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States Face $40 Billion 2003 Budget Deficit-Report
Nov. 25 — By Christina Ling
WASHINGTON (Reuters) - Sunk in the worst financial doldrums since World War II, states face a possible collective budget shortfall of $40 billion by the end of the fiscal year, the National Governors Association said on Monday.
Nor is the picture any brighter as new governors elected just weeks ago start turning to 2004 spending plans, since underlying problems are likely to cripple state budgets even if the sour economy turns around.
"My sense is probably we have a shortfall at least of $40 billion now," NGA director Ray Scheppach told a news briefing, saying states were likely to cut support for higher education and health care and to raise taxes on corporation and individual incomes to make ends meet.
States are bound by law to balance their budgets and must therefore cut spending or raise revenues to avoid actually ending the year with a deficit.
Scheppach added his voice to the chorus of analysts who say most states have drawn down rainy day and other reserve funds as much as they can without endangering their bond ratings and made the easiest cuts to their budgets already.
That leaves mainly tax increases and painful cuts to major health and education programs as options.
"I just have a lot of sympathy with the new governors as they begin to put together those (2004) budgets," Scheppach said. "Unfortunately even when the economy comes back ... I think states are going to continue in a very, very difficult situation for at least the next two or three years."
The 2001 U.S. recession hit states hard, as a bearish stock market compounded the overall decline in tax collections by wiping out the fat revenues from capital gains that had lined coffers during the 1990s boom years.
Without that cushion, the combined effect of the soaring cost of public health care and states' outdated tax systems that have failed to tap into service sector growth, a key U.S. economic driver, has been crippling, Scheppach said.
An NGA report released on Monday showed state revenues dropped 6 percent in fiscal 2002, the first time since World War II that negative revenue growth for a whole year had been recorded, Scheppach said.
The National Conference of State Legislatures estimated in July, based on preliminary 2002 figures, that state revenues fell 1.2 percent.
Estimates released earlier this year of state budget shortfalls for fiscal 2002 ranged from the NCSL's $36 billion to the NGA's $50 billion.
With many states already halfway through fiscal 2003, about 23 plan to cut enacted budgets by a collective $8.3 billion. That figure did not include California, where Gov. Gray Davis plans to present a plan early next month to cover a $21 billion shortfall, his finance director Tim Gage told reporters.
The decimation of the hi-tech sector has hit the state's famed Silicon Valley hard, with a devastating knock-on effect on state finances.
States were still hoping that funds from Congress would arrive for items as diverse as election system reform, homeland security, and children's healthcare, Scheppach said, noting that while states' tax systems were inefficient, reform was politically very difficult.
But he added they had the best chance of winning major reform of the Medicaid health care system for the poor, for which they share funding responsibility with the federal government.
"Some states probably will start to do something on the tax side, but I really believe that the Medicaid problem is a bigger problem," Scheppach said.
He said the House of Representatives Ways and Means Committee had approved a bill during the past session that would have relieved states of the funding burden for drug benefits -- the program's fastest-growing segment.
The Rockefeller Institute of Government in Albany, New York, said in a separate report on Monday that state revenues rose 2.4 percent in the third quarter compared to the same period a year ago -- the first time revenues rose this year.
But that was not enough to make up for current budget shortfalls, the report added.
Copyright 2002 Reuters News Service. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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