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Treasurey Study Sees Big Surpluses in States; Governors Disagree

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Washington--State and local governments could have a combined surplus totaling $86.5 billion by the year 1989 if current spending and tax policies remain unchanged, according to the unreleased draft of a report by the U.S. Treasury Department.

And although the report notes that, because of budgetary processes, such a surplus will never be actually realized, the projection of such large surpluses provides fiscal options for states and local governments such as accelerated expenditure growth, tax cuts, accumulation of balances, or some combination thereof.

Over the next five years, the report maintains, states should have no difficulty financing the level of services per capita provided in 1983--taking into account adjustments for inflation and changes in demography--without raising taxes. "Indeed, substantial room should exist for increasing outlays or reducing taxes," the report concludes.

The report, which was prepared by the Treasury Department's office of state and local finance as directed by the 1983 amendments to the Revenue Sharing Act, was mailed last week to an advisory group of state and local officials who are scheduled to meet this week to deliver comments.

The draft has already been challenged by five governors who called the study's five-year projections "inappropriate" and cautioned the findings could damage intergovernmental fiscal relations.

'Turbulent' Fiscal Seas

"During the past five years, state-local governments have been navigating fiscal seas more turbulent than any since the early years of the Great Depression," the report notes. "Through it all, fiscal austerity was the order of the day."

Because of continued spending restraint, large increases in taxes enacted by states in 1982 and 1983, and the strong economic recovery that has been underway for two years, the report maintains, the fiscal condition of the state-local sector improved substantially in 1983 and the outlook is favorable for the near future.

The Treasury Department report estimates that state and local revenues will increase 58 percent over the next five years, from $478.2 billion in 1983 to $757.8 billion in 1989. Total state and local expenditures are projected to rise 41 percent, according to the report, from $434.1 billion to $611.9 billion.

"The fiscal responsibility manifested by the response of state-local officials to the turbulence of the past half decade appears to have laid the foundation for a period of sustained fiscal strength through the balance of the 1980's, if the national economy remains healthy," according to the report, which is titled "Recent Trends in State-Local Finances and the Long-Term Outlook for the Sector."

This analysis, the report notes, is based on the assumptions that the economy will continue to perform as well at the Administration forecasted in July 1984, and that federal grants grow in current dollars at the average annual rate of 5.1 percent. All data, projections, and analyses included in the paper are subject to revision, according to the report.

Report Challenged

Gov. Richard L. Thornburgh of Pennsylvania has challenged the Treasury Department's projections in a letter to Secretary of the Treasury Donald T. Regan.

Writing on behalf of the National Governors' Association, Governor Thornburgh expressed his concern over any model that attempts to provide a five-year forecast of state and local finances. "If 'rosy' projections for state and local financial conditions are faulty," he wrote, "the damage to intergovernmental fiscal relations will be extremely serious."

Governor Thornburgh also pointed out that the National Association of State Budget Officers found that the report "greatly underestimates'' states' required expenditures and anticipated revenues.

And in a separate letter to Secretary Regan on behalf of the Midwestern Governors' Conference, Gov. Rudy Perpich of Minnesota, Gov. John Carlin of Kansas, Gov. Robert D. Orr of Indiana, and Gov. James R. Thompson of Illinois called the model "inappropriate" for projecting long-run fiscal conditions. "We request that no projections based on this model be released until we have had time to review both the applicability of this model and its overall production methodology," the Governors wrote.

Local Payments

In a related report issued last week, the Census Bureau of the U.S. Department of Commerce announced that state aid to local governments has increased 58 percent from 1977 to 1982, with education accounting for the largest share of the funds in 1982.

The 50 state governments paid $96.2 billion to local governments in fiscal 1982, or $416 per capita, according to the report, "State Payments to Local Governments." In 1977, the total state-to-local expenditure was $61.1 billion, or $283 per capita.

Education received 63.2 percent of the state assistance in 1982 and 60.5 percent in 1977. However, the report notes a wide variation in the scale of state education funding, which ranged in 1982 from $896 per capita in Alaska to $72 per capita in New Hampshire.

State payments to local governments include grants-in-aid funds; state-controlled, locally shared taxes; federal aid received by states and redistributed to localities; and reimbursements to local governments for services rendered to state governments, such as tax collection, care of prisoners, hospital care for the needy, and construction, according to the report.

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