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3 States Must Trim Budgets in Wake of Revenue Shortfalls

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An $800-million revenue shortfall in California is forcing state leaders to consider cutting education spending as a way to help balance the state's budget.

California is one of three states that are facing unexpected tax shortfalls after returning billions of dollars in surplus revenues to taxpayers only last year.

Massachusetts and New York also are struggling with revenue shortages, but officials in those states say that major cuts in education spending are unlikely.

In California, however, Gov. George Deukmejian has indicated he may use his line-item veto authority to slash spending after the legislature approves a fiscal 1989 budget. Earlier this month, Mr. Deukmejian backed away from a plan to eliminate the revenue gap with a series of tax adjustments, claiming that it was misrepresented by the media and his political opponents as a tax increase.

State lawmakers are required by California's constitution to submit a spending blueprint to the Governor by June 15. The state's fiscal year begins July 1.

"There's a lot of conjecture at this point as to what will happen,'' said Susan Lange, a spokesman for the state education department. "If things are as bad as revenue projections say they are, there needs to be some kind of action taken or education will suffer.''

Officials in all three states agree that their budget problems stem from the landmark revision of the federal tax code in 1986. That year was the last in which taxpayers could benefit from more favorable treatment of capital gains under the old tax law.

Federal Tax Revision

Many businesses and individuals sold property and stocks at the end of 1986 to take advantage of the old code. The resulting surge in transactions, as well as other changes brought about by the new federal law, produced a windfall of increased revenue for the three states, much of which was returned to taxpayers in the form of constitutionally mandated refunds, lowered tax rates, or extended tax cuts.

The current shortfalls were apparently caused by the states' overestimation of capital-gains tax revenues for 1987 and this year.

"New York and California assumed a 30 percent decrease in capital gains from the previous year,'' said Steven D. Gold, director of fiscal studies for the National Conference of State Legislatures. "In fact, the decrease was much greater.''

Mr. Gold said the problem was confined to those three states. Other states, he noted, had made more pessimistic projections about their capital-gains revenues.

"Everybody knew there was going to be a falloff,'' he said. "For a reason I cannot explain, those three states were more optimistic.''

Budget in Disarray

In California, Mr. Deukmejian's abrupt decision to withdraw his tax-adjustment plan has thrown the state's budget process into disarray. Leaders of the Democratic-controlled state Assembly last week threatened to delay action on the spending plan until the Republican Governor specifies which programs he would cut.

But Peter G. Mehas, the Governor's education adviser, said Mr. Deukmejian expects legislators to come up with their own plan to deal with the shortfall.

"If they do nothing, the responsibility is really in their hands,'' Mr. Mehas said. The Governor may have to impose a 2 percent to 2.5 percent across-the-board cut in state spending to balance the budget if legislators fail to act, he said.

That would mean a cut of "somewhere in the area of $250 million to $300 million'' for education programs, Mr. Mehas said.

Last January, Mr. Deukmejian proposed a $36.1-billion budget that would provide $13.6 billion for precollegiate education, a $1-billion increase over the fiscal 1988 level.

According to state education officials, the proposed cut would come at a time when California expects enrollments to jump by a total of 140,000 statewide next year.

Hiring Freeze

In New York, officials estimate there is a $900-million shortfall for the fiscal year that began April 1. Gov. Mario M. Cuomo last week announced a state hiring freeze and proposed a variety of spending cuts to address the problem.

The Governor's plan includes proposals to chop $24 million from the education department's $8.6-billion budget, including $8.4 million for special projects included in the general school-aid budget, said Terry J. Lynam, a spokesman for Mr. Cuomo.

The Governor has also proposed to cut funding for programs including summer mathematics and science institutes for students; teacher-resource and computer-training centers; the state's parent-advocacy program; and job training for disadvantaged youths in New York City.

Mr. Lynam characterized the proposed cuts in education spending as relatively minor.

"The governor has declared this the 'Decade of the Child,''' he noted.

$305-Million Shortfall

Massachusetts faces a revenue shortfall of $305 million for the current fiscal year, which ends June 30, said Michael S. Lelyveld, spokesman for the state's office of administration and finance.

To address the problem, Gov. Michael S. Dukakis has imposed a ceiling on the number of state employees, and last week was weighing whether to sign legislation setting a 5 percent sales tax on cigarettes.

The Governor had been opposed to the cigarette-tax hike, but was reassessing his position last week, Mr. Lelyveld said.

There has been no discussion of major cuts to education programs to offset the deficit, officials said. "The Governor has made it quite clear that education is a high priority of his,'' Mr. Lelyveld said.

"Elementary- and secondary-education programs look to be in relatively good shape,'' said Robert B. Schwartz, the Governor's special assistant for education.

But in the upcoming fiscal year, he added, "people are being asked to hold in place.''

"The normal, hoped-for expansion in some areas is just not possible'' with the revenue shortfall, he said.

For example, he noted that the legislature may earmark only $17 million for a new school-construction program next year, about $4 million less than the authorized amount.

He also said the state could be forced to spend about $7 million less than originally planned for a program approved during the 1987 session that will provide grants and relax regulations for schools that experiment with new forms of organization and give more authority to teachers.

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