Slump Saps Federal, State Revenue

STATE and federal revenue expectations have been shortchanged - again - by the economy's continuing sluggishness."We are weakening our forecast" for federal revenue, says Mark Desautels, an assistant in the office of intergovernmental affairs at the Congressional Budget Office (CBO). In August, the CBO added $16 billion to its deficit forecast for fiscal year 1992, which began on Oct. 1. The increase took into account anticipated lower tax collections caused by the recession. This addition, along with an upward revision last January that added $46 billion to the deficit, brings the total estimated federal shortfall to $362 billion on the $1.5 trillion 1992 budget. The latest adjustment still doesn't capture the impact of the recession because the recovery has proceeded so much slower than expected, Mr. Desautels says. The CBO is now at work on the budget projections it must give Congress on Jan. 23. The deficit will rise by at least $10 billion, he says. Other analysts expect the deficit, already at a historic high, to careen beyond $400 billion. That will be added to the existing $2.7 trillion national debt. Meanwhile, budgets in 25 states are running in the red, a survey of legislative fiscal officers found last month. And that number will increase when the National Conference of State Legislatures repeats the survey this week, predicts Arturo Perez, a research analyst with the NCSL. "No one wants to own up to it until they have to," adds Brian Roherty, director of the National Association of State Budget Officers. Governors prefer not to discuss deficits until they draft corrective measures, he says, but NASBO has unofficial word that deficits are again widespread.

Budgets due in January Just how serious the shortfalls are and how the affected states propose to deal with them will be seen in January. That's when governors of the 46 states present FY 1993 budgets to their legislatures. (Alabama, Michigan, New York, and Texas are the four states that do not operate on a July 1-June 30 fiscal year.) In general, states must balance their budgets and make up for any unexpected deficits this year. The proposed state budgets will incorporate revenue forecasts that are derived in part from economic projections by independent sources like DRI/McGraw-Hill of Lexington, Mass. Unfortunately, the company's econometric model is spitting out "pretty rotten" numbers, says David Wyss, research director at DRI. In September DRI envisioned 2.9 percent growth in the nation's gross national product for calendar year 1992. That was revised to "2.3 and falling" last month, Mr. Wyss says. He describes the economy as ranging from "slow recovery to no recovery." State officials had hoped that Bush administration predictions of an economic recovery would come true, boosting tax revenues. That would have spared them a repeat of last year's ordeal, when 31 states and Puerto Rico and the District of Columbia had to chop spending or squeeze taxpayers to bring revenues and expenses into line. In a nonrecession year fewer than five states would face that predicament, says Mr. Perez. Taken as a whole, state revenues are still increasing. But the rate is far slower than hoped and isn't keeping pace with expenditure growth. In fiscal year 1989, economic growth fueled a state revenue increase of 7.5 percent, says Ronald Alt, a senior research associate at the Federation of Tax Administrators. Revenues rose only 3.2 percent in FY 1991, which coincided with the start of the recession. And new taxes accounted for almost all the increase, Mr. Alt says. "It's going to continue to be slow." California may face the biggest gap in dollar terms. Its controller has said the deficit could reach $4 billion by next spring if the economy doesn't turn around.

States with surpluses The recession has hit Massachusetts much harder, yet that state is projecting an $800 million surplus. Perez attributes that to budgets based on very conservative revenue estimates. North Carolina did the same and could end up with a $40 million surplus. On the spending side, state after state told the NCSL survey that they were paying more than expected for Aid to Families with Dependent Children (AFDC) and Medicaid. Texas A&M University economist Morgan Reynolds isn't surprised that AFDC payments would rise during a recession. On Medicaid, Texas and Southern states generally have seen obligations increase dramatically, says John Kennedy of the nonpartisan Texas Research League. Those states tend to qualify "only those people the feds make us qualify" to receive the medical assistance payments, he says. So they were hit hard when the federal government expanded eligibility requirements. Human services spending, including Medicaid, rose 45 percent - more than any other item - in the Texas budget adopted last summer, Mr. Kennedy adds.