Performance standards in the public sector have always been a little bit murky. From road building to public education, the types of tasks that are performed by our governments do not produce results we can immediately review. And with the power to tax, governments aren't susceptible to the same kind of customer exodus that can befall a company in the private sector that loses its touch.

But there is one criterion that can be used just as effectively with our governments as it is in the private sector, namely, the bottom line. When governments, and in particular state governments, run out of tax revenues to cover their expenses, our level of scrutiny ratchets up quickly. There's nothing like the prospect of a tax increase to get the electorate's attention, and with the recession battering the financial health of states and cities across the country, there are a lot of politicians in the hot seat right now.

They are looking very hard for quick, painless fixes to situations that, in many cases, have been festering for years. The unprecedented prosperity of recent years has helped us sweep some problems under the rug, which is unfortunate. The bright light of fiscal discipline is a healthy thing for the operations of government, but reversing some of the trends that have brought state budgets to where they are today can't be accomplished overnight.

There are two reasons why states from Washington to Florida -- 42 states in all -- are struggling to cope with fiscal crises in their statehouses. The first is clearly the downturn in the economy, which has caused revenue collections to come in far short of expectations. Preliminary data on tax revenues for individual states collected by the Rockefeller Institute show that in the final quarter of 2001, revenues were down by an average of 2.9 percent compared to the final quarter of the previous year.

Hardest hit were states like California that depend heavily on corporate taxes. State tax collections from corporate coffers were down a whopping 34.5 percent in the fourth quarter of last year, reflecting the sharp contrast between the super-heated economy of 2000 and the more sober state of affairs at the close of last year. Personal income taxes also experienced lower revenues at the close of 2001, down an average of 3.0 percent for the states included in the analysis.

But it is equally apparent that there are important categories of state spending that figure prominently in the imbalances between spending and revenues in many states. In the period from 1980 to 1998 the expenditures of state governments across the nation increased by about 260 percent, to $930 billion. During this same period, however, increases in spending on three categories far outpaced the general growth in spending: corrections, health care, and employee retirement. Taken together, spending on these three items grew 508 percent, or at nearly double the rate of spending in general.

But cutting spending in any of these categories is difficult. For example, the precious General Fund dollars spent by Indiana on the Medicaid program are matched with Federal funds, making state cuts all the more painful for those who ultimately benefit. And the already announced cuts in Medicaid reimbursements will have the unintended effect of pushing up costs elsewhere in the system, particularly in indigent care.

Rising costs of health care, prisons and pensions should be better understood and comprehensively addressed no matter what the state of the state budget, of course. Indiana is hardly alone in putting off those hard decisions when rapidly rising tax revenues made inaction possible. But today we're paying a price for that inaction, and we'd be wise to remember that lesson in the future.