Slowdown: Risk For State Budgets

A PROTRACTED economic slowdown - or even just a long period of minimal growth - could especially squeeze state and local governments around the United States. States would find it increasingly difficult to balance their budgets, as legally required in most jurisdictions, and ``still meet increasing demands for public services,'' says David Sullivan, an economist with the Bureau of Economic Analysis in Washington. The bureau is part of the US Department of Commerce.

For the past several years, ``state and local spending has grown at a rate slightly higher than the growth in the rate for revenues,'' Mr. Sullivan says.

Indeed, in a study written for February's Survey of Current Business, published by the Commerce Department, Sullivan wrote that ``the fiscal situation of state and local governments has deteriorated steadily since 1984.''

``The pattern of states drawing down their [budget] reserves makes states vulnerable to an economic downturn,'' says Marcia Howard, director of research at the National Association of State Budget Officers in Washington. In 1980, the 50 states had reserves equal to 9 percent of their expenditures. By 1982, the reserves were almost all gone, as states grappled with recessionary conditions. States began to rebuild their reserves in the mid-'80s. But by the end of fiscal year 1988, which ended last June, reserves for the states were equal to 4.2 percent of expenditures, less than half the reserve level before the 1982-83 recession.

``The performance of the national economy is the single biggest determinant of state fiscal conditions,'' Ms. Howard says.

The current disparity between expenditures and receipts - through taxes and other state revenue-producing activities - is particularly apparent in the mid-Atlantic and Northeast regions of the US.

New Jersey, which has been one of the high-growth states during the past decade, is facing a $500 million shortfall for the $12 billion budget proposed for next year. New York was just forced to raise taxes to close a $3 billion budget deficit. Connecticut learned earlier this year that it will post a large deficit for next year. Massachusetts is facing a projected deficit of $250 million for the fiscal year ending June 30.

In other parts of the US, such as Louisiana and Wyoming, state governments are also facing difficult budget constraints.

Under an accounting method used by the Commerce Department, called the national income and product accounts basis, state and local government receipts increased 7 percent in calendar year 1988, two percentage points more than in 1987.

But state and local government expenditures increased 7.5 percent in 1988, the same as in 1987.

Sullivan warns: ``When you have a recession, tax revenues fall off at the same time that the demand for services, such as for welfare, increases.''

Using a somewhat different accounting method from that of the Commerce Department, state budget officers look at state general funds. This approach shows a better current fiscal position than the department's analysis.

``As fiscal year 1989 comes to a close in June for 46 [of the nation's 50 states], most states will be in the same or better fiscal position than at the close of fiscal 1988,'' says Howard.

Still, state officials should be concerned that ``rainy day'' and other surplus funds are being drawn upon to meet expenditures, she says. What might happen if ``there were to be an actual `rainy day' because of bad economic conditions?''

Experts note that not all states would find it equally tough to raise revenues during a turndown.

The Advisory Commission On Intergovernmental Relations (ACIR), based in Washington, in a recent study based on data collected through 1986, finds that states of the mid-Atlantic and Northeast region have rebounded well in their ability to raise revenue following the region's economic difficulties in the early 1980s. Western states and the Midwest, minus farm states, have also maintained their ability to raise revenues.

By contrast, energy-producing states, farm states, and Southern states in general have not done as well in restoring their ability to raise new revenues, an advisory commission spokeswoman notes.

Americans paid an average of $1,665 in taxes to state and local governments in fiscal 1987, according to the Commerce Clearing House. That is an increase of $118 from fiscal 1986.