MASSACHUSETTS faces a severe fiscal crisis, with a budget deficit that the governor has estimated at $3 billion.

States across the country are feeling similar pain. Nineteen states have reported budget deficits of more than 10 percent of their total budgets.

When the national economy is in recession, tax revenues decline, and demands on safety net programs generally increase. States are forced to try to do more with less. Of course, national recessions are nothing new. During the good times, states can prepare for periods of fiscal austerity, or they can fail to do so. By some measures Massachusetts was better prepared for the recession that started in 2001 than were many other states.

During the 1990s, as tax revenue grew at a healthy pace, the state built one of the largest rainy day funds in the nation. By the summer of 2001 funds totaled $2.3 billion. Having depleted nearly all of those savings over the past two years, the state must now choose between cutting services and raising taxes. We often hear that irresponsible spending increases caused the fiscal crisis. But how much did state spending increase, and how was the money spent?

From the end of the last recession in 1991 until 2002, personal income grew at a rate of 2.6 percent a year, adjusted for inflation. The real growth in government spending during this time was only 2.3 percent a year. Thus, over time the government spent a smaller and smaller percentage of the money people earned. By the end of the decade, state spending had dropped from 9.4 percent of personal income to 9.1 percent. During the same period, however, more than $3 billion worth of tax reductions occurred.

The strong economy and the spike in tax revenue from investments in the stock market made it appear that we could enjoy these tax cuts without corresponding reductions in spending. But when the boom ended and the revenue bubble burst, it became clear that the tax cuts had created a structural budget gap. When times were good, the Legislature acted responsibly, responding to public demands for better schools and health care.

After the fiscal crisis of the early 1990s, when funding for schools was slashed, teachers laid-off, and class sizes grew, the Legislature implemented an education reform initiative, increasing funding until every district had the resources necessary to provide an adequate education. Other spending increases have expanded full-day kindergarten programs, reduced class sizes, and helped students pass the MCAS tests. Steady gains in student achievement demonstrate the effectiveness of these investments.

Massachusetts also expanded health care coverage, reducing the ranks of the uninsured. In particular, the state began providing health care for all children (with those from families over 200 percent of poverty paying sliding scale fees) and established a $100 million subsidized insurance program that helps senior citizens pay for prescription drugs. Some argue that rapidly growing health care costs mean that the state will need to cut back on this commitment in order to balance the budget. Yet people who are poor and sick will still need health care. Without insurance, they will likely show up in hospital emergency rooms and caring for them will impose significant costs on both hospitals and the state program that contributes to the costs of free care provided by hospitals.

Since the fiscal crisis began in the summer of 2001, there have been about $2 billion in cuts from projected spending, and $1.2 billion in tax increases (including a freeze in implementation of the income tax rate reduction passed in 2000). The last two budgets have included cuts to public higher education, preschool and K-12 programs, the court system, and housing programs. Ever more painful cuts to human services have eliminated health coverage for 42,000 low-income adults and food stamps for legal immigrants. Yet despite these measures, the fiscal crisis persists.

There is no doubt that this budget crisis has created new opportunities for reforms in the way state government operates. But it is also important to recognize that state policymakers already implemented significant cost-saving measures during the 1990s. Health care reimbursement regulations were tightened, the delivery of special education services was significantly reformed, nearly all county government functions were transferred to the state, and the legislature mandated cost-saving reforms in the way prescription drugs are purchased. Moreover, administrative costs account for only a very small portion of total government spending in the state.

According to US Census statistics, administrative costs account for 4.5 percent of state and local government spending, ranking us 43d in the nation. While it is certainly desirable to make government more efficient, and while proposals to streamline the delivery of human service programs and merge the Metropolitan District Commission and the Department of Environmental Management may achieve this goal, there is no evidence that such restructuring will make much of a dent in the budget deficit. There are no easy choices left. In the absence of additional revenue, the public programs and services on which thousands of people rely to stay healthy, educate their children, and keep their streets safe will have to be cut.

On the next page, readers are invited to try to make the same tough choices that now confront our elected officials. We hope that this exercise will provide a better sense of what it is that our government does, how our tax dollars are spent, and what options are available for responding to our fiscal crisis.

Sarah Nolan is a policy analyst at the Massachusetts Budget and Policy Center.

This story ran on page H11 of the Boston Globe on May 18, 2003. Copyright 2003 Globe Newspaper Company.