States' tactic to stem red ink: borrowing

"Seven quarters of actual revenue decline is unprecedented," says Robin Prunty of Standard and Poor's in New York. "When it's part of the solution," and not the sole solution, borrowing is acceptable, she adds.

California, however, is fast becoming an example of what happens when avoidance becomes a state's primary political culture. The state was pushed to borrow by the collapse of stock-options and capital-gains taxes, which, in 2001, made up 25 percent of the budget, but have now fallen to 3 percent. Desperate to support a $100 billion budget, California has leaned heavily on loans.

Although California has no new budget in place, more loans will almost certainly be a part of the calculus - even though California has the lowest bond rating of any state, meaning it has to pay high interest. Moreover, with any chance for significant tax or government reform slipping away in partisan budget battles, analysts say California could well be revisiting the bond market next year.

"Usually people come to their senses and don't keep doing it year after year," says David Hitchcock, Standard and Poor's California analyst. "It's not a comfortable situation when the only brake on a state is the concerns of people on Wall Street."

The same economic pressures, however, are tapping more and more states. A study released last week suggested that 19 states are actually planning to lower their spending in 2004. Even in downturns, spending cuts are usually made from estimates of growth, meaning that spending still rises overall.

"It is extremely unusual to have a decrease," says Scott Pattison of the National Association of State Budget Officers, which released the report. "It really demonstrates how difficult this situation is."

As late as this weekend, eight states that were supposed to start their new fiscal year today were still working on this year's budget, according to the Center on Budget Policy Priorities. Usually, "one or two" miss the June 30 deadline, says Arturo Perez of the National Conference of State Legislatures.

The difference is the chronic lack of revenue and lawmakers' hesitancy to raise taxes. Indeed, observers say, politicians' light tread around taxes is a shift in the business of budget-making. "The climate around taxes has changed," says Ray Scheppach of the National Governors Association in Washington. "In 1991, [states] got through by raising taxes. Now you can't do that."

Yet, if there is no recovery soon, states may have to. Already, many are talking of convening special budget sessions in the fall as economic forecasts continue to be revised downward.

"Being finished doesn't mean a lot because the revenues aren't there," says Mr. Scheppach. "A lot of states are going to look at [the budget] in two or three months and need to come back and do more."

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