Budget Cuts Will Squeeze State and Local Treasuries

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WHEN the United States' budget battle ends in Washington, D.C., it will have only begun for state and local governments.

Already in the worst financial shape since 1983, state governments would be squeezed by further cuts in the federal budget. Some cities already in fiscal crisis could also be hit hard by budget cuts at the federal level and, indirectly, from the states.

State and local governments face a Catch-22 situation. If President Bush and Congress fail to reach a budget compromise by Oct. 19 and the across-the-board Gramm-Rudman cuts take effect, states would quickly have to delay big capital projects and reduce services.

If a budget deal emerges, then the cuts would be less draconian, but the states may lose revenue as new federal taxes are piggybacked on items that the states tax already, such as gasoline.

"State and local governments are in a kind of bind," says Elliott Dubin, an analyst with the Advisory Commission of Intergovernmental Relations.

"I don't think there's anything quite like it that we have seen," says Christopher Zimmerman, chief economist with the National Conference of State Legislatures. "Unfortunately, things look like they are going to get worse before they get better."

As the US economy has slowed, state revenues have slowed - dramatically in some cases - since 1989. More than half the states would have ended fiscal 1990 in deficit had they not raised taxes or cut their budgets, according to a fiscal survey released Oct. 5 by the National Governors' Association and the National Association of State Budget Officers.

States' year-end budget surpluses dropped substantially, from $12.5 billion in fiscal 1989 to $9.1 billion in 1990. They are estimated to dip further to $7.4 billion in fiscal '91, according to the survey. That amount would represent only 2.5 percent of state expenditures - the lowest level since the 1983 recession year, when surpluses reached 1.5 percent of expenditures.

"There is no evidence to suggest that state fiscal conditions in 1991 will represent an improvement," the report concluded. "If a recession were to occur, states would be in substantially worse condition."

Indeed, the condition of the national economy is so important to the states' fiscal situation that many governors would prefer a tough budget deal if it reduced the deficit and revitalized the economy, says Chris Nolan, director of the Federal Funds Information for States, which is affiliated with the National Governors' Association. "They (the governors) would be willing to accept some pain to get a deal."

But the acceptability of a federal budget compromise will depend very much on its details.

"I am not a happy camper," says William Althaus, the mayor of York, Pa., and chairman of the advisory board of the US Conference of Mayors. He says the original budget compromise Mr. Bush and congressional leaders worked out should have been passed by Congress and was preferable to the draconian cuts that might be imposed by the Gramm-Rudman deficit-reduction law.

Under Gramm-Rudman, York would see reduced assistance from the Federal Bureau of Investigation in its battle against the drug problem, he says. Regional bus service, which receives some federal funding, would have to be cut back. Low-income housing projects would have to be postponed, because federally supported community development block grants would be cut by 38 percent. …