State, city officials keep wary eye on Washington budget cutters

All the talk in Washington lately about the plumpness of state budget surpluses and the need to sew up the national deficit with more cuts and tax changes makes many state officials distinctly uncomfortable. In united fashion they have, in no uncertain terms, shot down the United States Treasury Department's recent rosy predictions that state and local governments could have an $86 billion-a-year surplus by 1990.

Deluging Treasury officials with written and oral rebuttals, they insist the federal projections (based on the low-spending year of 1983), falsely assume no spending increases or tax decreases -- although a number of emergency state tax hikes are being repealed.

What particularly nettles these leaders is that they see such forecasts being used as a rationale for the Office of Management and Budget (OMB) plan to assign the lion's share of the federal budget cuts to states and cities.

``Together we represent only about 10 percent of the national budget, but we're being asked to take about 60 percent of the cuts,'' says National Governors' Association (NGA) executive director Raymond Scheppach.

Though the Republican Senate leadership has vowed to come up with its own deficit-reduction plan by February, expected to include a broader spending freeze, state officials are not greatly comforted. The reason, they say, is that the deficit (according to the revised early January forecasts) will require at least $20 billion more in cuts just for the next fiscal year to meet the President's goals.

Although cuts in defense and social security cost-of-living adjustments are expected, in the GOP plan, cuts in state's and cities appropriations may end up being as large as those in the OMB plan. Those cuts are reportedly being studied by Republicans.

``There's no reason to feel any better about things,'' says Gerald Miller, director of the National Association of State Budget Officers.

Technically the states, which have been deprived of federal revenue sharing funds since 1979, may not be as directly hard hit as the nation's cities by the cuts.

As Kansas Gov. John Carlin, the current NGA chairman, noted in a telephone interview: ``There really is little or no money going to the states -- we don't get assistance. We're conduits. We pass money along to the cities and we run a lot of federal programs.''

Yet in many states more than half of their federal dollars support such human-service programs as medicaid, which provides health care for the poor, and Aid to Families with Dependent Children (AFDC). According to the OMB savings plan, federal payments to states for medicaid would be frozen next year. Many states already pay as much as 50 percent of medicaid program costs and would come under pressure to do more.

Michigan Senate Budget Office director Ted Ferris says that for most states medicaid is ``the No. 1 budget problem'' because it is costly and usually is growing faster than any other portion of the budget. Medicaid growth is recently down a bit in Michigan, but is still rising about twice as fast as other programs, he says.

Michigan is slated for more medicaid help than usual from Washington this year, under a formula that takes into account a state's ability to pay, Mr. Ferris says. But he and others are concerned that the allocation will be arbitrarily cut before it is sent.

In a rural state like Maine, state legislators must also be concerned with the OMB's proposed cuts in agriculture research, farm price supports, and rural housing subsidies. ``Nothing happens in a vacuum,'' insists Maine House Speaker John Martin. ``States end up with more pressure to provide water and sewer extension lines, money for crop irrigation and agricultural research.''

Similarly, cuts aimed at cities, such as OMB's proposal to end local revenue sharing, also affect states. Not only do states get requests to fill in the gaps -- which they can only rarely do -- but the change affects the revenue they receive and the spending pressures they face.

``We're very concerned about what happens to revenue sharing because the viability of our cities is really the viability of our states,'' says Mr. Miller. The OMB's proposed elimination of federal operating assistance for urban mass transit, which could force service cuts and rate hikes, is also a major state concern.

In Michigan economist Ferris's view, it should not be so hard to cut 10 percent from Washington's budget. ``We cut ours 15 percent during the recession,'' he recalls. But the tendency, he says, to regard defense and social security spending as sacrosanct leaves Washington trying to squeeze almost everything -- for the second time -- from state and local governments.

Lucille Maurer, a member of the Maryland House of Delegates, says what bothers her most in all the federal deficit talk is the tendency to treat states and cities as ``subsidized'' special-interest groups rather than colleagues in a team effort. ``We feel we should be talking about who provides what services in this government partnership,'' she says.

Technically, New Federalism talks between the states and Washington broke down two years ago when Washington proposed funding all of medicaid in exchange for states becoming exclusively responsible for financing the AFDC program. Ray Scheppach of the NGA says negotiations bogged down then in talk of cuts, and would do so again. ``The governors are still interested in an additional sorting out [of functions],'' he says, ``but it's not the right time.''

The administration's proposal to net an extra $30 to $35 billion by eliminating the historic federal deduction allowed for state and local taxes is another majory concern, especially among the populous high-tax states that provide a higher-than-average level of services.

``If deductability is taken away, it will have a much greater impact on our states,'' notes David Merkowitz, a spokesman for the Northeast-Midwest Congressional Coalition. He says that states in his region tend to take a greater proportion of their revenue from personal income taxes than Sunbelt states, which sometimes lean more heavily on energy taxes passed along to energy-importing states. ``For us, it's kind of a double whammy,'' Mr. Merkowitz says.

But for the moment, the tax proposals appear to be on the back burner. Congress expects to deal first with the fiscal 1986 budget cuts. State officials insist they empathize and ask only that they be allowed a voice and that the cuts be distributed fairly.

``The No. 1 concern of governors is the deficit,'' insists NGA chairman John Carlin. ``A certain degree of sacrifice is a very modest price to pay. We'd just like to have as much input as possible in how it's done. The people out there elected all of us.''