As the national economy has slowed in the past two years, state governments
have been feeling the pain. Nearly all are in fiscal crisis, according
to a pair of reports published in November by the National Governors Association
(NGA) and the National Conference of State Legislatures (NCSL). Many states
now face large budget deficits that are products of big troubles on both
the revenue and expenditure sides of the books. For governors, it's the
stuff of migraines and nightmares.
"We have to answer some fundamental questions about the very nature
of what we expect from state government," New Democrat Virginia Gov.
Mark Warner told his state in a televised address.
Warner took office in January 2002, inheriting a $3.8 billion shortfall
in a two-year budget signed by his predecessor, Republican James Gilmore.
Sounding the alarm bells early and often with tough, straight talk, Warner,
a seasoned businessman, set out to stop the bleeding with a series of
amendments to the existing budget. He focused first on reducing expenditures,
and insisted that the sacrifices must be widely shared. Warner has been
dogged in his efforts to solicit input from legislators in both parties.
Through an innovative program called "Ask Why," he has also
brought government employees into the process. The program urges them
to examine their agency operations from within and recommend areas to
be cut or overhauled.
Most governors will face similarly wrenching situations as they ready
their budget proposals for the coming year. They will have to dig deep
into a bag of tricks that includes across-the-board spending cuts, layoffs,
early retirements, and hiring freezes. Some have been able to dip into
rainy-day funds; others are eyeing tobacco settlement money. Many see
opportunities for fundamental reorganizations of state agencies. But all
face only hard choices.
In the end, those hard choices reflect deeply held policy values. Said
Warner: "Our priorities are clear in what we have protected from
cuts, at least for now: state police and local sheriffs, basic state support
for public schools, long-term care for the elderly and disabled, and health
care for low-income Virginians, to note a few examples."
Nationally, revenue streams have been dwindling across the board. Average
sales tax collections in fiscal year 2002 were 3.2 percent lower than
originally budgeted; personal income tax collections missed targets by
12.8 percent; and corporate income taxes were a staggering 21.5 percent
lower than projected, according to the NGA report. There's no relief on
the immediate horizon, either. NCSL's survey found 33 states with revenues
coming in below forecasts in the early months of fiscal 2003.
Expenditures have ballooned, meanwhile, in no small part because of entitlements
and programs that are funded according to predetermined formulas. Average
spending on Medicaid, for example -- which accounts for nearly 20 percent
of total state budgets -- grew a whopping 13.2 percent in fiscal 2002.
So in the quest to rein in spending, policymakers are being forced to
look under every budgetary stone.
New Democrat Gov. James McGreevey of New Jersey took office at the same
time as Warner. Like Warner, he has placed a premium on soliciting recommendations
from outside his administration. He wasted little time in signing an executive
order to create a budget commission that brought together top New Jersey
business leaders to help find ways for state government to cut waste and
operate more effectively and efficiently. And while McGreevey asked for
the business community's advice, he also asked it to share in the sacrifice,
taking aim in his first budget at corporate tax loopholes. "With
30 of the 50 largest businesses in New Jersey paying only $200 per year,
it is time they pay their fair share," he said.
Following on the heels of Warner and McGreevey, another group of New
Democrats is now joining the fun after successful gubernatorial bids in
2002: Jim Doyle in Wisconsin, Jennifer Granholm in Michigan, Janet Napolitano
in Arizona, Ed Rendell in Pennsylvania, and Kathleen Sebelius in Kansas.
Combined, their states are facing an initial fiscal 2003 budget gap of
nearly $5 billion, according to NCSL -- and all face lower-than-expected
revenues in the first part of this year.
But the newcomers have expressed eagerness to apply fresh ideas to meet
the challenge. For example, showing their New Democrat stripes, all have
proposed plans to harness market forces to start driving down the cost
of prescription drugs through bulk purchasing and other means.
State budget woes are a product of myriad factors, and no two states
have quite the same set of circumstances. But drug prices are a major
problem for most -- and an obvious area to rein in costs -- because
they have been a leading factor in the expanding cost of Medicaid. State
spending on drugs for outpatients has skyrocketed at an astonishing average
of 18 percent annually over the past three years. Of the many trend lines
governors are desperate to reverse, that ranks pretty high.
