The 1990s were a time of unprecedented prosperity for the United States. Coming out of a painful recession in 1992, the economy moved into extended high gear, driven by huge capital gains on Wall Street and strong consumer spending. Controlling for population growth and the consumer price index, state revenue grew by 29 percent between 1988 and 1997. For six straight years, states awash in money were able to hand out tax cuts like party favors to all who came to the table.

Last year, the party came to a grinding halt. High-tech/dot.com became the great success story that wasn't. The stock market tumbled. Consumer confidence crumbled. Medicaid costs, which had stayed modest for years, started climbing and welfare rolls began to swell. States felt the pinch as revenues grew at a slower-than-expected rate all summer.

In late fall, we learned the truth of what many had been supposing for months. We were in a recession, and it had officially begun in March. While states were partying--in the form of tax cut largess--they were averting their eyes from the law of gravity: What goes up must come down. In many states, even as the latest tax cuts were kicking in, revenues were sliding and expenditures were increasing because of the faltering economy.

After Sept. 11, states also had to factor in increased security costs as a result of the terrorist attacks. Yet as profound an effect as those attacks had on the economy, it pales in comparison to the political decisions of states and the federal government regarding how to benefit from the economic boom. (See sidebar.)

From July to September 2001 (which for most states is the beginning of the 2002 fiscal year), the major indicators of state economies moved into the negative column for the first time since the last U.S. recession 10 years ago, reports the Rockefeller Institute's Fiscal Studies Program. Overall, state tax revenue declined by 3.1 percent. Personal income tax collection declined by 3.4 percent--an abrupt reversal from the three prior quarters. Corporate income taxes were down by 25 percent.

Midway through the fiscal year, these unforeseen shortages already had affected operations in many states. In November, for example, Illinois Gov. George Ryan announced a projected budget shortfall of $500 million for the 2002 fiscal year. By January, that estimate had risen to $700 million. Wisconsin is looking at a $1 billion shortfall, which follows on the heels of a deficit last year.

Massachusetts is facing a $2 billion shortfall, forcing legislators to rethink tax cuts that are some of the most excessive in the country. In 1996, the state began phasing out the capital gains tax. In November 2000, residents voted to reduce the income tax from 5.8 percent to 5 percent. That rollback is supposed to take effect this summer.

New Jersey's new governor, James McGreevey, took office in mid-January facing a $2.8 billion shortfall. The following week, it was up to

$2.9 billion, and he announced that 600 state workers could expect to receive layoff notices within days. Monthly tax revenues are coming in about $500 million below projections.

New York, dealing with both a weakened economy and the costs associated with the World Trade Center attacks is confronting a $6.8 billion budget gap.

California, with a budget of $100 billion--the "sixth largest economy in the world," California Federation of Teachers legislative director Judith Michaels calls it--has a shortfall of $12.5 billion.

In all, at the start of 2002, these kinds of dropping-revenue/increasing-expenditure trends had opened gaps in the budgets of 43 states, says Ed Muir, AFT senior associate for research. In December and January, Muir spoke with AFT leaders and legislative experts across the country. "This will be the dominant issue in 2002, taking time and energy that would otherwise be used to pass good laws and bad," he predicts.

How states are coping

Unlike the federal government, every state except Vermont has a law requiring the budget to be balanced. States are taking a variety of actions to fill the gaps for 2002: hiring freezes, across-the-board spending cuts, targeted cuts, dipping into "rainy day" and tobacco company settlement funds.

One thing states aren't doing much of is raising taxes. It is an election year for most governors and lawmakers. "We must raise taxes" is not a politician's applause line. Nor is "Rescission Now!"

An idea that is catching fire in many states is a cigarette tax. Oddly enough, polls have shown that even smokers endorse it, saying it will be an incentive to cut back or quit. Connecticut is considering a 61 cent increase, on top of the 50 cent tax it already charges. New York would add only 39 cents to its tax of $1.11. In a short period, the legislatures or governors of 15 states, have picked up on the idea.

Some states not only are putting a freeze on hiring, they're also looking to permanently trim public payrolls with early retirement offers. This is a strategy with advantages and disadvantages, notes Dan Georgianna, president of the University of Massachusetts-Dartmouth Faculty Federation.

Last year, the Legislature passed an early retirement plan for Massachusetts employees that included faculty for the first time. While the offer has an incentive that would increase retirement benefits by 10 percent to 15 percent a year, it has a kicker too--strict limits on rehiring. So colleges would be able to hire only one person for every 10 who leave. What's more, the salary for the new person is capped at 70 percent of the average of those who retired.

