Living Beyond Their Means

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Nearly half the states are with Uncle Sam in the fiscal sick ward

With the Federal Government all but drowning in red ink, scant attention has been paid to the fiscal health of the states. Now two studies show that there is cause for concern. While not nearly as badly off as Washington, the states are busting their budgets at an alarming rate. The Bureau of the Census reports that, while state revenues rose 12.2% to $310.8 billion last year, spending increased at a faster rate (13.1%) and overall indebtedness jumped 10.6% to $134.8 billion. Seven states (Massachusetts, Kentucky, Indiana, South Dakota, South Carolina, New Jersey and New Hampshire) could not balance their books. And according to the National Conference of State Legislatures, the situation is growing worse. High unemployment and the recession have hit the states with the force of a one-two punch, swelling welfare and unemployment expenditures while sharply reducing the income, sales and business taxes needed to pay for them. Just a few months into their new fiscal years, at least 22 states are already slashing spending in the face of ominous revenue shortfalls.

Unlike the Federal Government, all states except Vermont are required by their constitutions to balance their budgets. Nowhere has this been more difficult during the current recession than in the hard-hit industrial heartland. With the nation's highest unemployment rate (15.9%), Michigan barely made it through the past two years by laying off 8,000 state workers, wringing $20 million in pay concessions from its remaining 60,000 employees, slashing spending in every area, and raising income and cigarette taxes. Michigan is only one month into an austere fiscal 1983 budget of $4.6 billion, and already it looks as if the state will come up short by $100 million. In Ohio, where joblessness is running at 12.5%, the current biannual budget of $13 billion was only three months old when officials realized that they might face a $1 billion shortfall. "We kept looking at it to make sure we were not mistaken," said Budget Official Edgar Troyer. "You can't imagine how tense it was." To cope with the deficit, state officials cut all spending by 10%, imposed a temporary 50% surcharge on state income taxes (for a maximum rate of 7.5%), and raised sales taxes from 4% to 5%.

Parts of the South are in similar straits. In Alabama, a 15% reduction in the general fund was ordered in September, just four months after the fiscal 1983 budget of $496 million was adopted, when Governor Fob James realized that the declining state economy and a 14% unemployment rate had opened a $50 million hole in the budget. Even Louisiana, long buoyed by oil and gas taxes, has that sinking feeling. Reason: the oil glut has depressed prices, and thus tax revenues. Fearing that its $6.3 billion budget could be $100 million out of balance by the end of the fiscal year next July, the state has frozen hiring, is deferring maintenance on state buildings and has canceled $500,000 in new equipment orders. Now state legislators are talking about a tax hike. Says Budget Director Ralph Perlman: "We've run out of windfall from Washington. We've run out of exotic tax measures. Our economy has run out of gas, and in Louisiana, when you run out of gas, you run out of money."