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Recession-Hit States Brace For Second Year Of Budget Gaps

After record shortfalls and tax increases last year, lawmakers now may cut welfare

STATES in 1992 face some of the toughest economic times in the postwar era as recession tatters treasuries and election-year politics complicate the ability of lawmakers to cope with the austerity.

Most states are starting the new year as they did 1991: with revenues down, expenditures for such things as health care and prisons up, and a restive populace that wants services but is unwilling to pay higher taxes to underwrite them.

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What makes this year unusually doleful, though, is that many states raised taxes or used the easy tricks to close budget gaps last year. Thus many of those options are closed to them this time around. At the same time, state capitals are realizing the scenario probably won't change when the recession finally ends. Lawmakers expect years of slower growth and rising costs for legally mandated programs.

"The decade of the '90s does not look good," says Raymond Scheppach, executive director of the National Governors Association. "It is going to be a time of downsizing and looking for efficiencies."

Therein, though, may lie the one shaft of light. A growing number of states are approaching their current budget woes as a long-term instead of a short-term problem. They are rethinking programs and even what the role of government should be.

"Crisis provides opportunity," says Corina Eckl, a fiscal analyst with the National Conference of State Legislatures (NCSL). "States are considering capitalizing on the opportunity to make changes. But there are going to be winners and losers when that happens."

The depth of the fiscal plight facing states was reflected in some sober State of the State speeches. California Gov. Pete Wilson (R) acknowledged it would be a "year of great challenges," though also rewards; Indiana Gov. Evan Bayh (D) said the recession was "picking Hoosiers' pockets."

The woes were also reflected in a series of recent reports by groups that have the unenviable task of forecasting state finances:

* The National Association of State Budget Officers found that 32 states are starting the new year with budget shortfalls, a gap approaching $10 billion. Another $12 billion shortfall is projected for fiscal 1993, which for most states starts July 1.

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* The NCSL found that 30 states are seeing revenues trickle in below projected rates, while at least half the states are seeing Medicaid, welfare, and other expenditures rising more rapidly than expected.

"The budget process this year is going to be uglier than last year," says Stephen Gold, a fiscal expert at the Rockefeller Institute in Albany, N.Y. "States that raised taxes last year are unlikely to do it again, and the anti-incumbent feeling across the country - even though not necessarily due to higher taxes - is scaring the wits out of governors and lawmakers."

Like two gloomy bookends, California and the New England states continue to be among the hardest hit. Treasuries are also tight in mid-Atlantic states and the Midwest. Teachers and public employees have marched on the capitol in Maryland to protest cuts and urge tax increases to make ends meet.

Budget woes ostensibly helped drive Virginia Gov. L. Douglas Wilder (D) from the presidential race and kept New York Gov. Mario Cuomo (D) from running. Austerity's grip, by contrast, doesn't seem too tight in some Plains and Rocky Mountain states.

With states last year raising taxes by a record $15 billion (though California and Pennsylvania accounted for much of that), higher levies will be a rarity this year.

This is particularly true given the wrath voters displayed against two governors, Lowell Weicker (Ind.) of Connecticut and James Florio (D) of New Jersey, who raised taxes in 1991.

That leaves spending cuts. Many states may trim aid to local governments, a favorite tactic in lean times, and scrutinize Medicaid, one of the fastest-growing state expenditures. But another popular target will be welfare.

Governor Wilson has already made welfare cuts and reform a centerpiece of his plans to close a projected $6 billion budget gap over the next 18 months and to underwrite "preventive" health and education programs for the young. Many states are looking to see what happens in Michigan, where 83,000 adults were cut from general assistance rolls to balance the budget.

In Illinois, Gov. Jim Edgar (R) has suggested cutting welfare and education to help meet a $350 million shortfall. The New Jersey Legislature last week debated welfare reforms that would cut additional benefits to welfare mothers whose families increase and reduce payments to those who refuse to train for work or go to school.

While few analysts expect welfare cuts alone to erase deficits, they are popular with many middle-class voters. They also have their detractors.

"We see this as fundamentally anti-child," says Lauren Asher of Children Now, a California advocacy group, of Wilson's proposal to cut Aid to Families with Dependent Children by as much as 25 percent.

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