STATES STRUGGLE IN THE RED
January 3, 2003

With a slumping economy and a shrinking tax base, states are facing massive budget shortfalls and tough questions. Four governors discuss efforts to stave off a financial crisis in their state.

 

Online Special: Vote 2002 School Reform in Philadelphia Dec. 20, 2002: A look at the plight of the working poor in America Oct. 29, 2002: Experts discuss the gubernatorial races to watch on Election Day 2002 and their potential impact on the country's political picture Nov. 28, 2002: The latest debate over extending unemployment benefits Oct. 29, 2002: A look at how the weakened economy may be affecting voters Sept. 18, 2002: What went wrong during the gubernatorial primary in Florida Aug. 2, 2002: Experts discuss the state of the economy following the release of disheartening unemployment numbers Jul. 16, 2002: A report on the problematic state budget deficit in Arizona March 4, 2002: Washington state's struggle to balance its recession-era budget deficit Feb. 28, 2002: Minnesota's state budget, now experiencing its largest shortfall in history Browse Online NewsHour coverage of Economy and Politics   National Governor's Association Arizona Governor's Office Colorado Governor's Office Virginia Governor's Office Utah Governor's Office	JIM LEHRER: The fiscal crisis facing the states. Spencer Michels begins with a look at California's problems. GOV. GRAY DAVIS: "Chug, chug, puff, puff, ding, dong, ding dong, the little train rumbled over the tracks..." SPENCER MICHELS: Education was California Governor Gray Davis' top priority when he was first elected. He acknowledged improving the state's schools would be expensive. GOV. GRAY DAVIS: I will make this promise: Every discretionary dollar I will put in education, because without it, California has no future. SPENCER MICHELS: But last month, Davis proposed a 4 percent cut in public school funding, which had increased in recent years, and he might have to ask the legislature to reduce it even more. That's because California is projecting a $35 billion budget shortfall over the next 18 months, more money than most states' entire budgets. GOV. GRAY DAVIS: It represents fully 45 percent of general fund spending in the current budget. The problem is so big we don't have a lot of time for hand wringing. We have to face this problem head on. SPENCER MICHELS: California is one of a majority of states where revenues are down and costs are up. Some projections indicate the total expected deficit for the 50 states will reach $68 billion by July. Nationwide, 40 states-- shown here in red-- are expecting lower than anticipated revenues, with California by far the worst off. Only 10 states-- shown in green-- report stable or optimistic budget forecasts, even some of them could end up in deficit. Davis and other governors say the bleak picture is the result of lower tax revenues due to the downturn in the national economy and rising costs for things like health care and homeland security. By law all states except Vermont require a balanced budget. So governors and state legislators are trying to come up with creative ways to make cuts. Several states, including Nebraska and Oregon, are considering releasing some nonviolent inmates as a way to reduce prison costs. Kentucky already has. And other states are thinking about not prosecuting some misdemeanors to save money. Cuts in social services like welfare are being contemplated in many locations, including New York, where officials say a $2.5 billion deficit could balloon to $10 billion. And medical care, especially for the poor, is vulnerable around the country. In California last month, the governor proposed cuts that would deny access to medical care for half a million people. Transportation projects are also in jeopardy, as are jobs for some state employees. For the first time the governor is also talking about tax and fee increases. GOV. GRAY DAVIS: I'm going to propose a balanced approach. It will have further reductions and in all likelihood it will have some revenue increases. SPENCER MICHELS: The university of California universities have already announced they are raising tuition next year. Another likely increase would be fees for cars and trucks, which were reduced a few years ago. A new nickel-a-drink tax on alcoholic beverages is under consideration, but the liquor industry is strongly opposed. Cigarette taxes could go up. There is talk of a tax on Internet retail purchases, currently untaxed. A tax on gambling at casinos on Indian lands is a possibility, though the Indians would have to agree. And increased income taxes for high-earning Californians will be on the table, though Republicans have vowed to fight such hikes. California Democrats say budget cuts won't solve the problem alone, though they're not sure what will. CALIFORNIA STATE SENATOR: I haven't even got a clue. I mean, I think it would kind of look like a slaughterhouse in Chicago. SPENCER MICHELS: California's governor will announce his plan on January 10, and the legislature will then debate how best to close an unprecedented gap. JIM LEHRER: And to Ray Suarez.
