States Are Facing Big Fiscal Crises
By ROBERT PEAR
ASHINGTON, Nov. 25 —
Plunging tax collections and soaring medical costs have
created the worst fiscal problems for states since World War
II, the National Governors Association said today.
"Nearly every state is in fiscal crisis," the
governors said in a new report surveying the states.
The states' fiscal woes will force governors, many of them
newly elected, to propose politically sensitive tax increases
or drastic cuts in services.
Raymond C. Scheppach, executive director of the governors
association, said states were increasing tuition at public
colleges and universities, cutting Medicaid eligibility and
benefits, increasing taxes on individuals and corporations and
laying off state employees.
"You will see huge cuts in Medicaid" next year,
beyond the cutbacks already enacted, Mr. Scheppach said.
Medicaid and other health costs like employee health
benefits account for 30 percent of state spending and grew
last year by 13 percent, the largest increase in a decade, the
report said. At a time when revenues are declining, Mr.
Scheppach said, such growth is unaffordable and unsustainable.
Governors and state budget officers said the fiscal
condition of the states was more dire than the condition of
the national economy. The recession has reduced state
revenues, especially personal income and capital gains taxes,
Mr. Scheppach said, but the states' fiscal problems are also
linked to long-term trends, like the increase in health costs
and the growing importance of services in the economy.
Relatively few of the newly elected governors have said
precisely how they will deal with these fiscal problems.
"Most of them don't understand how bad it is," Mr.
In its "Fiscal Survey of States," the governors
association found that the amount of money states had on hand
at the end of the most recent fiscal year had fallen to $14.5
billion, from a peak of $48.8 billion in 2000. The current
balance equaled 2.9 percent of state spending, the smallest
cushion since 1992.
Total state tax collections fell by 6 percent last year and
declined in every quarter, even as spending grew by 1.3
percent, Mr. Scheppach said.
These figures are consistent with data reported recently by
the Rockefeller Institute of Government at the State
University of New York, which found tax revenues down 6.3
percent in the fiscal year that ended June 30. Among states
reporting the largest reductions were Alaska, Oregon,
California, Massachusetts, Connecticut and New York.
In New York, the budget director for Gov. George E. Pataki,
a Republican, told state agencies last week to cut spending by
5 percent in the remainder of the fiscal year, which ends on
March 31. The budget director, Carole E. Stone, also said that
cuts next year would be deeper than expected. The state is
facing a deficit that legislators have estimated at $5 billion
to $10 billion.
Oklahoma is experiencing the worst budget crisis in
decades. Oklahoma State University, in Stillwater, was told to
return money to the state, and its library has reduced its
hours. The state finance director has instructed all state
agencies to reduce spending by 6.5 percent.
Gov. Gray Davis of California, a Democrat, said last week
that he would call a special session of the State Legislature
to consider $5 billion of spending cuts and other emergency
measures to "stanch the bleeding" in state finances.
The governor told legislative leaders that the deficit in the
coming year could exceed $21 billion.
Herb J. Wesson Jr., the Democratic speaker of the
California Assembly, said, "This is a terrible crisis,
and every Californian will be affected."
In Illinois, a Democrat will become governor for the first
time in 26 years, and he will inherit a huge problem: a
deficit that could grow to $2.5 billion, in a budget totaling
In his campaign, the governor-elect, Rod R. Blagojevich,
said that Illinois could resolve its budget problems without
an increase in sales or income taxes. But aides to Gov. George
Ryan, a Republican, said that spending cuts made last spring
were overwhelmingly unpopular, and that further cuts would be
To deal with a fiscal crisis in Arizona, the
governor-elect, Janet Napolitano, a Democrat, wants agencies
to cut spending by 10 percent across the board, making
exceptions only for education, corrections and some children's
The University of Iowa increased tuition and fees this year
by 18.5 percent, the biggest increase in more than two
decades, after an increase of 9.9 percent in the prior year.
The state Board of Regents is considering further increases
for the next academic year.
Most of the tax changes made by states in the last year
affected tobacco levies. Nineteen states increased cigarette
taxes, many by more than 50 cents a pack, the governors'
Services account for a growing share of state economic
activity, but states have found it difficult, for political
reasons, to increase taxes on services. Likewise, Mr.
Scheppach said, "it's very hard to raise taxes on
middle-income Americans, when they don't have secure health
insurance, to pay for health care for low-income
State tax collections came in far below the states'
original estimates in the most recent fiscal year, which ended
on June 30 for most states. Sales tax revenues, $147.6
billion, were 3.2 percent lower than expected, while personal
income tax revenues ($187.7 billion) were down 12.8 percent
and corporate income tax receipts ($21.6 billion) were down
In July, the United States Senate overwhelmingly approved a
proposal to provide fiscal relief to states through a
temporary increase in federal grants for Medicaid and social
services, but it never became law. The Bush administration and
Senator Don Nickles, the Oklahoma Republican in line to become
chairman of the Budget Committee in the new Congress, opposed
Federal officials say they have no money to spare at a time
when the federal government faces growing deficits, after four
years of surpluses.
Mr. Scheppach cataloged some of the states' needs. After
the Sept. 11 attacks, President Bush sought $3.5 billion to
train and equip local police officers, firefighters and rescue
workers, but Congress adjourned last week without providing
Mayor Thomas M. Menino of Boston, president of the United
States Conference of Mayors, said cities were spending $2.6
billion on new security measures without receiving any direct
With great fanfare, Congress passed legislation last month
to clean up the nation's election procedures. But it provided
none of the money promised to states to help them buy new
election machinery and to train poll workers to comply with
On Oct. 1, states lost $1.2 billion that had been
appropriated by Congress to provide health coverage for
low-income children. The money, unclaimed after four years,
reverted to the Treasury, and Congress did nothing to restore
it, despite pleas from states.