"It's good for our members who will take advantage of it," says Georgianna, who predicts that 10 percent of the 320 full-time faculty will leave. But six or seven new faculty replacing 35 to 40 retirees is not good--for students, faculty workload or academic quality. Enrollments are going up and the university system has already taken an emergency $30 million hit this year.

Faculty are upset that higher education had to absorb the biggest cut of any agency in the state budget, especially when Massachusetts has reserves of $1.5 billion in a rainy day fund. "It's raining here," says Georgianna.

History shows that higher education has been taking it on the chin for decades. When state revenues plummet, lawmakers with scalpels aim for the largest discretionary item in the budget first--higher education. (See sidebar "Recessions' bite out of higher education.")

The irony is that investing in work force enhancement is one of the best antidotes to an economic downturn, says Michael Rosen, president of Local 212, the Milwaukee Area Technical College Federation of Teachers, and chairman of the economics department at MATC.

The technical college is the largest of 16 in the system, which enrolls 462,000 students--"and growing," says Rosen. "At any one time, one of nine adults in Wisconsin is in one of the technical colleges."

In the last budget, however, the technical colleges got no increase in state aid. "As a result, state aid has fallen since 1990 from 30 percent of the technical college budget to less than 20 [percent] today," says Rosen. Local property taxes make up the bulk of the colleges' operating budgets.

Because of the budget shortfall, which is projected at between $300 million and $1.3 billion, the governor has proposed to cut state aid by 4.5 percent next year and freeze the property tax portion, for a total hit of $5.2 million to MATC. "That cut," says Rosen, "is the equivalent of completely eliminating the fire science, police, emergency medical service and nursing programs--or 1,360 class sections or 12,400 students."

Local 212 is mounting a full campaign against the cuts, drawing on the strengths of its active COPE political action program. It asked its unit of 1,500 to e-mail, call and meet with state senators and assembly people. It mobilized people to testify at public hearings. Working with the administration, the union has enlisted support and elbow grease from the college's board members and from industry people who serve on numerous advisory committees for the college's programs.

"Our enrollments are growing rapidly because dislocated workers and underemployed workers are turning to the technical colleges right now for retraining. It's absolutely criminal to shut our doors on the very people who have supported us with tax dollars for so many years." The cuts, Rosen adds, "will actually undermine the ability of the state's economy to grow."

The United University Professions is making a similar argument in challenging the flat-line budget New York Gov. George Pataki has proposed for the State University of New York. "It's time," a voice announces in a 30-second public service announcement airing throughout the state. "It's time to put our money where our future is." The ad shows some of the many contributions a large public research university makes to a state's economy and to its residents.

The union repeatedly finds itself doing what SUNY trustees are not--advocating for adequate funding for the system's 29 campuses. UUP lobbies not just for salaries and faculty lines--1,000 of which have been lost during the last six years--but for the academic programs as well. UUP also conducted a public poll recently and uncovered the strength of New York residents' support for the system. It is using the poll results to bolster its arguments before the Legislature.

In Illinois, the governor's call for 5 percent, across-the-board cuts resulted in $25 million being cut from higher education. Then, "as a reward for the administrators' being so cooperative," says University Professionals of Illinois president Mitch Vogel, "the state cut another $45 million." It did this by shifting the obligation of covering the cost of health insurance from the state to the universities. The University of Illinois has announced that it will be increasing tuition by 9 percent next year.

UPI and other state unions have successfully fought the governor's proposal that he be granted broad discretionary authority to cut up to 5 percent from state agency budgets in the immediate future.

New Jersey Gov. McGreevey, a Democrat, is trying to work with labor groups to manage the difficult budget and deficit situation. In particular, he accorded the Council of New Jersey State College Locals/AFT a significant voice in addressing higher education matters by putting CNJSCL president Nicholas Yovnello on two gubernatorial transition teams. In preparation for the new governor, the union did an analysis of the state's higher education governance reforms ushered in by former Gov. Christine Todd Whitman in 1994. It documents where administrative expenses increased, state investment went down and academic services to state residents declined over the past decade. By showing management bloat and excessive raises in top administrators' compensation, the report provides a blueprint for reallocation of resources.

In California, as the first round of adjustments to address the state's $12 billion shortfall is completed, the California Federation of Teachers Community College Council is breathing a sigh of relief over one cut not made. Last year, the unions succeeded in getting $57 million toward equalizing the salaries of part-timers. This year, the governor put another $57 million in the budget for the same purpose, and it made it through the cuts unscathed.

There is talk of raising fees at the University of California system, says Judith Michaels of the CFT, "which we strongly oppose.

"Not only do we oppose raising fees, we think there should be no fees," she adds. "Public education should be state funded."