Restoring a Delicate Balance

By Susan Tifft

After a bath in red ink, some state budgets begin to recover

In the trough of the national recession a year ago, state and local governments were all but drowning in a $1.9 billion pool of red ink. But now there is cause for cautious optimism. According to a survey by Morgan Guaranty Trust Co. of New York, states and localities may finish 1983 with a combined operating surplus of $16.1 billion.

The current economic recovery, which has boosted revenues through increased income and retail sales, deserves considerable credit for the rosier outlook. Just as important, however, has been a spartan regimen of tax hikes and belt-tightening. Some 38 states imposed new levies or extended temporary tax hikes during 1982 and early 1983, measures that are expected to raise some $10 billion for fiscal 1984. Fully three-quarters of the states slashed spending below the levels they had originally appropriated during the past two years. The result of these austerity measures, says David Levine, an economist with the Bureau of Economic Analysis, is "a whole lot more money than state governments expected."

Among the surprise entries on the most-improved list are several states in the nation's recession-racked industrial heartland. West Virginia, still leading the U.S. in joblessness with an unemployment rate of 15.1%, faced a projected fiscal 1983 deficit of $81.4 million as recently as last January. But thanks to the unflagging efforts of Democratic Governor John D. Rockefeller IV to ram through a $90 million package of spending cuts, the state managed to end the year with a small surplus of $12.4 million.

Michigan, its economy wedded to the unpredictable auto industry, faced a 1983 budget deficit between $800 million and $900 million last January. But the state raised personal income taxes from 4.6% to 6.35%, added 2-c- to the state gas tax, whittled the number of employees on the state payroll by 4%, and delayed and deferred payments for schools. When the 1983 books closed Sept. 30, Michigan was anticipating a budget surplus of more than $50 million.

Minnesota conquered a projected deficit for 1982 and 1983 of $767 million in part with the help of a temporary income tax surcharge enacted in March 1982. Buoyed further by larger-than-expected tax revenues, state officials have predicted a $650 million surplus by the end of fiscal 1985 and an early repeal of the surcharge. In Indiana, Republican Governor Robert Orr called the state legislature into special session last December to avert an estimated 1983 shortfall of $452 million. The result: a $1.8 billion tax hike, the largest in Indiana history, and painful delays in state payments for schools, universities and local subsidies. The state finished the fiscal year $60.4 million in the black, with forecast surpluses of $96.1 million in 1984 and $126.9 million in 1985.

In Ohio, Democratic Governor Richard Celeste helped beat back a projected 1983 deficit of $528 million by tacking an additional 90% onto the state's personal income tax. Despite the size of the hike, deficit-weary Ohioans soundly rejected a tax repeal referendum earlier this month. The state ended the fiscal year with a $43.6 million surplus and is now looking forward to a combined bonus of $80 million in fiscal 1984 and 1985.

When California's Republican Governor George Deukmejian took office last January, the Golden State was staggering under a projected deficit of $1.5 billion. One month later it was broke. Unemployment hovered around 11.2%. Pledged to balance the budget without tax increases, Deukmejian prodded the legislature to close porous tax loopholes on leisure activities and streamline tax-collection laws. The state finished fiscal 1983 with a comparatively manageable deficit of $462 million. That done, he blue-penciled $1.1 billion from the legislature's fiscal 1984 budget proposals. Coupled with surging revenues from the state's rebounding aerospace and defense industries, the changes have resulted in a projected 1984 surplus of $440 million and a 1985 surplus of $1.2 billion. "Ours is one of the most elastic tax bases in the country," says California Legislative Analyst William Hamm. "Our sales, income and corporate profits taxes respond directly to the economy."

Despite these success stories, the fiscal fate of many states is still uncertain. One alarm bell is the dangerously low level of reserve funds. Georgia's protective surplus stands at $9 million, the lowest level in 15 years. "That would run the state government for about six hours," says Clark Stevens, director of the Governor's office of planning and budget. In even worse shape is Mississippi, which is looking at a $120 million deficit in fiscal 1984, despite $250 million in pared spending. "We've cut all the fat we can," laments outgoing Democratic Governor William Winter. "Now we're talking about cutting out arms and legs."

The current precarious financial balance that exists in many states could be upset by a new wave of tax revolts or an economic slump caused by the huge long-term federal deficits. For now, however, the good news has raised spirits. "The national economy will lift all boats," assures Kenneth Kirkland, an official at the National Conference of State Legislatures. "But depending on local conditions, not all boats rise at the same time."

--By Susan Tifft.

Reported by Barbara B. Dolan/Detroit and Joseph J. Kane/Los Angeles, with other bureaus

With reporting by Barbara B. Dolan/Detroit, Joseph J. Kane/Los Angeles This file is automatically generated by a robot program, so viewer discretion is required.