States hit by budget shortfalls, new needs

In Florida, lawmakers have called a special legislative session to consider $1.4 billion in spending cuts. In Colorado, road and construction projects are being cut by $385 million. And California faces its worst spending crisis in a decade.

After 10 years of swimming in excess revenues during an economic boom, nearly every state now stares at red ink.

The problem: A slowing economy, compounded by the events of Sept. 11, means that revenues are shrinking resources even as demands - from new security measures to longer unemployment rolls - rise. So in recent weeks, most states have begun to slam the brakes on spending.

"There are a couple of exceptions, but we have moved into a fairly universal situation of tight finances for the states," says Scott Pattison, executive director of the National Association of State Budget Officers (NASBO).

Eight states told agencies to cut budgets last week. Maine is looking to curtail state employee trips and office supplies, while Michigan is considering school-budget cuts.

"Add to an already slowing economy the tragedy of the World Trade Towers, and you can see a lot of states backpedaling to reconsider budgets they already have enacted because their revenue projections are not being met," Mr. Pattison says.

Though 46 states report slower revenue than anticipated in their July projections, the added concerns since Sept. 11 have socked some regions especially hard. High-tourism states of Florida, Nevada, and Hawaii confront heavy drop-offs in travel by thousands who have opted not to fly. Washington State faces the loss of about 10,000 jobs at jetmaker Boeing. Manufacturing-reliant Midwest states such as Missouri, Wisconsin, Ohio, and Michigan have been hit harder than oil-reliant Texas.

"The terrorist attacks of Sept. 11 have done nothing less than change history - across America and across Florida," said Florida Gov. Jeb Bush (R) in calling for a special legislative session to rewrite the state's budget.

While state planners there have outlined principles to guide their cuts - forgoing pay raises, no new taxes, protect education and the elderly - the immediate goal is to cope with an estimated $1.4 billion shortfall in the $48 billion general fund.

Other states have adopted similar principles, stressing management efficiencies rather than elimination of programs.

"The first things states look for are ways to curtail spending without eating into core programs and entitlements. That usually means deferring maintenance and stopping capital projects," says Arturo Perez, an analyst at the National Conference of State Legislators.

Washington State, for example, is freezing $400 million in public works projects and considering a pay freeze.

"It is sufficient to say we are in serious trouble," says Hal Spencer, spokesman for the state's budget bureau. The state has a $22 billion budget, but half is off limits because earmarked by law for entitlements such as education. That means legislators are looking at cuts of nearly 10 percent from what is left. That could include social services and corrections, which have been cut drastically in recent years, and higher education.

"We were already dealing with the dotcom meltdown and generally declining economy," Mr. Spencer says. "Now this."

One thing that is generally not happening, for now, is tax hikes.

Besides the psychological effect on consumer confidence, the move would reduce sales-tax revenue, as consumers have less money to spend.

New taxes also work against the principles of an economic stimulus package that many are anticipating from the federal government. "It's still too early to talk about tax increases in this environment," Mr. Perez says.

Many states remain in good fiscal health. But even they are scrambling to respond.

"We had a $1 billion buffer this year, but Sept. 11 is sending us back to the drawing board," says Fran Rappa, treasurer for New Jersey's bureau of the budget.

California is another state that had huge surpluses in recent years but is still stumbling. Nearly $6 billion has been spent on energy purchases to keep the lights turned on, and many lawmakers are worried the state is on track to wipe out $2.6 billion in reserves already built into the current budget. While not as tourism-reliant as Nevada or Hawaii, California still has a huge travel business, whose losses are rippling through the economy.

State revenues are already running $1.1 billion below estimates for this time of year. Gov. Gray Davis (D) is considering a special legislative session.

Even before the attacks, the US had lost 250,000 jobs in August alone. At least 275,000 more-recent job losses are being directly attributed to the tragedy.

Still, states seem to be averting panic. "This is more than a minor blip, but not something we are in a frenzy over," says Perry Comeaux, director of administration for Nevada's budget bureau. His state may be the most vulnerable of all to changes in consumer behavior. Gambling revenues and sales taxes account for 70 percent of state revenues.

"If this consumer-confidence scare is short-lived, we will be all right," he says. "If it goes on for an extended period, it could get very deep."