Where Did All The Money Go?

When the Board of Supervisors of Fairfax County, Va., voted back in 1987 to build themselves a new $100 million government center, it didn't seem so extravagant. After all, Fairfax County was the richest in the United States, riding high on the real-estate boom sweeping the Washington, D.C., suburbs. So why shouldn't the steps be paved with granite imported from Finland, and the lobby paneled with mahogany flown in from South America? The supervisors themselves were sure to stay lean and mean - working out in the new gym equipped with a sound system and $37,000 of fitness equipment.

Today, the half-finished Taj Mahal on Route 50 is a source of some embarrassment. The boom has gone bust, and the county, facing a $30 million shortfall this year, is cutting back on care for AIDS patients and buying fewer school textbooks. The sheepish supervisors have had to cancel a $400,000 obelisk, modeled on the Washington Monument, that was to stand in front of the building. But the architect, Randal Gaskins of Baltimore, is unrepentant. The building, he boasts, is "timeless. It has classical overtones from Roman times."

There are overtones of ancient Rome, all right, and not just in Fairfax County. In county and state capitals all over the United States, officials have overextended their empires. To satisfy a growing demand for government services, lawmakers have spent freely and not always well. Now, to pay for it all, lawmakers tell voters that they must fork over more than $25 billion in new taxes - the largest state and local tax increase in history. The tax hike--combined with a $15 billion to $20 billion cut in government spending - threatens to slow the national economic recovery and, in some hard-hit regions, to strangle it altogether.

So far, the public response has been muted. No one has been reported leaning out a window, shouting, "I'm mad as hell and I'm not going to take it anymore!" But if ordinary citizens have yet to take to the streets in large numbers to protest, it may only be because the bad news hasn't quite sunk in. In the months ahead, as taxpayers learn they will be paying more for less, the anger is sure to grow. Deep-seated social and economic forces, as well as heedless bureaucrats, are to blame. Still, people may begin asking a reasonable question: where did all the money go?

Awash in cash from a flush economy, many local lawmakers in the 1980s were unquestionably spendthrift. By common practice, they were supposed to tuck away rainy-day surpluses. Unlike the federal government, 49 of 50 states are required to balance their budgets every year. But only a few, like Oregon and West Virginia, saved up for the bad times. Most spent every dollar they had, and then, with the help of the usual smoke-and-mirror accounting tricks, they spent some more. The boom states went on a spree. Spending during the '80s rose 134 percent in Massachusetts, 119 percent in California, 169 percent in Florida. In most states, the tax-and-spend game all seemed to go swimmingly - until the economy soured last year. Suddenly, revenues that had been growing nationally by almost 9 percent a year turned flat. Three out of five states are now in serious financial trouble. Overall, the shortfall is at least $35 billion. In some economically depressed regions, the red ink is a flood tide. In New England, spending could exceed revenues for fiscal 1992 by a whopping 22.5 percent. In California, where a surge of immigration has overwhelmed state resources, the gap is 33 percent (chart).

A weak national economy is partly to blame, but only partly. "It's not just the recession," says Edward Gramlich, a local-finance expert at the University of Michigan. "State budgets appear systematically out of whack." Even after the recovery, most states will be in the red, says Steven Gold of the Center for the Study of the States, in Albany, N.Y. "They've overpromised or undertaxed, and the problem is now so giant that no gimmicks can hide it. It's squatting in front of nearly every statehouse like a giant toad."

Banishing the fiscal toad from the statehouse door will require considerable sacrifice from the taxpayers. It means, for starters, that the state and local revenue increase for 1992 will be even larger than the $22 billion federal-tax hike approved last fall by Congress. With July 1 - the deadline for passing a 1992 budget in 46 states - approaching, local lawmakers are agonizing over whether to raise taxes or cut government services. Some states have no choice but to do both. California last week increased taxes by $7 billion - $240 for every person in the state, $960 for a family of four. At the same time, the Golden State cut spending by $5.2 billion and "saved" an additional $3 billion with accounting gimmickry.

