How To Balance A Budget

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The plight of Harrison township in southeast Michigan is typical. Through the 1990s, local authorities did next to nothing to increase tax revenue, counting on bountiful state pass-throughs as a booming economy and stock market boosted the state's sales-and capital-gains-tax revenues. Indeed, many states were able to support municipalities and cut tax rates at the same time, a strategy that critics say is backfiring and is more to blame than the recession for the states' fiscal mess. Michigan is cutting revenue to townships like Harrison. Governor John Engler is expected to announce some $470 million in total budget cuts this week. Harrison township has already had to shut down its recreation department, sell 12 vehicles, slash $16,000 earmarked to clear seaweed that hampers boat traffic near the Lake St. Clair shoreline and cut $19,000 for improvements to dirt roads. The town board had to approve a special assessment last week to cover police and fire protection. "People still don't have their eyes open," says newly elected township supervisor Mark Knowles, the first Democrat voted into that office in 33 years. "They're going around saying, 'You're raising taxes! You're raising taxes!' Yes. But they weren't paying enough to begin with. They just got caught sneaking into the movie theater."

The dire fiscal straits have been visible for some time, but state and local officials were able to paper over their problems by depleting rainy-day funds--surpluses built during boom years--and tapping other onetime sources of cash to keep the budget in balance without encroaching on the everyday lives of most people. But that tactic has been exhausted. Already, many states have broken a trend of tax cuts that began in 1994--raising taxes by an aggregate $9.1 billion last year.

A recent pair of bombshell reports has made clear the severity and scope of the crises. The National Governors Association said the states' cash reserves as of June 30 had dropped to $14.5 billion, from $48.8 billion three years earlier. This new figure is 2.9% of total state spending--by that measure, the lowest cushion in a decade. Meanwhile, the National Conference of State Legislatures said two-thirds of states had collected revenue below forecasted levels through October of this year and that 26 states had lowered their revenue estimates for the rest of the fiscal year. "2003 will be a year of tough policy decisions," says Bill Pound, the group's executive director. The only states saying their budgets are on sounder footing are Florida, Hawaii, New Mexico, North Dakota, Rhode Island, Tennessee, Utah, Washington, West Virginia and Wyoming.