	Facing bleak budget numbers
	RAY SUAREZ: Now, four governors on what the National Governors Association says is the most dire fiscal situation facing the states since war world ii. Janet Napolitano is the newly elected Democratic governor of Arizona where there is a $280 million shortfall remaining this fiscal year. The state faces a possible $1 billion shortfall for the 2003-04 fiscal year. Bill Owens, Republican of Colorado, has a $850 million shortfall this year and $705 million in the next year. Mark Warner of Virginia, faced a $2.1 billion hole in the state's two-year budget. He has cut $858 million and is proposing to close the remaining $1.23 billion with program cuts, fee increases and using one-time fixes like a rainy day fund. Mike Leavitt of Utah - he's called five special sessions of the state legislature to close the $420 million deficit this year and he anticipates a $305 million gap next year. Well, Governors, let's go around the country and get an idea of what your state's balance sheet looks like. Governor Napolitano, you are pretty new in the job. What greeted you when you first started as governor? GOV.-ELECT JANET NAPOLITANO: Well, I inherited a huge budget deficit. We had six special sessions of the legislature this year and we're still off balance by $280 million, and we have a billion dollar, as you mentioned, to close for '04. I'm preparing a package for the legislature that I think is a balanced approach to get out of this mess. RAY SUAREZ: Mike Leavitt, your senate president called this process torture, having to make the kind of cuts that have been contemplated. What's going on in Utah? GOV. MIKE LEAVITT: It continues to be a difficult circumstance. We're all working through it one step at a time. This is unprecedented and certainly different than the last ten years where we've had an abundance of revenue and been able to make good investments in highways and roads and so forth. But as I've heard Governor Owens say, that's why they pay us the big money and we're working through it. RAY SUAREZ: Well, Governor Owens, what does the balance sheet look like in Colorado and near term, what are you planning to do about it? GOV. BILL OWENS: Well, it's obviously a challenge. Mike has been governor for a number of years. I've been governor for four years. It is a lot easier being governor in the good years than in these challenging times. Like Utah and the other states, we're looking at what Colorado's priorities are, we're really trying to make sure that we are running a government as efficient as possible. We are trying to keep the cuts as far away from real people as possible. We're still a little short, but we're going to deal with it. We'll be fine and looking forward to revenues increasing and fairly soon. RAY SUAREZ: Mark Warner, you're another governor who didn't have much of a honeymoon when it came to the fiscal challenges in your state. What does it look like today? GOV. MARK WARNER: Well, Ray, we've gone through three rounds of budget cutting in less than one year that I've been in office. We closed 3.8 billion in the first three months, as your announcer indicated, about 858 million in October, and now I've submitted a plan for another billion-two in savings and some small fee increases but no tax increase to the legislature before the Christmas holidays. I actually think in Virginia we've seen the worst of it at this point and I think that by acting proactively, that hopefully we are a little bit ahead of the curve.
	Education and Medicaid: required spending?
	RAY SUAREZ: Are your hands tied, governors, in part by so much of the state budgets being taken up by two big items: Education and Medicaid alone, Governor Owens? GOV. BILL OWENS: Well, certainly here in Colorado education and Medicaid take up 60 percent of our general fund. Add in higher education and you're up to 80 percent. So when it comes time to have to cut, the cuts are very difficult because you have to cut into programs which are not only very popular but also, in most cases, very, very useful for the people that we're representing. RAY SUAREZ: Governor Napolitano, same question. GOV.-ELECT JANET NAPOLITANO: Obviously, if we were to balance the budget on the part of the spending we could reach, we would have to cut things like our universities by 40 percent. One of the huge drivers of these budget deficits, beyond the down economy, of course, is the cost of health care as was mentioned earlier in the show. It has almost doubled in Arizona in the past four years for our Medicaid eligible population. RAY SUAREZ: Mike Leavitt, you have a very low average age -- you have a lot of kids in your state, K-12 and Medicaid must be two big items in your balance sheet as well? GOV. MIKE LEAVITT: Like other states, it makes up the majority -- a vast majority of our budget. I would point out, however, that there are two areas that contribute to this. One is the lack of flexibility granted to states by the national government to deal with problems in the area of health care to the poor or Medicaid. It's the one area of our budget that is growing almost without restraint. And we have very little capacity to deal with it. Congress could be very helpful to us by simply giving us the flexibility to manage our health care systems in the same way that private sector managers have. I'd also point out that a good share of this is not just driven by the economy. There's been changes in our economy, structural changes that mean, I think we will be dealing with some of these problems for a good long time. RAY SUAREZ: Governor Warner? GOV. MARK WARNER: I would echo what Mike said. We have been able to protect public education through the shortfall. It's my top priority. We did freeze our Medicaid reimbursements. As Mike already touched on and I think one of the things all the governors are in agreement with, just as we are partners with our local governments, we're also partners with the federal government and the federal government's obligation to pay its fair share on Medicaid, on transportation, on making sure that they pick up their share of homeland security, are areas where frankly Congress left town before the elections without finishing their work. It's I think all our hope they take up the items as they reconvene and become that full partner they need to be.
