Financial Crisis Easing for States

After three years of combining severe budget cuts with moderate tax increases, state governments are beginning to climb out of the hole created by a weak national economy, skyrocketing health care expenses and cuts in capital gains taxes, a report said Thursday.

“The bottom line is that we have bottomed out,” said Raymond C. Scheppach, executive director of the National Governors Assn. The “crisis is easing somewhat.”

Yet the tough financial times are far from over, officials warned, despite the “extremely severe” budget cuts states have made in the last year and a brightening economic outlook.

The semiannual report of the governors’ association and the National Assn. of State Budget Officers predicted that budget pressures would continue to force governors and state legislators to make tortured political choices. “Unfortunately, it’s still a very difficult time for the states,” said Scott Pattison, executive director of the budget officers’ group.

To make ends meet in the fiscal year that for most states ended in June, 32 states made across-the-board budget cuts and 25 tapped “rainy day” or other special funds. Sixteen states laid off government employees, 13 encouraged workers to retire early and 13 consolidated or eliminated government departments.

California was among the states that used almost every trick in the book, including reductions in state aid to cities and counties. Last year California made $2.1 billion in budget cuts.

Overall, state governments cut their budgets by a total of $11.8 billion in fiscal year 2003, which followed $13.7 billion in spending cuts the year before, the report said.

The budget crisis was fueled in part by job losses, cuts in capital gains taxes and a general slowdown in consumer buying and other economic activity, which resulted in drops in state revenue.

The problem was compounded by what Scheppach called “obsolete” tax structures that continued to focus on the shrinking manufacturing sector of the economy while leaving the growing service sector virtually untaxed.

As a result, after cutting state taxes by more than $33 billion in the flush years from 1995 to 2000, states have been forced to increase sales taxes, personal income taxes and fees by $18.2 billion over the last three years, Scheppach said.

Because of those increases and a brightening economy, states saw their revenue increase by an average of 4.5% over the last three months. That is still only about half the increase in national economic output.

Medicaid, the federal-state health-care program for the poor, continued to account for about one-fifth of state spending despite severe cuts. All 50 states have frozen or cut Medicaid payments to doctors and hospitals and limited spending for prescription drugs; 34 states have restricted enrollment; 32 have cut benefits; and 32 states have increased the amount Medicaid patients must pay for medical services and medications.

But because of increases in the number of people without health insurance and double-digit health-care inflation, Medicaid spending grew by 9.3% last year and is expected to grow by as much as 5% this year, Pattison said, predicting that statehouses would be forced to impose further Medicaid cuts or “disproportionate cuts elsewhere or to raise taxes.”

Representatives of the nation’s largest mental-health advocacy group said previous Medicaid cuts had already made it harder for the mentally ill to get treatment and medications.

“We implore the nation’s governors to stop making further reductions to a public mental health system that is undergoing an extraordinary crisis of its own,” said the heads of the American Psychiatric Assn., the National Alliance for the Mentally Ill and the National Mental Health Assn.