Budgets Prompt Refrain: 'We Ran Out of Money'

July 1, 2003
By Patrick McMahon and Dennis Cauchon
USA TODAY

Walt Hellman, a physics teacher at Hillsboro High in Portland, Ore., knows firsthand the financial problems plaguing state governments. He took a 9% pay cut this year, and his school district ended classes 17 days early.

''This is a pretty tough time to be a teacher and even tougher for the students,'' he says. ''We ran out of money before the school year ended.''

In less than three years, states have gone from big surpluses to large gaps between what they want to spend and the money they receive from taxes, fees, the federal government and other sources. Many states that adopted costly programs during the economic boom of the late 1990s are finding it difficult to sustain them now that tax revenue is flat or even declining.

Since the economic slowdown began in 2001, states have largely shielded citizens from big spending cuts or tax increases by tapping reserve funds and borrowing record amounts of money. The federal government also is giving states an extra $20 billion to ease their financial problems.

State spending rose about 5% in the fiscal year that ended Monday for 46 states, and it is expected to rise modestly over the next 12 months.

The effects of state budget problems are starting to be felt. States increased taxes by $8 billion in the past 12 months. Among those hardest hit are smokers. Thirty states have raised cigarette taxes since Jan. 1, 2002.

''Every state is raising cigarette taxes through the roof,'' says Darlene Brennan, 56, a smoking rights advocate in Caribou, Maine, who smokes a pack and a half a day. She says smokers are finding other ways to buy cigarettes. ''It's the American way to shop cheap,'' she says. ''We now go to Indian reservations, roll our own and shop the Internet. And the states don't like it because they don't get the money.''

Other trends in state budgets that take effect today:

* States are cutting their workforces for the first time since 1997. State employment declined 1.5% in May from June 2002.

* Education from kindergarten through 12th grade and health care for the poor have been largely spared from budget cuts. These programs account for 60% of state spending.

* State aid for higher education, parks, arts and environmental protection was reduced in many states.

The new state budgets could be jeopardized if the economy remains weak. State tax collections were up 1% in the first nine months of the budget year that ended Monday, far less than most states had predicted.

And financial analysts warn that a sharp rise in interest rates might preclude states from heavy borrowing to plug future budget holes.

http://www.usatoday.com/usatonline/20030701/5287313s.htm