State Bailouts? 41 of 50 States face shortfall next year! What is next?

North Carolina has finally had to rein in state government spending to narrow a budget shortfall, a year after many other states began feeling the nation's economic crunch.

Outgoing Gov. Mike Easley has ordered spending cuts of up to 5 percent and held up building repairs to locate up to $1.2 billion the state will need later. But he and other leaders in Raleigh for now are more optimistic than they were eight years ago, when Easley's began his term amid a recession.

"I think we'll be OK through the end of this budget year," said Sen. Linda Garrou, D-Forsyth, one of the Senate's chief budget-writers. "We're going to have to tighten our budget and be good stewards."

At least 41 states face or have faced budget shortfalls for this year and next, according to the Washington-based Center on Budget and Policy Priorities, a liberal think tank. But North Carolina is clearly in a better position than many.

California Gov. Arnold Schwarzenegger has proposed a temporary 1.5 cent sales tax increase, making billions of dollars in cuts and even reducing the number of state employee holidays to close a $11.2 billion deficit. In Virginia, Gov. Tim Kaine announced last month nearly 600 state employee layoffs and postponed worker raises.

As other states experienced shortfalls last year — due in part to the severe mortgage lending crisis and slowdowns in manufacturing — North Carolina recorded a revenue surplus for the fifth consecutive year. The state's foreclosures were below the national average.

"Revenues were supported by strong investment in the Research Triangle and by the financial institutions that moved there," said Philippa Dunne, who tracks state tax revenues for the New York-based Liscio Report. "Although housing prices were up and there was certainly a lot of new construction, (North Carolina) didn't fall prey to a full-blown housing bubble."

But the state couldn't avoid the slowdown forever.

State government revenues, while growing in the first quarter ending Sept. 30, dipped at least $230 million below the estimate lawmakers used in crafting their $21.4 billion annual budget.

Easley, who struggled out from under a budget shortfall when he took office in January 2001, started holding back money early from most state agencies — first, a 2 percent reduction in September, followed by up to 5 percent a few weeks ago.

Across state government, travel has been curtailed, vacancies in non-critical jobs left open and equipment purchases delayed. Public education reductions are voluntary and financial aid for college students are exempt.

"Basically, it's belt-tightening right now and hoping for the best," said Diana Kees, a spokeswoman with the Department of Environment and Natural Resources, which had to come up with $10.7 million in cuts. They included sending a 140-page document on rare plants and animals electronically instead of printing it, and reducing flight time for regulators who catch people violating coastal development regulations from overhead.

Among the hardest hit was the Department of Health and Human Services, where Secretary Dempsey Benton said overall spending to local mental health agencies has been trimmed by $10.5 million, or 4.6 percent, and to mental health facilities by $8.5 million, or 3 percent.

Mental hospitals are seeking to reduce employee overtime without harming patient treatment and safety, Benton said.

"It's hard to touch a budget without it being a part of our safety net systems," he said.

State government economists predict the shortfall could reach $800 million to $1.6 billion before the end of the fiscal year in June, with Easley's office predicting it will likely reach no more than $1.2 billion.

If the economy doesn't improve in the first half of next year, there are worries the difference between revenues and expenses — including money needed to fund health insurance for state employees and their cost-of-living pay raises — could reach as much as $3 billion to draw up the budget that lawmakers and Gov.-elect Beverly Perdue will write for the year that starts July 1.

"The shortfall situation is so serious that we're not going to be able to use some Band-Aid approach," said Elaine Mejia, of the left-leaning N.C. Budget and Tax Center. "We're also going to be talking about raising revenues to (deal) with this gap."

The state, meanwhile, has some cushion.