Governors Seek Remedies for Shortfalls

This time, economists and analysts fear, the bursting of the property bubble will soon start to cause financial problems for localities dependent on property taxes -- and the localities will have to turn to state governments for aid.

The problem is exacerbated in New York and northern New Jersey because of the two states' heavy reliance on Wall Street's good fortunes to keep their own tax revenue high.

Some say the problem is overspending by state governments. And new governors in particular, such as Patrick and Spitzer, came into office with a list of plans to implement and promises they want to keep: in Spitzer's case, expanding health insurance for children, increasing the stock of middle-income housing and investing $1 billion in an Upstate economic development fund. Patrick wants to revive the cabinet-level post of education secretary and is exploring whether to offer in-state college tuition to the children of illegal immigrants who attend public schools.

Critics say the governors' one-time gimmicks to raise money mask the deeper budgetary problems. "They try to get more and more creative financially, but all of this can't replace budgetary responsibility," said Nicole Gelinas, a senior fellow with the Manhattan Institute, a New York think tank. "At some point, the checkbook has to balance. At some point, they'll run out of things to securitize or sell off."

Using creative methods to find cash is not new. During the last period of deficits, in 2001, some states raised money by securitizing their share of the large court settlements from tobacco companies. "The states took that money up front so they could close those budget deficits," Gelinas said.

Many of the governors have ruled out increasing taxes to cover the shortfalls, further limiting their options.

Spitzer, in his State of the State speech Wednesday in Albany, embraced the idea of imposing a ceiling on property taxes. In California, Schwarzenegger said, "I know that some people say that we should just raise taxes in order to fill the gap, but it would be wrong to raise taxes on people to cover Sacramento's overspending."

In New Jersey, Corzine said that if the legislature does not enact his plan for toll increases, the alternatives are to increase the sales tax by 30 percent, the income tax by 20 percent or the gas tax by 12 cents per gallon.

There is always an aversion to raising taxes during a recession.

The only other way for states to close the gap is by radically reducing spending, as Schwarzenegger is proposing in California. But according to some analysts, the states went through such painful cuts during the 2001 slowdown that there is not much left to trim.

The Center on Budget and Policy Priorities, a liberal think tank that advocates for the poor, reported that during the recession in 2001, about 34 states cut eligibility for public health programs, causing 1 million people to lose access to health care, and 34 states cut per-pupil aid to school districts in 2004, meaning higher costs for textbooks, shorter school days and fewer staff members. States also raised tuition at public colleges and universities.

"In general, state expenditures are below, on average, where they were prior to the last recession," said the center's Lav.