Unsettled Budget Leaves State Plans On Shaky Ground

IN a normal year, Maryland would be printing its budget documents this week, and the governor would be working on his State of the State speech.

But this year, the budget is only penciled in, and Democratic Gov. Parris Glendening still does not know if he'll offer voters a tax cut. The reason for the governor's fuzzy approach: the budget impasse in Washington, where talks are adjourned until Friday.

Governor Glendening is not alone. Almost every governor in the nation is struggling to put together a budget based on hazy information from Capitol Hill.

The uncertainty could affect everything from the size of tax cuts expected in some states to the many programs slated for major overhaul, including Medicaid and welfare.

"It has wreaked havoc with our ability to plan," says Jim Ramsey, Kentucky's budget director.

For most states, the uncertainty is a significant problem because they get 20 to 40 percent of their revenues from Washington. In New York State, for example, $22 billion out of a $63.8 billion budget comes from federal sources. Maryland estimates that 10,000 of its state employees are federally funded.

The uncertainty follows a generally good year for the states. "The states ended the fiscal year last June on average in the best condition financially in the last 15 years," says Ron Snell, director of the Economic and Fiscal Division of the National Conference of State Legislatures in Denver. "If the economy continues at a moderate pace, the states will accumulate balances [surpluses]."

Those positive balances are likely to work their way into the upcoming State of the State speeches. "The governors will brag what good shape their states are in," predicts Steve Gold, director of the Albany, N.Y.-based Center for the Study of the States, who estimates there is a good chance for tax cuts in at least 11 states.

Once President Clinton and Congress reach a budget agreement, the governors and state legislatures are likely to spend most of their year trying to adapt to Washington-induced changes. "The theme this year will be reacting to and managing federal-state relations," Mr. Snell says.

The biggest prospective changes will be in welfare and Medicaid reform. Yet, until Mr. Clinton and Congress agree on those issues, it's not clear what it will mean for the states. For example, under the Republican proposal, the states will receive block grants but will be given the flexibility to decide who gets Medicaid. Under the Clinton plan, the states will also get block grants but will be required to continue to treat Medicaid as an entitlement.

Proposed budgets in Kentucky and New York illustrate two different approaches. In the Empire State, Gov. George Pataki (R) in his budget, which was unveiled on Dec. 17, assumed New York would receive less Medicaid funding in the future.

"New York, in particular, will have to end its policy of maximizing federal Medicaid dollars as those funds will no longer be unlimited," stated Governor Pataki in his budget.

He plans to cut $1.1 billion out of Medicaid spending, which represents 27.5 percent of the state budget. As a result of the cuts, New York is also likely to receive less federal money. "For every dollar a state cuts, total spending declines by about $4," Mr. Gold says, since government revenues are linked to state and local spending.

In Kentucky, Gov. Paul Patton (D) has decided to assume the passage of the congressional Medicaid reform bill. But the state will not make any cuts that will result in the loss of federal revenue. This is called "maximizing federal dollars."

Both states plan to look at their budget assumptions again next month to accommodate any federal changes.

In yet a third approach, Ohio and Delaware, with surpluses, are putting away money on the side. Delaware, which already has a "rainy-day" fund, has set aside an additional $30 million, or 1.7 percent of its budget. Ohio has saved $100 million in addition to a $838 million emergency fund.

"The money gives you options," says Dan Scholl, Delaware's assistant secretary of finance, "such as using it to replace federal money if you know there are cuts."

Despite the possibility of higher state expenditures on welfare and Medicaid, some governors are expected to propose tax cuts. Not counting states that are phasing in multiyear cuts, Gold expects tax cuts in Arizona, Delaware, Georgia, Maryland, Michigan (a one-time rebate), Mississippi, Utah, Iowa, and Minnesota. Massachusetts Gov. William Weld (R) also plans to ask for a new two-year $500 million reduction in personal income taxes. All this will be down from last year when 30 states cut $4.1 billion in taxes.

Although most states will eschew tax hikes, New Jersey Gov. Christine Whitman (R) - generally known as a tax cutter - recently proposed raising new revenues with a 25 cent per pack excise-tax increase on cigarettes. The additional money would fund charity care for children whose parents can't afford health insurance. "Governor Whitman looks at it as a user fee - anyone who objects can quit smoking," says Jayne Rebovich, deputy press secretary.