Most states and cities are scrounging hard for savings. In New York City, Mayor David Dinkins is threatening to turn off a quarter of the street lights and close the Central Park Zoo. In Michigan, the Detroit Symphony has been completely zeroed out of the state budget, along with all museums and other arts institutions. In Wyoming, high-school graduates can no longer be assured a place in the state university. Lawmakers generally prefer a nickel-and-dime approach to taxation. In Tennessee, Amish farmers may have to pay a $25 tax on horse and buggies, while in Nevada, state legislators are considering a "fun tax" on legalized prostitution. But some cannot avoid more sweeping levies. Connecticut, which has held out against an income tax for two centuries, seems certain to enact one this year.

Governors raise taxes at their political peril. In a NEWSWEEK Poll of the nation's governors, almost half agreed that it is "impossible to generate support" for new taxes. Last year, the first of the crisis, taxes went up by $10 billion - and a half-dozen governors were voted out of office. In New Jersey, Jim Florio did not have to run, but he was nearly tarred and feathered after raising taxes $2.8 billion. This year, Florio is confronting his $1.5 billion deficit in more cautious fashion: with scores of small cuts and accounting tricks, like selling an entire state highway to the New Jersey Turnpike Authority, which will in turn install toll booths to finance the purchase.

Lawmakers are looking for anyone to blame except themselves for their fiscal woes. The obvious target is the federal government. During the 1970s, as Great Society programs kicked in to clean the environment, cure the sick and feed the poor, federal aid to cities and states went from 16.8 percent to 29.4 percent of state and local budgets. Then came Ronald Reagan's "new federalism," which essentially passed the buck to the states. The flow of federal largesse has shrunk back to 16.8 percent of state and local spending. At the same time, however, Congress has required the states to do more. Environmental laws demand cleaner water, but federal funds for sewage plants have all but dried up. With landfills fast disappearing, the cost of garbage removal alone has soared 34 percent in the last two years. Medical coverage for the poor has steadily expanded, and states must pay half. The result: Medicaid costs have grown from 9 percent to 14 percent of state spending since 1980. Unless something is done to curb rising health-care costs, Medicaid will eat 20 percent of state budgets by the year 2000.

The federal courts have added heavily to the statehouse bill. Rising crime, and an eagerness to punish it, account for a wave of prison building across the country. Corrections costs have grown by double digits for a decade. But existing prisons were such slums that the courts ordered the states to clean them up. No fewer than 41 states are under court order to relieve prison overcrowding and improve conditions. State spending on corrections has jumped 29 percent in just two years to $17.9 billion.

Activist judges have also ordered Texas, New Jersey and a half dozen other states to impose massive tax increases in order to equalize school spending in rich and poor areas. The cost of education might have dropped in the 1980s as school populations declined. But instead educational spending increased as reformers tried, with notable lack of success, to improve the poor quality of America's schools. In the next decade student bodies will grow again, and so will the cost of educating them.

State lawmakers rant about the "ridiculous stuff that comes out of Washington," as Ohio legislator Patrick Sweeney puts it. Sweeney notes that 63 percent of the employees of the state Department of Education are engaged in filling out federal documents. But taxpayers can rightfully wonder what state employees do when they're not filling out forms. Local bureaucracy was a growth industry in the 1980s, particularly where organized labor was strong.

Two cities stand out as egregious cases. Although its population was stagnant in the 1980s, New York City expanded its job rolls by 53,000 to 417,000, or one city worker for every 17 residents. Labor has been able to extract fat concessions from an all-too-pliable city hall. School janitors, for instance, are required by contract to sweep lunchroom floors only once a week. The District of Columbia has been just as notorious. In 1987 government cost $5,331 per D.C. resident, versus $3,300 in Anchorage, Alaska, where the cost of living is about as high. D.C. spends well over twice as much per capita for police than any other city, yet has the highest rate of serious crime.

Other states and cities have not been stingy with their employees. Between 1980 and 1987, the last year for which full data is available, city and state salaries rose 59 percent - versus 35 percent in the private sector. Some of the increase can be explained by the need for professionalism, but more is owed to the willingness of politicians to buy short-term labor harmony at long-term expense to taxpayers. Governors like Bruce Sundlun and California's Pete Wilson are now negotiating for givebacks on pensions and salary, but the going is tough. Newly elected Mayor Mary Moran of Bridgeport, Conn., took the drastic step of declaring her city bankrupt - in effect, turning over control from elected officials to the courts. She knew no other way to persuade city employees to reopen their wage and pension contracts.

