachusetts Republican Jane Swift and Minnesota independent Jesse Ventura--each of whom has been afflicted by political problems on other fronts.

Political analysts say it’s not surprising that most governors have not yet felt the full effect of the fiscal storm. Few states have acted yet to close their budget shortfalls; the tough choices will come in legislative sessions that get down to business in the next few weeks. And as those choices translate into headlines about reduced spending on education or highways, professionals in both parties expect many governors to pay a price.

“The salad days of governors having high approval ratings . . . are a thing of the past,” GOP pollster Neil Newhouse said.

McCallum’s situation in Wisconsin may be typical. He starts in a precarious position because he was so overshadowed as an understudy to Thompson. Last fall, even before the budget reached a crisis stage, McCallum’s approval rating stood at just 49%--in the danger zone for any incumbent.

Since assuming the top job, McCallum has faced steadily widening estimates of the potential shortfall in the state’s two-year budget. As a result, he’s already had to impose two across-the-board cuts in programs totaling around 10%.

Now he’s awaiting the release of final deficit numbers and warning that they may demand further across-the-board cuts of as much as an additional 12%. Only a state program subsidizing prescription drugs for seniors will be exempt from cuts, he has said; while ruling out tax increases, he has pointedly left schools on the block for cuts.

McCallum aides predict that the response to his proposals is likely to be the deciding factor in his campaign this year. “The governor has made it clear to us . . . that this is the election right here,” said Tim Rowby, his communications director. “We have one shot at this . . . and if it is not handled appropriately, the rest of 2002 is going to be a long year.”

The four Democrats seeking to oppose McCallum, led by state Atty. Gen. Jim Doyle, have been accusing the governor of mismanaging the state’s finances and waiting too long to issue his plan for closing the deficit.

But the Democrats may be hamstrung in their ability to draw contrasts with McCallum because they have shown no inclination to talk about raising taxes to cover part of the deficit. That means they will be debating not if, but what, to cut.

This follows the trend nationwide. While high-profile Democratic challengers such as Andrew Cuomo in New York and Janet Reno in Florida are accusing incumbent Republican governors of fiscal mismanagement, they aren’t talking about repealing any portion of the large tax cuts those states approved in the late 1990s.

That has left many Democratic gubernatorial candidates in a position similar to their counterparts in Congress, who have shied away from a direct confrontation on President Bush’s tax cuts despite the impending return of federal budget deficits.

Like Bush, incumbent governors may be able to defend unpopular budget decisions by pinning them on an economy sent spinning by the Sept. 11 terrorist attacks. “That may serve as some insulation for incumbents,” Newhouse said.

Further clouding the political effect of the state fiscal squeeze is the large number of gubernatorial races featuring open seats. Incumbents are stepping down in 11 seats now held by Republicans and six by Democrats. Some analysts say it may be tougher for the party out of power to benefit from unpopular budget decisions if the incumbent who makes them isn’t on the ballot.

But other analysts say the budget woes may actually pose a greater threat to the party in power in cases where an incumbent is retiring. Incumbents, they note, can draw on an extended relationship with voters to blunt any backlash against this year’s spending and tax decisions. Those chosen to succeed popular incumbents must bear the brunt of discontent over the budget without the benefit of those existing ties--as McCallum, for one, may discover.