Now that the federal budget soap opera has moved from center stage in Washington to the fringes of the domestic policy debate, city and state leaders are engaged in frantic discussions over how to lessen the pain they feel Congress caused them by last fall's budget package.

Two weeks ago, Arkansas Gov. Bill Clinton (D) told a House Government Operations subcommittee that the congressionally mandated expansions of the Medicaid program are a "back-door approach to universal health care" that use "the states' credit cards as the financing mechanism."

And last week, the National Conference of State Legislatures' annual federal assembly here turned into a gripe-fest for angry lawmakers who are facing record revenue shortfalls at the same time budget-writers in Washington are asking them to pick up a bigger share of the financial load. An Ohio legislator said the states get their "butts kicked" every time the federal government decides to reduce the deficit.

In its current newsletter, the National League of Cities warns municipalities that last-minute alterations to the Gramm-Rudman-Hollings deficit-reduction law could cap future domestic spending and "handcuff" cities.

At the same time, the lawmakers argue that brewing taxpayer revolts make it politically difficult for local governments to raise taxes to pay for increased costs of the new mandates.

State governments are "getting hit by both sides now," said Raymond Sheppach, the executive director of the National Governors' Association.

The protracted budget debate on Capitol Hill evolved into a philosophical dispute between moderates and conservatives. But state and local lawmakers complain that they have been left with the political consequences of trying to balance competing needs and revenues.

State governments that were proud to be called laboratories of innovation during the 1980s are now railing against a thick layer of new federal mandates -- from Medicaid to enforcement of clean air standards -- that requires them to take on new responsibilities without giving them the flexibility to administer programs as they see fit.

"I think what we're finding is, several years ago when the the first wave of mandating started, the states were in good fiscal condition and could have adapted to the standards," said Martha A. Fabricius, an analyst with the National Conference of State Legislatures. "Now the states are in dire condition."

Two-thirds of the 50 states -- including Maryland and Virginia -- are struggling to offset current year revenue shortfalls that run into the billions of dollars. And at a time when taxpayers are beginning to howl about onerous property taxes, state and local lawmakers find themselves faced with painful revenue choices as they prepare for the 1991 fiscal year.

"The fundamental political fact is that Congress benefits from mandating," said NCSL executive director William Pound. "They get to make the rules in many cases

while paying only a portion of the cost."

The steepest price tag among the $13.3 billion in new federal mandates is likely to come in spending for Medicaid, the joint federal-state program that provides health services to the poor. By requiring states to extend coverage to a broader category of poor children, the frail elderly and to pay for a larger number of prescription drugs, the federal government has placed several new requirements on the states without providing the funding to pay for them.

"When you go into a recession your case load on Medicaid and AFDC {Aid to Families with Dependent Children} goes up," said Sheppach. "Lay on those additional mandates and you have a lot of money plus a real problem in terms of administering {the expanded programs}. What {state officials} are finding now is that the money for new initiatives is gone."

State governments are perhaps most unhappy about the money they won't be able to collect because the federal government has, in effect, beaten them to the punch. By imposing new excise taxes on gasoline and alcohol, for example, the federal government has foreclosed that option for state lawmakers who would have to deal directly with the wrath of taxpayers being assessed twice for the same goods.

NCSL estimates the nickel-a-gallon gas tax increase, for example, will cost states $2.8 billion in revenue that will go to federal coffers instead of to state highway funds. Similarly, another $746 million is expected to be lost to federal -- instead of state -- alcohol and tobacco taxes.

Among themselves, the state and local lawmakers are beginning to see long-term problems arising out of changes in the Gramm-Rudman-Hollings law that cap discretionary spending for five years. A separate cap would apply to each of three spending categories: domestic, defense and foreign aid.

But the local officials worry that domestic programs, grouped under a single spending limit, will be left to war among themselves for available funding. Under this scenario, which was approved by Congress with little public debate or discussion, agencies with such disparate missions as education, housing or space exploration could find themselves bumping against a common spending cap.

The altered law exempts the thrift bailout, Operation Desert Shield and other presidential emergencies from the limits.

"It puts the federal government in a straitjacket," said Frank Shafroth of the National League of Cities. Shafroth likens the categorical caps to a "shark tank" that pits worthy programs against each other.

Moreover, he said, the federal government will be pitting cities and states against each other as well.

"Another problem is, not only does the federal government impose mandates, but states impose mandates" on cities, Shafroth said. "So we are really at the bottom. To an extent, all we have {to impose mandates on} is the taxpayers."



Clean Air Restoration and Standards: States must assess and collect fees on regulated pollutants. If they do not, the Environmental Protection Agency will collect and keep the money, depriving states of potential future revenue.

Medicaid: States must phase in coverage for a broader category of poor children

nder 19 over a 10-year period beginning in 1992. New laws will also prohibit states from limiting how long medically necessary inpatient care for eligible children under six could continue. States will also be required to provide continuous coverage to infants during their first year and to postpartum women, as well as to provide reimbursement for a larger number of prescription drugs.

Child Care: State and local governments must establish minimum health and safety standards to prevent and control infectious diseases. States must also create a child-care voucher program by October 1992.

Payroll taxes: States will have to extend Social Security coverage to part-time state and local employees not covered under another retirement plan. The agreement will also raise the wage cap for the Medicare payroll tax.

Student Athlete Right to Know: State colleges and universities must disclose athlete graduation rates in order to receive federal funding.

Drug-Free Schools and Community Act: States' schools must have an anti-drug policy in order to receive federal funding.