Other lawmakers are suggesting less draconian, more ingenious moneymaking measures. In Ohio, Rep. William Shuck has proposed a bill offering advertising space inside state buildings, in state publications and on state buses and cars. He claims the billboards would bring in $30 million. In Texas, the lower house tried to raise money with a plan to sell coupon books full of $5 speeding tickets. A driver nabbed for less than five miles an hour over the limit could just pay and go. (The state Senate rejected the idea.) One popular money raiser is the state lottery. By appealing to dreams of instant wealth, some 29 states plus the District of Columbia now raise more than $6 billion a year. A better idea might be to tax the wealthy. By relying heavily on regressive excise and sales taxes, "most states tax the poor and middle-income families at much higher rates than the very rich," says Robert McIntyre of Citizens for Tax Justice.

Inevitably, governors who are not eager to cut spending or raise taxes are looking for gimmicks. Potential presidential candidate Mario Cuomo of New York, eager to shed his tax-and-spend image, has made a genuine stab at curtailing some of New York's runaway costs. But he's not above playing the old games. He "sold" Attica prison to a state agency called the Urban Development Corp. The UDC in turn will issue bonds, and the state will lease back the property. Presto! Cuomo has an extra $200 million to spend this year. Such tricks may fool enough voters to help Cuomo get the Democratic nomination, but it's obviously not a long-term solution for the taxpayers of New York. As the states join the federal government in the sea of red ink, leadership of a different kind is called for. "It's time for a little desperate courage," says Professor Gramlich of Michigan. The realization that money can no longer be the answer to every social ill might spur some real reform in areas like education and health care. But politicians can rarely be counted on for bravery. At bottom, the real problem lies with the taxpayers themselves. They want more than they are willing to pay for. They are going to have to pay more, or expect less, and, chances are, they will have to do both.

More than half the states anticipate budget shortfalls in the coming fiscal year. The worst off:

                               1992 DEFICIT AS % 

                                OF GENERAL FUND

Connecticut                           37%

California                            33%

Maine                                 22%

New York                              22%

Louisiana                             20%

New Hampshire                         20%

Pennsylvania                          19%

Vermont                               18%

Massachusetts                         16%

Texas                                 13%


To assess the states' difficulties, NEWSWEEK asked the nation's governors to rank their most serious challenges and potential remedies. They were also asked to judge the effectiveness of their peers. Arkansas's Bill Clinton, touted as a possible Democratic presidential candidate, emerged as first among equals. In a similar poll in 1986, Michael Dukakis, who became the 1988 Democratic nominee, was ranked No. 1.

39%   Clinton (D, Arkansas)

33%   Romer (D, Colorado)

26%   Gardner (D, Washington)

15%   Campbell (R, South Carolina)

11%   Ashcroft (R, Missouri)

11%   Sullivan (D, Wyoming)

11%   Thompson (R, Wisconsin)

 9%   Bangerter (R, Utah)

 9%   Cuomo (D, New York)

 7%   Branstad (R, Iowa)

57%   Health care

43%   Social services

41%   Higher education

41%   Public works/infrastructure

26%   Secondary education

24%   Prisons

20%   Housing

13%   Law enforcement
                                     Rep.      Dem.

Higher individual tax rates          10%       21%

Higher corporate tax rates           10%       38%

Oil-import tax                       15%       38%

Value added/domestic sales tax        0%       21%

None needed                          58%       25%
87%   Have fewer spending mandates and requirements

48%   Reduce red tape

26%   Focus public attention on state problems

11%   More pilot programs
21%   Al Gore

17%   Sam Nunn

13%   Bill Clinton

 8%   Mario Cuomo

 4%   Lloyd Bentsen

 4%   Bill Bradley

For this special NEWSWEEK Poll, The Gallup Organization interviewed 46 of the nation's 50 governors or aides they designated by telephone May 20-June 20. Some "Don't Know" and other responses not shown. The NEWSWEEK Poll c1991 by NEWSWEEK, Inc.