	Finding ways to plug the budget holes
	RAY SUAREZ: What are your options, Governor Warner? When you look at a hole in the budget, what tools, what possibilities are at your disposal when you're just not getting the tax revenues you were getting in the late '90s? GOV. MARK WARNER: We had, in the last fiscal year in Virginia, the largest decline in tax revenues since the tax department has been keeping records. Part of that was exacerbated in Virginia because in our past, and I've only been governor for a year, we were operating on a fairy tale existence for a while. We were basically cutting our taxes dramatically, increasing our spending dramatically at the same time, and assuming the go-go days of the '90s was going to last forever. Well, that fiscal house of cards collapsed. We've gotten through the year by make cutbacks in services, we've raised tuition. We've used our one time tools like the Rainy Day Fund, which is set up for these kinds of circumstances. But there is also a window here of opportunity, and what we've proposed to our legislature for the upcoming session is the most massive government restructuring program in the last generation in Virginia -- consolidation of almost 10 percent of state agencies or elimination of the agencies, consolidating technology services, procurement, HR, not very sexy things but things that can really, in the long run, make Virginia state government more efficient and cost effective. RAY SUAREZ: Governor Owens, you were giving Colorado taxpayers rebates when there were surpluses when times were good. Can you go back to them now and say we need a little bit of that money back? GOV. BILL OWENS: You know, Ray, I wouldn't want to, even if I could, because I think now would be the precisely the wrong time to try to take more money from taxpayers. I think that our economy is relatively stable because we've kept the cost of government somewhat lower than some states. One of the challenges that I think that we face as governors is simply this. With the exception of the four great states who are on your show tonight, you look at the states around the country and state spending increased at twice the rate of increase of federal spending between 1995 and 2002. So in some respects, states haven't been as prudent and as careful as we should have been during the good years. I don't think that means it's a necessary time to go out and raise taxes in on our citizens. They're suffering just as our state revenues are. And so we need to pull in our belts as these four states are and get through this period of challenge. RAY SUAREZ: Governor Napolitano, in addition to the cutting, are things on the revenue side that are available to you as tools? GOV.-ELECT JANET NAPOLITANO: I'm not going to be proposing any tax increases. I agree that this is a bad economic time to do that. We have a number of one-time things we can do to get through '03 and '04. Keep our fingers crossed that the economy turns around and keep our fingers crossed that, as Governor Warner mentioned, Congress, when it reconvenes, acknowledges it has not been bearing its full share of our partnership and steps up to the plate. RAY SUAREZ: Governor Leavitt, what have you been able to do in Utah to close the gap? GOV. MIKE LEAVITT: We have been prioritized education, as other states and other governors have mentioned. We've also worked to assure that we are not having to turn criminals out of our prisons. But I focused on proposing -- putting off or at least delaying some highway projects and to discontinued subsidizing, in some cases, water projects with tax dollars. We've also clipped and tucked and combined and prioritized and taken some money out of our savings account and all of the things the other governors have mentioned and I think we are all quite hopeful that things will turn around and the economy will get better. I indicated earlier, however, some of the problems are structural. There have been changes in the way our economy works that, in the long run, states are going to have to deal with because our tax base, the things that we draw revenue from, have been shrinking as our economy goes more and more to a service economy.
