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Dwindling Coffers Force States to Cut All Programs

A National Governors' Association study shows that the recession has decreased revenues from coast to coast.

A NICKEL here, a dime there - state governments are desperately searching for savings anywhere they can find them. At the University of North Carolina at Chapel Hill, where state lawmakers have ordered major budget cuts, state officials have turned up the thermostats on air-conditioners to 78 degrees, canceled more than 400 subscriptions to newspapers and magazines, and chopped travel budgets.

At the University of Virginia, where state officials are determined to save millions of dollars, the administration has laid off 30 secretaries and maintenance workers, imposed a hiring freeze, and enlarged class sizes.

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The eight-month-old recession, which continues to deepen, is cutting across almost every activity of state government - from higher education to welfare. Even with heavy budget-pruning, states like New York and California are threatened by a tsunami of red ink.

"The states are in the worst financial shape of the decade," says Raymond Scheppach, executive director of the National Governors' Association (NGA). "Governors are making very difficult choices about which programs to protect and which to cut."

States to boost taxes

Nationwide, states collect about $290 billion a year in revenue. But in recent months, as the recession deepened and unemployment rose, 29 states were forced to cut $8 billion from their 1991 budgets and 26 states are boosting taxes by $10.3 billion.

After years of rapid growth during the booming 1980s, state spending will grow this year just 0.3 percent in real, inflation-adjusted terms, NGA estimates. That's the slowest rate of growth since the previous recession in 1983 when state spending actually declined by 6.3 percent.

There's particularly bad news for taxpayers. All three of the states' major sources of revenue - sales tax, personal income tax, and corporate income tax - are producing less cash than projected. As a result, 23 states face another round of higher taxes in 1992, with three states, New York, Pennsylvania, and Connecticut, leading the way.

According to NGA's latest "Fiscal Survey of the States," Connecticut taxes may rise $876 million next year, New York's will climb $783 million, and Pennsylvania's will boom upward by the greatest amount in the nation - $1.7 billion.

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Pennsylvania's higher collections would come from sales taxes ($288 million), corporate income ($334 million), cigarette/tobacco ($300 million), and a variety of other revenue sources such as cable TV ($773 million).

Introduction of an income tax in Connecticut could raise a whopping $1.8 billion, but that would be offset in part by a $933.2 million reduction in the state's sales tax, which is now 8 percent.

Bright spots

Amid all this fiscal gloom, however, there are bright spots, mostly west of the Mississippi River. Rocky Mountain states such as Montana and Colorado and Plains states such as North Dakota, Nebraska, Kansas, and Oklahoma should end this year and next with strong balance-sheets, the NGA reports. Also showing strength are Washington, Oregon, Nevada, Hawaii, Alaska, Alabama, and Indiana.

Mr. Scheppach says problems are being greatly exacerbated by Congress, which has imposed a series of Medicaid rules on the states. Medicaid is the program that provides treatment for those who cannot afford it. But federal rules have expanded Medicaid so broadly that state spending for the program soared from $18 billion in 1985 to $31 billion in 1990 and is heading toward $67 billion in 1995.

Medicaid has become the "Pac-Man of state government," relentlessly gobbling up state budgets, Scheppach says. "Health care costs are out of control.... Medicaid spending is increasing 25 percent this year on top of an 18 percent increase last year."

Federal regulations

Governors consider Medicaid an inefficient vehicle to deliver many medical services, especially preventive care, Scheppach explains. But federal rules require governors to drain money from preventive treatment programs, as well as such critical areas as food distribution, preschool education, and the environment to fund federally-mandated Medicaid, Scheppach says.

Education officials would add major state universities to that list of programs being cut. At UNC Chapel Hill, the $700 million budget will be trimmed by $19 million this year, with more cuts likely in 1992. Virginia is taking an even bigger swat - over $30 million out of this year's budget of $416 million.

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