WASHINGTON -- States face more tough times balancing their budgets in a sluggish economy despite large tax increases and spending restraints on many programs in the last two years, according to a report issued yesterday by the the National Governors' Association.

"The message is states are still under phenomenal fiscal pressure for the third year in a row," said Raymond C. Scheppach, the association's executive director. "If the economy doesn't recover, I think we're going to see more cuts in services."

Scheppach also told reporters that state governments are increasingly coming around to the view that they face long-term fiscal management problems that will not go away, even if the economy picks up. "Even if we get economic recovery, the financial situation is not going to get much better," he said. "What we have is longer-run problem.

"The decade of the '90s does not look very good, "Scheppach added. "We're going to have to either raise taxes substantially or make huge cuts" in services.

Scheppach said he does not expect to see much of an increase in state bond issues to meet rising demands for medical care and other needs.

The report, which was also prepared by the National Association of State Budget Officers, concludes that states continue to be lashed "by the lagging U.S. economy."

The problem has been especially severe in California and in states along the East Coast, but all states have had problems and have been forced to make tough choices to balance their budgets, the report says. A total of 35 states, more than two-thirds, had to reduce their fiscal 1992 budgets by a total of $4.5 billion.

Florida, Georgia, Iowa, Maryland, Missouri, Montana, Nevada, and South Carolina all slashed their general fund expenditures by more than 5% in fiscal 1992. And, the report says, with continued economic weakness, Georgia and Maryland have already announced cuts in their enacted 1993 budgets.

Overall, states have enacted $3 billion in new taxes and fees for fiscal 1993. That represents a substantial slowdown from fiscal 1992, when a record $15 billion in tax increases were put in place. Tax increases in fiscal 1991 were a still-hefty $10.3 billion.

On the expenditures side of the ledger, states plan a 2.4% increase in general funds in fiscal 1993. If realized, that would be the smallest annual rise since 1983, when states were recovering from recession.

By comparison, general fund outlays expanded an estimated 5.1% in fiscal 1992 and 4.5% in fiscal 1991.

The combination of rising tax receipts and a modest increase in outlays is expected to improve yearend state balance sheets, but not by much. The yearend balance for states is estimated to rise from $800 million, or 0.3% of total expenditures in 1992, to $4.4 billion, or 1.4% of revenues, in 1993.

Officials from the governors association said that even with the projected improvement in yearend balances, states will still be working with lean resources by historical standards.

The projected 2.4% increase in spending would represent an estimated 1.2% reduction when adjusted for inflation. By comparison, state general funds rose an inflation-adjusted 1.5% in the period from 1979 to 1993, and by 1.9% in the period from 1980 to 1990.

Moreover, most of the increase in revenues that states are banking on is expected to be eaten up by sharply rising outlays for Medicaid and other mandated programs. Medicaid now accounts for 15% of all state expenditures and is expected to rise to 28% of total outlays by 1995, said Scheppach.

The report estimates that state Medicaid spending increased by 20% last year. By 1995, total spending is projected to rise to $85 billion from $ 31.4 billion in 1990. Other major increase in spending are projected for prison systems, which accounted for 11.4% of total state expenditures last year, and for education, which is seeing steadily higher enrollments.

Over the long term, said Scheppach, states are likely to see the pace of revenue collections lag the general rate of growth in the U.S. economy because states rely heavily on traditional tax sources outside business services.

States' receipts of sales taxes, personal income taxes, and corporate income taxes account for about 80% of general fund revenues.

A total of 31 states reported that revenues last year came in below the estimates used when their budgets were passed. Overall, state tax collections fell 3.6% below the original 1992 budget estimates.

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