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Published in Print: December 4, 2002, as Governors: State Finances Worst Since World War II

Governors: State Finances Worst Since World War II

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Sagging tax revenues and growing health-care costs have pummeled state economies so relentlessly that states are in their worst fiscal situation since World War II, a sobering new report from the nation's governors and state budget chiefs declares.

As a result, even those areas of spending that often enjoy favored status, such as K-12 education, are likely to become targets for state budget-cutters.

Thirty-seven states were forced to cut some $12.8 billion from their enacted budgets in fiscal 2002, according to "The Fiscal Survey of States," which was released last week by the National Governors Association and the National Association of State Budget Officers, both based in Washington.

Of the 49 states that submitted data for the Nov. 25 report, 23 already said they planned to reduce their fiscal 2003 budgets by an estimated $8.3 billion—even though most states are just five months into their fiscal years. Florida is the only state that did not submit data.

The fiscal crunch comes as states must weigh new federal education requirements for testing, teacher qualifications, and supplemental programs under the "No Child Left Behind" Act of 2001.

"Lawmakers will try to protect elementary and secondary education, but at the end of the day, it will be on the table," said Ray C. Scheppach, NGA'S executive director.

He pointed out that while the states have budgeted a paltry 1.3 percent overall general-fund increase in fiscal 2003, even that hike is not guaranteed. "I think we will see cuts," Mr. Sheppach said. "By the end of the year, I think that number will be negative."

The last time that states' general-fund spending dropped was in 1981, when it fell by just under 1 percent. From 1979 to 2003, by comparison, states averaged a 6.5 percent annual hike in such spending.

Battered Budgets

Optimism is hard to come by in the 68-page report. Stacey Mazer, a senior staff associate for NASBO, said no comparable historical data exist for the 23 states projecting budget cuts this early in their fiscal years. The researchers who conduct the annual survey have not had to ask about such cuts in the past, she explained.

"In a normal year, states wouldn't be talking about cutting budgets as soon as they are enacted," she said.

In fiscal 2002, nearly a dozen states exempted K-12 education. But, almost as many put everything on the chopping block.

The biggest contributors to the states' woes are a "deterioration in state tax systems," a collapse in tax revenues from capital gains, and overall slow economic growth, Mr. Scheppach said. Medicaid, for example, grew 13.2 percent over the previous year—the highest one-year jump since 1992.

Those factors, he added, "have battered almost every state budget to the point where there just are no easy choices left."

State budget-balancing is complicated by the fact that many states have delved—sometimes liberally—into rainy-day funds and have fewer places to turn for revenue.

"Yes, rainy-day funds have been dipped into," Ms. Mazer said. "States will have to be scrutinizing everything [for new cuts]."

Vol. 22, Issue 14, Page 18

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