Fiscal Headaches Will Force Tough Choices on Governors

Victory parties in the 36 gubernatorial races will be short this year.

After campaigns filled with vague rhetoric about cutting "the bureaucracy" or finding "additional revenue," newly elected governors will be pressed to come up with specific remedies for yawning budget deficits. "The fiscal crisis is so serious that it will inevitably consume at least the first two years and maybe the entire four-year term of the next governor," says Michael Widmer, president of the Massachusetts Taxpayers Foundation, a watchdog group in Boston, where the state government is facing as much as a $2 billion shortfall in its next fiscal budget.

By ANDREW CAFFREY and RUSSELL GOLD
Staff Reporters of THE WALL STREET JOURNAL

States collectively faced some $50 billion in budget shortfalls entering this current fiscal year, which for most began July 1. Now California may be facing another $12 billion-plus deficit, New York’s revenue shortfall has been estimated as high as $10 billion, while the gap in Texas’s next two-year budget could be anywhere from $5 billion to $12 billion.

Why the continuing misery? Growth in tax receipts remains anemic, while big-ticket services such as Medicaid and public education are experiencing higher enrollment and higher costs.

The cost of fixing states’ problems will ripple through the national economy. State and local governments account for 12% of the U.S. economic output. Moreover, the timing of state spending cuts and tax hikes — hitting with full force next year — could amplify their drag on an already-limping economy.

With a few weeks to go until the midterm elections, many Senate, House and gubernatorial contests are too close to call. See an interactive map1 for an in-depth look at the most hotly contested races. And join a discussion2 about the elections featuring invited guest experts.

Despite the states’ financial crisis — the worst in at least 20 years — candidates have been able to largely tiptoe around the issue. Pollsters say voters are more focused on the possibility of war with Iraq. But soon it will be time to pay the piper. Here is a look at four states whose budget problems are among the gravest.

Massachusetts

A few weeks after his 1990 election victory, Bill Weld was walking through an airport when, according to former top aide Mark Robinson, a businessman identified Mr. Weld to a colleague: "That’s the poor bastard who just got elected governor of Massachusetts."

The same could be said 12 years later for either Democrat Shannon O’Brien or Republican Mitt Romney, who also will confront a fiscal crisis when one of them succeeds acting Gov. Jane Swift, a Republican who isn’t running. Beyond vows to cut bureaucracy and reduce Medicaid costs for pharmaceuticals, neither candidate has been too specific about how to close the budget gap. Both have said they wouldn’t allow cuts to affect school classrooms, but that pledge may be hard to keep.

Massachusetts is a decade into a spending spree to fix its public schools. At $3.2 billion, state aid to classrooms is the second-largest item in the budget. But now this most sacred of political cows may be vulnerable to cuts. "You can’t deal with a $2 billion problem without going after public education," says Thomas Finneran, the Democratic Speaker of the Massachusetts House, who holds great sway over budget matters. "It’s in the target zone." He adds there is "little political capacity" for the legislature to again raise taxes after a $925 million increase earlier this year.

That is "very depressing news" to Sheldon Berman, school superintendent in Hudson, a city of 18,000 in central Massachusetts. Even the increased state aid hasn’t kept pace with Hudson’s enrollment growth, and the sour economy forced the city to institute a hiring freeze this year. More than a third of classes at Hudson’s one high school are above the district’s 25-student target, up from around one-fifth of classes just two years ago. Already lab groups in introductory chemistry have as many as six students, "which means one or two will do the work and the rest will stand around and watch," says teacher Marty Clough.

Ohio

Every month, thousands of Ohio gamblers travel to the northern tip of West Virginia to play the 3,000 slot machines at Mountaineer Race Track. Their pilgrimage so crowds rural byways that the state of West Virginia may spend $70 million for a new bridge over the Ohio River. And why not, since West Virginia gets a big chunk of those Ohio gamblers’ losing bets. So do Detroit and Indiana, which host casinos that lure Buckeye gamblers.

Ohio voters have twice rejected gambling. Although Democratic challenger Tim Hagan supports video gambling, incumbent Republican Gov. Bob Taft, who is ahead in recent polls, adamantly opposes it. But now even some Republican legislators are marshaling forces to legalize gambling as a way to help close a projected budget shortfall for the next biennium of at least $3 billion.

