State Budget Crises Mount

Demands from governors and state lawmakers for a federal financial bailout are growing, as states from California to Florida face potentially sweeping cuts in popular programs amid deepening budget woes.

Every state but Vermont is required by law to balance its budget, and virtually all of them are now struggling with deficits. “This is the worst budget crisis states have faced since World War II,” said Raymond Scheppach, executive director of the National Governors Assn., which released a state fiscal survey Monday.

But the states confront a difficult climate in Washington, as the federal government struggles with its own budget deficits -- and both President Bush and the incoming Republican Congress focus on other priorities.

Over the last several weeks, state officials have pressed Washington for more money to fund homeland security improvements, election reform, education, highway construction and, above all, the joint state-federal Medicaid health-care program for the poor. That program may suffer widespread cuts this year, even as the number of Americans without health insurance is rising.

Although states appear likely to receive aid on some fronts, most analysts say that they are unlikely to obtain nearly as much help as they are requesting. And that could mean deeper cutbacks, especially in Medicaid, in states such as California that have been counting on a federal lifeline.

“The general picture is, don’t count on anything from the feds, because the federal government now has a deficit, and it also has other priorities,” said Kenneth Finegold, a senior research associate at the nonpartisan Urban Institute. “National security and tax cuts are priorities of this administration, and balancing state budgets are not.”

Administration officials say that while they are increasing spending in some areas important to states -- such as special education -- it is unrealistic to expect a broad aid package when Washington is in the red too. And they say that states may be helped more -- especially in coping with exploding health-care costs -- by reductions in federal regulations than in increases in federal dollars.

In all, the states faced a cumulative budget shortfall of nearly $50 billion when initially designing their budgets for this fiscal year, according to the National Conference of State Legislatures. Last week, the conference reported that the deficit is on track to swell by an additional $18 billion by June, when most states close their books for the fiscal year. Tax receipts are running below projections in two-thirds of the states, the legislatures group found.

In California alone, Gov. Gray Davis recently said the budget gap was going to be even worse than the $21.1 billion projected by the nonpartisan Legislative Analyst’s Office. To begin dealing with that, Davis said he would freeze as much state spending as possible and would give the Legislature a package of $5 billion in budget cuts and other savings to consider in a special session beginning Dec. 9.

These vast deficits mark a screeching end to the boom times of the late 1990s, when state revenues soared and governors of both parties buoyed their popularity by cutting taxes and increasing spending on such programs as education and children’s health.

In retrospect, it appears that states may have gone too far on both fronts -- increasing spending and reducing revenue in ways that became unsustainable when the economy slowed.

“A lot of states in the 1990s developed structural deficits, because they increased spending and cut taxes, and that combination left them with revenues that would not be sufficient ... unless the economy would continue to grow at the high rate it was growing,” Finegold said.

States now have been forced to cut spending and, in a few instances, raise taxes. In each case, tougher decisions are looming.

In its report Monday, the governors association said 37 states have cut $12.6 billion in spending in their 2002 budgets. However, the report noted, states have relied heavily on short-term solutions, such as drawing down on so-called rainy-day funds that swelled during the fat years of the late 1990s.

Also, many states have been able to get by with cuts that the public is least likely to feel, such as reducing their work forces or limiting travel.

States have moved even more gingerly in considering taxes. According to the governors association study, states raised taxes by just over $8 billion in this year’s budgets.

By contrast, the widespread cuts in state taxes approved while the economy was booming from 1994 to 2001 are now reducing state revenue by more than $40 billion annually, according to an analysis by the Center on Budget and Policy Priorities think tank.

The reluctance to take tough steps at home may hurt the states in their pleas to Washington for help.

Here are the key areas where state legislators and governors are seeking additional help:

Homeland security: States have been frustrated by Congress’ failure to approve the $3.5 billion in grants that Bush proposed to upgrade local emergency agencies that would provide the first response in a terrorist attack. Most expect that money will be approved in 2003 as the incoming GOP Congress and the Bush administration reach agreement on broader appropriation bills that stalled on Capitol Hill this year.

Election reform: Prospects are far more uncertain for states receiving the $2.2 billion that they say they need to fund election reform legislation that Congress approved this year. Congressional committees have been talking about much smaller funding levels.

Highway construction: States are pressing Washington to restore $4.1 billion in highway construction funds slashed from the omnibus bill that Congress approved to keep the federal government operating until January.

Health care: By far the biggest issue for the states is their push for increased federal funding for Medicaid. With health-care costs rising rapidly -- and the recession increasing caseloads -- Medicaid spending spiked by more than 13% in 2002, the largest annual increase since 1992. States are now spending more money on Medicaid than any other program except elementary and secondary education, according to the governors association study.

As costs explode, states are beginning to scale back Medicaid coverage. One recent survey found that 29 states were cutting payments to doctors and hospitals, 15 were requiring higher co-payments from recipients and 18 were taking at least some steps to reduce eligibility.

Larger and more widespread cuts seem likely in the months ahead, most experts believe. “Any state with a fiscal problem is going to be cutting their Medicaid program next year,” said Al Jackson, vice president for political affairs at the American Hospital Assn.

Health experts find that an ominous prospect, because more Americans last year relied on Medicaid as the number with private health insurance plummeted by 1.2 million, according to the Census Bureau.

Trying to forestall further cuts, the Senate in July approved an emergency $6-billion increase in the federal contribution to the program. Washington now picks up about three-fifths of the cost of Medicaid, with the states supplying the rest. Under the Senate bill, the federal government would have absorbed a slightly larger share of the cost for 18 months. The Senate bill also provided states with an additional $3 billion to bolster social-service programs.

But the bill died in the House amid opposition from the Bush administration. White House officials fear that the Senate’s “temporary” increase in the federal share of Medicaid costs would become permanent. As an alternative, the administration proposed, and the House approved, one-time grants to states of $3 billion to cover the uninsured.

Without significantly more federal dollars -- which appear unlikely -- the coming budget sessions could be turbulent in many states. With the easiest spending cuts behind them, states may be facing much more politically explosive reductions or tax increases this fiscal year. And that means the howls for help from the state capitals may grow even louder in the months ahead.

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Coming up short

In the last fiscal year, 41 states collected less in tax revenues than they initially projected. The 10 states with the biggest short-falls as a percentage of personal income tax projections:

Colorado -- -22.5%

New Jersey -- -20.8

California -- -19.6

South Carolina -- -18.4

Arizona -- -17.2

Idaho -- -17.1

Oregon -- -16.8

Virginia -- -15.9

Rhode Island -- -14.1

Massachusetts -- -14.0

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Source: National Governors Assn.

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Times staff writers Eddy Ramirez in Washington and Gregg Jones in Sacramento contributed to this report.