Governors: State Economies Still Hurting

Many states are cutting their budgets and dipping into emergency funds to make ends meet, according to a report released Monday.

"For 2002 fiscal, state revenues were down negative 6 percent," said Raymond Scheppach, executive director of the National Governors Association, which released the report with the National Association of State Budget Officers. "This is the first time we've seen a negative growth in revenues since the second World War."

Fiscal year 2003 doesn't end until June 30th in most states but already 38 states say they are concerned or pessimistic about their budget situation and expect to end up the year in the red, the Fiscal Survey of States revealed.

Ten other states say they have a stable or optimistic financial outlook, and two states did not report back projections to the National Conference of State Legislatures.

Scheppach said that the battered budgets are attributable to three problems: high health care costs, rising at 13.2 percent per year, an overall slow economy nationwide and outdated tax systems that won't allow state revenues to grow as they should.

Scheppach said the problem is that states are thinking in terms of a 1950s manufacturing economy rather than a new millennium, high-tech international economy.

NCSL Deputy Executive Director Carl Tubbesing said the prognosis for states isn't particularly cheery for the near term.

"State budgets tend to recover more slowly than the economy does because of tax collections coming in and that sort of thing. So even if the economy is on the upswing, it could be another 18 months or so before the state budgets start to see that," Tubbesing said.

Americans soon may feel the pinch of state budget problems, according to the experts. Most states require a balanced budget every year, and the money has to come from somewhere.

Some states may try to balance their ledgers by raising the tuition at public colleges and universities, cutting Medicaid benefits, and laying off or furloughing government workers.

Twenty-three states reported they have already raised taxes this year, collecting $8.3 billion in tax hikes since July 1. That was the largest dollar increase since 1992, when $15 billion in tax hikes were enacted, the association reported.

Cigarettes and other tobacco products saw the biggest tax hikes, $2.9 billion, followed by sales taxes, $1.4 billion; corporate income taxes, $1.2 billion; and personal income taxes, $1 billion.

"It just gets worse and worse," Tubbesing said. "I think what states have to do to balance their budgets in some ways exacerbates the problems of the economy. If they have to cut spending — that takes money out of circulation — and cutting jobs and often they have to turn to tax increases. And all of those tend to slow the recovery."

With additional homeland security expenses facing states, some governors say they'll need some help from Uncle Sam.

"You do the best you can to stay level but there is going to be a concerted effort from all the governors to make sure that we get the dollars to do what we need given this post 9/11 world," said Maryland Gov.-elect Robert Ehrlich.

Ehrlich is one of 24 new governors around the country who will come into office and immediately face very tough budget decisions.

They are counting on congressional lawmakers to revive a bill that sends states $9 billion in Medicaid assistance. The legislation passed the Senate in July on a 75-24 vote, but stalled in the House.

Fox News' Molly Henneberg and The Associated Press contributed to this report.