Healthy States -- For Now

July 23, 1995

State comptrollers and treasurers across the nation are whistling a happy tune these days, as well they should. Their coffers are brimming with tax revenue. The slim-down of spending programs during the recession has continued, though at a slower pace. Reserves, on average, are 64 percent higher than had been predicted a year ago.

Yet budget officials and most state leaders are wary of what lies ahead. The momentum in Congress and the White House to get serious at last about closing the yawning federal budget gap poses a big challenge for the states. They will be directly affected by what happens in Washington.

Take Maryland, for instance. At the moment, state government is better off than it has been in years. The economy has rebounded, slowly. A cautious governor and General Assembly have hiked the "rainy day fund" -- set aside to deal with fiscal emergencies -- to $370 million. That should put Maryland in position to ward off fiscal crises without resorting to panicky solutions.

The state also set aside $190 million to cope with federal cuts. Should the impact fall short of that amount, the remaining funds will form the foundation for an income-tax reduction.

How hard could Maryland be hit? Mahlon Straszheim, a University of Maryland economist, predicts as many as 20,000 jobs could be lost in Maryland over the next four years -- most of them in the Washington suburbs that have turned into the state's economic engine. This would produce a double-whammy for state government -- a loss of tax revenue from these jobs and a loss of federal funds from other budget cuts in Washington.

The problem is that no one yet knows the precise nature of these cuts. It is likely, though, that the worst of the federal actions won't take place until later. That will give Maryland officials time to stimulate the private sector to fill the jobs void. But there still will be a substantial impact in the state from congressional budget actions.

Annapolis is taking a conservative approach. Agency heads have been told there will be zero growth in their budgets next year and have been encouraged to eliminate programs deemed non-essential in order to shore up core activities. Only education, Medicaid, local aid, prisons and economic development seem immune.

Caution remains the operative word. As the federal budget shrinks, state governments must respond -- by cutting social programs, by replacing federal funds with state funds or by experimenting with new approaches. Coming off robust fiscal years, the states are well positioned to grapple with this predicament -- if state house officials use good judgment, creativity and caution.

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