States Mend Budgets Warily

By Stephanie Simon

June 14, 2004 12 AM PT

Times Staff Writer

ST. LOUIS — After three years of financial crisis, states across the nation report a turnaround: Tax revenue is coming in strong. Crippling budget deficits have largely been erased.

With the new fiscal year two weeks away, 32 states are predicting surpluses.

So why are parents and immigrants and senior citizens so worried?

They’re fearful and frustrated because in most states the emerging economic recovery has not translated into more funds for the services they depend on. To-the-bone cuts in education, healthcare, parks, road repair and other programs have not been reversed.

Corporate executives are frustrated too because the tax and fee increases passed in grimmer times have not been rolled back. “We’ve had to spend most of our time making sure things don’t get worse,” said Todd Maisch, a vice president of the Illinois Chamber of Commerce.

In some states, the austerity budgets reflect conservative principles, as politicians continue to shrink government even when revenue rebounds. In others, the cautious spending plans are a painful concession to reality: Balance sheets look much better than a year ago, but given how bad last year was, that’s not saying much.

“Better is relative,” said Iris Lav, deputy director of the Center on Budget and Policy Priorities, a liberal think tank in Washington. “Revenues are exceeding expectations in part due to how low the expectations were.”

A few of the best- and worst-off states have significantly adjusted their 2004-05 budgets.

The Mississippi budget was so tight lawmakers eliminated some health insurance benefits for 65,000 elderly residents earning as little as $7,000 a year. Massachusetts stopped relief payments of $303 a month for impoverished immigrants.

In California, Gov. Arnold Schwarzenegger has proposed raising college fees, cutting aid to local governments and eliminating some hot meals for prison inmates, even as the state borrows $15 billion to pay operating expenses.

On the flip side, Florida banked such a healthy surplus that lawmakers cut corporate taxes and funded a new literacy program that would send reading coaches into hundreds of classrooms. Arizona will spend heavily on full-day kindergarten. Virginia will expand subsidized preschool.

But such bold moves have been relatively rare this spring. In most state capitols, lawmakers have stuck with hold-the-line budgets that give few constituents much reason to cheer.

State spending will inch up, on average, 2.8% next fiscal year, according to the National Assn. of State Budget Officers.

That equals last year’s increase, and it’s more robust than in the recent recession. (In 2002, state budgets expanded 1.3% and in 2003, just 0.6%.) Still, the pace of the spending increase is far below the annual average growth rate of 6.2% that citizens came to expect during more than a quarter-century of expansion stretching back to the 1970s.

Across the nation, advocates for a variety of causes are feeling the pinch.

Missouri lawyer Joel Ferber finds himself having to explain to his indigent clients that the Legislature won’t resume sending subsistence checks of $70 a month to the poorest of the poor.

In Cleveland, PTA activist Mary Mason complains, “It’s getting hard just to furnish our schools with pencils and paper and textbooks.” Two of Mason’s grandchildren and her five great-grandchildren attend public schools, and she’s alarmed when she hears of plans to cut athletic programs and bus routes to save money.

“Instead of no child left behind, it’s become the child gets kicked in the behind,” she said.

In Georgia, Fred Watson calls his state’s new budget “cruel” because it takes 2,000 nursing home patients off subsidized health insurance, leaving them no way to pay for their care. Though old and sick, they all face eviction when the fiscal year starts July 1.

“Now that the economy’s better, we’d like to see state funds restored” -- not cut -- said Watson, president of the Georgia Nursing Home Assn. “This just does not make sense.”

Part of the caution in statehouses can be chalked up to prudence: Burned by a staggeringly swift collapse in revenue after the 2001 terrorist attacks on New York and the Pentagon, legislators say they’re wary of expanding services or cutting taxes until they feel sure the economic revival will continue.

Part of it is philosophy. In states like Missouri -- where Republicans recently won legislative majorities on the slogan “It’s a spending problem, not a revenue problem” -- conservatives sense an opportunity to keep a tight lid on state programs.

“It’s so easy for departments to fall back into the trap of, ‘We have some money now, so let’s spend it.’ We have to be very vigilant about that,” said Missouri state Rep. Carl Bearden, a Republican from suburban St. Louis.

Some analysts see one more factor as well in the cautious approach to fiscal 2004-05.

They contend that structural problems in state tax codes have created a perpetual crisis in capitals everywhere.

Most states rely heavily on sales taxes for revenue. But most tax only products, not services. And services -- car repair, construction, even plastic surgery -- account for 60% of economic transactions, up from 40% in 1960. Under federal law, states are also barred from collecting sales taxes on most Internet transactions, another fast-growing segment of the economy.

Finally, some states give so many breaks to businesses that their revenue from corporate taxes fails to keep pace with inflation. Missouri, for instance, collects about $200 million a year from its corporate citizens, the same amount it collected in the 1980s, according to state Sen. Ken Jacob, a Democrat.

“There are ways to broaden the tax base to plug some of these leaks, but citizens have shown over time that they’re fundamentally reluctant to pay more,” said David Osborne, coauthor of the new book “The Price of Government,” which argues that states have entered an age of “permanent fiscal crisis.”

Virginia Gov. Mark R. Warner, a Democrat, pushed a major program through his Legislature this year, cutting the sales tax on food, raising it on other products and closing corporate loopholes. He considers it a huge accomplishment -- but acknowledges the need to consider more changes to ensure a steadier income stream for states reeling under the soaring costs of social services, especially the Medicaid program of healthcare for the poor.

Too often, “there’s a willing suspension of disbelief,” Warner said. “State treasurers say, ‘Yes, we’ve got some problems, but we’re hoping to grow our way out of it.’ Well, for many of these states, growing your way out of it is simply not an option, not if you have a fundamental structural imbalance.”

Florida Gov. Jeb Bush, a Republican, responds to such pessimism with incredulity.

He insists that the only way for a state to get ahead is to cut taxes to encourage business growth and personal entrepreneurship. It worked in Florida, he says: Revenue is up more than 10% this year, outpacing the national average. And Florida has the largest rainy-day reserve in the United States.

Bush trimmed social services in next year’s budget; for instance, he canceled a planned increase in the fees the state pays nursing homes to care for the poor. But he was able to boost overall spending by 5.1% and public school funding by 7.3%. He doesn’t buy the talk of “permanent crisis.”

“People are complaining about our tax base being too narrow? That’s crazy,” he said.

Ali Noorani has a different definition of crazy.

The director of the Immigrant and Refugee Advocacy Coalition in Massachusetts, Noorani says he cannot understand why his state has not moved to restore the health insurance, relief payments, English classes, citizenship training and other programs that were slashed during the fiscal crisis of the last three years.

“Even as money is coming back into the state ... more and more we see the immigrant community getting the raw end of the deal,” he said.

A fellow advocate for the poor, John E. McDonough, is more upbeat.

Massachusetts has restored health insurance for several thousand poor residents who lost their benefits during the deepest cuts of 2003, said McDonough, director of the nonprofit lobbying group Health Care for All. He’s hoping the economic recovery will allow the state to resume insuring the tens of thousands of others still excluded.

“The cuts are over. The restoration period has begun,” he said.

Recognizing that few activists in any state share that confidence, McDonough acknowledged this year’s budgets had disappointed many.

Still, he refuses to give in to gloom, saying: “We try to lead the nation in optimism.”