The New York Times The New York Times National November 26, 2002  

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States Are Facing Big Fiscal Crises, Governors Report

By ROBERT PEAR

WASHINGTON, Nov. 25 Plunging tax collections and soaring medical costs have created the worst fiscal problems for states since World War II, the National Governors Association said today.

"Nearly every state is in fiscal crisis," the governors said in a new report surveying the states.

The states' fiscal woes will force governors, many of them newly elected, to propose politically sensitive tax increases or drastic cuts in services.

Raymond C. Scheppach, executive director of the governors association, said states were increasing tuition at public colleges and universities, cutting Medicaid eligibility and benefits, increasing taxes on individuals and corporations and laying off state employees.

"You will see huge cuts in Medicaid" next year, beyond the cutbacks already enacted, Mr. Scheppach said.

Medicaid and other health costs like employee health benefits account for 30 percent of state spending and grew last year by 13 percent, the largest increase in a decade, the report said. At a time when revenues are declining, Mr. Scheppach said, such growth is unaffordable and unsustainable.

Governors and state budget officers said the fiscal condition of the states was more dire than the condition of the national economy. The recession has reduced state revenues, especially personal income and capital gains taxes, Mr. Scheppach said, but the states' fiscal problems are also linked to long-term trends, like the increase in health costs and the growing importance of services in the economy.

Relatively few of the newly elected governors have said precisely how they will deal with these fiscal problems. "Most of them don't understand how bad it is," Mr. Scheppach said.

In its "Fiscal Survey of States," the governors association found that the amount of money states had on hand at the end of the most recent fiscal year had fallen to $14.5 billion, from a peak of $48.8 billion in 2000. The current balance equaled 2.9 percent of state spending, the smallest cushion since 1992.

Total state tax collections fell by 6 percent last year and declined in every quarter, even as spending grew by 1.3 percent, Mr. Scheppach said.

These figures are consistent with data reported recently by the Rockefeller Institute of Government at the State University of New York, which found tax revenues down 6.3 percent in the fiscal year that ended June 30. Among states reporting the largest reductions were Alaska, Oregon, California, Massachusetts, Connecticut and New York.

In New York, the budget director for Gov. George E. Pataki, a Republican, told state agencies last week to cut spending by 5 percent in the remainder of the fiscal year, which ends on March 31. The budget director, Carole E. Stone, also said that cuts next year would be deeper than expected. The state is facing a deficit that legislators have estimated at $5 billion to $10 billion.

Oklahoma is experiencing the worst budget crisis in decades. Oklahoma State University, in Stillwater, was told to return money to the state, and its library has reduced its hours. The state finance director has instructed all state agencies to reduce spending by 6.5 percent.

Gov. Gray Davis of California, a Democrat, said last week that he would call a special session of the State Legislature to consider $5 billion of spending cuts and other emergency measures to "stanch the bleeding" in state finances. The governor told legislative leaders that the deficit in the coming year could exceed $21 billion.

Herb J. Wesson Jr., the Democratic speaker of the California Assembly, said, "This is a terrible crisis, and every Californian will be affected."

In Illinois, a Democrat will become governor for the first time in 26 years, and he will inherit a huge problem: a deficit that could grow to $2.5 billion, in a budget totaling $50 billion.

In his campaign, the governor-elect, Rod R. Blagojevich, said that Illinois could resolve its budget problems without an increase in sales or income taxes. But aides to Gov. George Ryan, a Republican, said that spending cuts made last spring were overwhelmingly unpopular, and that further cuts would be extraordinarily difficult.

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THE MAYOR'S BUDGET PLAN: OVERVIEW; MAYOR URGES PLAN FOR DRASTIC CUTS AND TAX INCREASES  (November 15, 2002)  $

FED CUTS KEY RATE BY ONE-HALF POINT IN AGGRESSIVE MOVE  (November 7, 2002)  $

World Business Briefing | Asia: Southeast Asia: Shifting Credit Outlook  (October 30, 2002) 

Pataki's Record: 2 Terms, Unexpected Turns  (October 30, 2002)  $

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