How To Balance A Budget

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While states are salivating over the prospect of settlement payments stemming from the stock-research scandals on Wall Street, those probably won't be forthcoming in time to save this year's budget and won't amount to that much on the whole. But the states have won a lucrative settlement from tobacco companies in a 1998 agreement that has been valued at more than $200 billion. Many states plan to borrow against those future receipts in a process known as securitization. The Oregon house just approved selling $400 million of so-called tobacco-settlement bonds.

This strategy has a downside. States are essentially stealing from future revenues and paying interest to do so, leaving less for spending in the long run. Many investors, in turn, have recognized this strategy as a sign of a state's financial stress and have demanded even higher interest rates to buy any of the state's bonds, which further erodes the value of the tobacco settlement.

Doctor in the House?

Health costs, first among them Medicaid for the poor, have been the biggest drivers on the cost side of state budgets, and that will be a difficult problem to solve. Medicaid costs rose 13.2% last year. The Senate approved assistance to the states worth $9 billion last summer, but the bill stalled. What could force the issue, says Joy Johnson Wilson, who covers health care--cost issues for the National Conference of State Legislatures, is the passage of time. "Medicaid programs will probably be in much worse shape by the time Congress comes back next year," she says. "That may force them to act." Meanwhile, surveys show many states are cutting payments to doctors and hospitals, requiring higher co-payments and taking steps to reduce Medicaid eligibility.

The Kids Aren't All Right

With the popular and effective State Children's Health Insurance Programs facing shortfalls, the states tried to get some $3 billion from Washington, but the effort failed. "There was no consensus on how to get that money to the states, so there was no action," says Wilson. She is not hopeful that the new Congress will be able to come to an agreement either.

States are also cutting aid to people like Cindy Bishop, 33, of Kansas City, Mo., who has enjoyed being a foster parent for six years. These days she wonders if continuing to do so is economically viable, given her rising costs and falling state aid. "It isn't that the state needs to be responsible for everything you need to do for a child, but there are basic things our kids won't get because we can't afford it," says Bishop.

With elections having just taken place, the hard work is only getting started. Most state officials say they are steadfastly against raising taxes and that no program is safe from cuts. But they don't say where the ax will fall. In most cases the states have until February to come up with a plan. That's when Governors start offering their budgets for approval. As reality starts coming down to real numbers, you're not going to like what you see. --Reported by Sally Donnelly/Washington, Karen Bouffard/Lansing, Sarah Sturmon Dale/Minneapolis and Laura A. Locke/San Francisco