Aftershock in State Coffers

By David S. Broder

Wednesday, September 26, 2001; Page A25

On the same day that his brother, the president, went before a joint session of Congress and a vast national television audience to rally the nation for a struggle with terrorism, Florida Gov. Jeb Bush had a more awkward task.

He told his constituents that he had reluctantly decided a special session of the legislature will be needed to slash the state budget in the face of a drastic decline in the economy.

Jeb Bush acted after his economists warned him that even before they could factor in the effect on the state's $50 billion tourist industry of the Sept. 11 terrorist attacks, the economic slump threatened to knock a $673 million hole in his budget. Now, the shortfall could easily top $1 billion in a $48 billion budget.

Florida is far from alone. Indeed, while Congress and President Bush ignore the budget constraints that loomed so large until Sept. 11, busily approving billions for the Pentagon, for recovery efforts in New York City and for bailing out the airlines, state governments are facing the sudden shock of falling revenue and forced spending cuts.

Hawaii, another state heavily dependent on tourism, has seen its governor, Ben Cayetano, call the third special legislative session of the year for October -- unprecedented even in wartime -- because of its budget crisis. Hawaii may have to use some of its tobacco settlement money and deplete its hurricane relief fund just to get through the current fiscal year.

But it is not just high-tourism states that are reeling economically. Iowa Gov. Tom Vilsack last week ordered a $108 million cut in state spending this year and said he expected next year's budget to be slashed almost twice as much. He warned that there will be layoffs of state employees and that higher education will take a heavy hit in order to protect elementary and secondary school programs. The president of Iowa State University called the prospective reductions "devastating," but Vilsack said the slowest revenue growth in 18 years left him no alternative.

The aftershock of the attacks on the World Trade Center and the Pentagon, which temporarily shut down the airline industry and last week clobbered the stock market, hit state governments at a time when their finances already had been weakened. State governments are reeling too.

Last week, the Nelson A. Rockefeller Institute of Government, part of the State University of New York in Albany, said the growth of state tax revenue in the April-June quarter was the weakest in eight years.

The old economy states of the Midwest and the Plains have been hit hardest, because of the decline in manufacturing and agriculture. But the states reporting serious fiscal trouble also included Arizona, Missouri, North Carolina, Oregon, Tennessee and Washington. The South has not been spared, and last week, even states such as Colorado and Maryland, which had been reporting healthy surpluses, said the fiscal warning signs are clear.

Unlike the federal government, most states are required to balance their general funds each year. While North Carolina has struggled all year to work out a tax increase, most states are trying to avoid that option by holding back their spending.

But that has proved to be extremely difficult, because costs are rising in several of the major areas of the state budget. The worst problem is in the Medicaid program for low-income families. Powered by increasing prescription drug costs, Medicaid budgets are rising at double-digit percentage rates in many states.

A large number of states are also reporting record enrollments in their public colleges. A softer job market has influenced more recent high school graduates to continue their education, and fewer of them think they can afford private colleges. So the state schools are being swamped.

And, after dramatic drops in welfare rolls during the long economic boom, more states are beginning to see them inch upward. A Health and Human Services Department report said 18 states saw increases in the number of welfare recipients in the six months ending last March, and the economy has faltered further since then.

In President Bush's home state of Texas, unemployment was reported last week to have hit 4.9 percent, the highest level in three years. August was the sixth straight month in which Texas jobless numbers increased.

Budget analysts in Washington said the fact that so many states are being forced to cut spending in the face of economic worries may increase the pressure on the administration and Congress to provide more stimulus -- either by cutting taxes or boosting spending or both. The grass-roots picture is not pretty.