Ohio will pursue other options as well. Two special legislative commissions are examining proposed changes in the state’s $8 billion Medicaid program, which at current service levels will cost $1 billion more next year. If re-elected, Gov. Taft says he would tighten reimbursements received by nursing homes. And both he and Mr. Hagan say they would consider eliminating special tax exemptions for businesses — an effort Mr. Hagan says could yield $500 million a year.

But any tax hit on businesses appears unlikely to pass the Republican-controlled General Assembly. Republican Senate President Richard Finan, who isn’t seeking re-election due to term limits, says he will continue to work to bring video slot machines to the state’s race tracks. One possibility: putting the question to voters on a ballot in May, to avoid a certain veto if Gov. Taft is re-elected. Depending on how the spoils are split with the tracks, the state’s take could be as much as $500 million a year.

Arizona

As it has since 1905 before it was even a state, Arizona recently held its annual state fair at a 96-acre location near downtown Phoenix. More than one million people attended, listening to country star Lee Ann Womack, roaming a gaudy midway and watching the judging for best angora goat. Next year, though, the fairgrounds — valued at an estimated $75 million — may be auctioned off to help pay down a projected $1 billion state budget deficit.

"When times are tough for a family, sometimes you need a garage sale," says Jim Morse, policy director for Matt Salmon, the Republican candidate for governor. Selling off state property is just one of the steps Mr. Salmon or his Democratic rival, Arizona Attorney General Janet Napolitano, may be forced to resort to in the next 12 months. After swearing off tax increases and cuts to education, either candidate will have to be creative to further shrink an already-tight $6.2 billion budget.

In addition to dumping state real estate, Mr. Salmon has revived a previously rejected proposal to privatize some state prisons in return for an upfront payment. Ms. Napolitano has suggested consolidating agencies, such as the state commerce department and office of tourism.

Both agree the first step is to trim 10% from agency budgets, except for the state corrections system and education funding. But finding fat is going to be difficult. Republican Gov. Jane Dee Hull and the legislature already cut $837 million this year.

Ms. Hull, who is not seeking re-election due to term limits, also has proposed an additional $409 million in cuts, eliminating more than 700 state jobs and reducing services such as child-support enforcement and air-quality monitoring. Ms. Hull isn’t expected to act until after the election, allowing the governor-elect to have a voice in the process.

Wisconsin

Two weeks ago, a nine-member committee of former top Wisconsin public officials recommended a remedy to a $2.8 billion-plus shortfall projected for the next two years. Among the suggestions: Slice state aid to Wisconsin’s more than 3,000 local governments, raise the sales tax to 6% from 5% (in exchange for reducing income tax rates) and broaden the sales-tax base to include professional services that include legal advice and haircuts.

Both gubernatorial candidates — incumbent Republican Scott McCallum and Democrat Jim Doyle — immediately rejected the idea of tax increases or big cuts in local aid. Instead, they would slash the state work force and outside consultants, eliminate agencies and consolidate administrative functions. Mr. McCallum would also hit up the federal government and Indian casinos for more money, while Mr. Doyle says the state can collect tens of millions more in delinquent taxes.

But neither candidate’s prescriptions may be enough, and the committee’s recommendations face formidable obstacles. More than 60% of the state budget goes to local agencies, such as tiny school systems, special lake districts and big cities. The panel of former officials said a $628 million reduction in such aid would be just the tonic to force a long-overdue consolidation at the local-government level.

Little villages such as Genoa City, along the Illinois border, say there is no give at their end. Homeowners there are already paying an additional $269 a year in property taxes for a new middle school. Some longtime residents are still smarting over the late 1950s consolidation of the high school with larger neighbor Lake Geneva and two other communities. "The fear is, we’ll lose control of our schools," says Patrick Sherman, a member of Genoa City’s board of education.

Mr. Sherman and other local officials say it will be nearly impossible for Wisconsin to fix its shortfall without a tax increase, no matter what the gubernatorial candidates say. "Local municipal officials are really willing to sit down at the table" to discuss reforms, but cutting their state aid can’t be the only answer to Wisconsin budget woes, says Jeannette Bell, mayor of West Allis outside Milwaukee.

Already local government officials and social-service advocates are forming a coalition to push for a tax increase, and already opposition is lining up to fight a tax on professional services.