	Communicating the crisis to the public
	RAY SUAREZ: Are you, as governors able to really carry on a conversation with the people of your state about the realities that you face; the kind of numbers that are coming across your desk? How hard is it to explain the fix that you're in, Governor Warner? GOV. MARK WARNER: Well, sometimes the numbers are so enormous that they don't translate well. One of the ways I've tried is to indicate that the shortfall in Virginia this year has accounted -- is the same as $750 for every man, woman and child in Virginia. That puts us in a little more manageable terms. Some of the budget cuts we've had to make, unfortunately, have clearly affected people's lives. We shut down some of our department of motor vehicles offices and at others reduced hours. I've caught some flack for that. But I couldn't spare DMV while we were freezing health care reimbursements. Voters in Virginia and Virginians understand we have a shortfall. But I want to come back to the point that Mike made as well. This is also a time to go about streamlining state government, it's a time to rethink how government operates and really to take on issues that the good times you don't take on because of bureaucratic inertia. So whether it's consolidation of existing agencies, whether it's looking at the way the state spends procurement or hires people -- my background is technology before I was in government -- how we can maximize our technology utilization, those are things in the long run that will make our states much more effective and much more efficient. RAY SUAREZ: But every government program has some fans. If it is a line item in the state budget, somebody probably put it there. Governor Owens, how do you explain the things you have to do on a weekly basis when you're making really tough decisions about how the state gets run? GOV. BILL OWENS: Ray, I think you just tell it like it is. I think everybody in Colorado and virtually everybody in the country knows that over the last year, year and a half, we've had challenging budget times. These challenging times have hit state budgets even harder than they've hit in many cases family budgets. And so what you do is you just use this as an opportunity to explain what you're having to do, why you're doing it and I think that Coloradoans, like Americans, are willing to step up to the plate and understand when you're in a challenging time like this. I would also echo, though, what Governor Warner said, and that is that this can be a time of opportunity. This is a time when you can look at our bureaucracy. This is a $13 billion enterprise here in Colorado. And it is a good opportunity to look for ways to make it run better and use this challenging time as a time to move forward and do things that otherwise, in good times, you might not have been able to accomplish. RAY SUAREZ: But if, Governor Leavitt, you're changing the way you do business and telling people they have to wait, isn't that just demand that builds up like behind a dam, until you do have money again? I mean, when you're saying to localities for instance, we are not going to revenue share with you this year the way we planned, don't they just want it next year or the year after that? This isn't something that goes away, is it? GOV. MIKE LEAVITT: Ray, programs like this help enormously, I think, to inform the public because we are now engaged in something that hasn't happened for a couple of decades and that is a discussion about what the proper role of government is. What do we want government to do? What are we willing to pay for? What are we not willing to pay for? How do we separate our wants and our absolute needs? This is, in fact, a difficult time. But we're working through it. It doesn't mean it won't be without pain. It doesn't mean we won't make some mistakes. But we'll learn some things, and I think government can come from this stronger. We can become better people as a society, and we'll learn some things about what's most important to us. RAY SUAREZ: And Governor Napolitano, a different shape of local government, a different set of expectations that people will bring to what state government does? GOV.-ELECT JANET NAPOLITANO: Perhaps, although I think we're being a little easy on ourselves. Part of this is fueled by the down economy. But also, in a state like Arizona, tremendous growth, 42 percent population growth net in the past ten years. So that now with basically the same revenues we had in 1999, I have 300,000 more people on Medicaid, 100,000 more children in school and 5,000 more inmates in prison. And those are kind of the basic services that government should be able to provide: Education, public safety and health care. So we have to be looking forward for the long term to plan for the growth we hope will continue. RAY SUAREZ: And watch those national economic statistics, I guess, like a hawk, hoping that things are starting to turn around, Governor? GOV.-ELECT JANET NAPOLITANO: Exactly. And look at what my fellow governors are doing and see what good ideas they've come up with. RAY SUAREZ: Janet Napolitano, Mark Warner, Bill Owens and Mike Leavitt, thank you all.