State and local finance: still perilous seas.

• Author: Peirce, Neal
• Position: Commentary

The fiscal outlook for America's states and cities, already bleak enough, will turn dramatically worse if Congress passes the budget President Bush submitted in February.

With all eyes glued on the presidential campaign, scant public attention is focused on the financial stability of state and local governments, which deliver the lion's share of public services to the American people.

The national economic recovery is delivering a little dollar-and-cents relief to states and cities. State tax revenues have started to edge up for the first time in several years.

But the improvement comes off a miserable base. The recession was called mild, but the blow to state tax revenues was close to cataclysmic--for example, the 7.4 percent real per-capita revenue drop states suffered in 2002, notes Donald Boyd of the Rockefeller Institute of Government.

This year, rising consumer spending may boost sales taxes, but state income taxes will be gaining little from a largely jobless recovery. About 30 states are projecting budget gaps totaling $40 billion for the coming fiscal year. The shortfall in New York's budget is 13 percent. New Jersey starts off 21 percent in the red, Arizona at 17 percent, with other states just a little worse off. Many states and cities have recently seen their bonds downgraded--and practically none upgraded.

And now comes the new Bush budget, compounding the problems. States are worried by its move toward capping the federal share of Medicaid, leaving states to carry the incessant, inflationary upward push of a program that already consumes 21 percent of their budgets.

The National League of Cities views a range of Bush-backed cuts with alarm, starting with homeland security shifts that would cut deeply into federal aid for front-line first responders--local firefighters and police--even while the administration claims homeland security is one of its priorities.

Cities fear that Bush cutbacks will cause Section 8 housing vouchers to reach 250,000 fewer families next year. On the education front, they note the Bush budget increases No Child Left Behind funding by $1 billion, to $13 billion--but still falls $7 billion short of the promised federal contribution.

And so goes the pattern--a bite here, a nip there, and lots of programs scheduled for block-granting, which the cities fear is just a prelude to collapsed federal assistance.

Accounting for inflation, say the critics, the Bush budget would inflict a 2.6 percent aid cut on...