In FY 2002 and FY 2003, states responded to fiscal stress by using one-time revenue sources such as reserves and borrowing against future tobacco settlement payments. States took modest steps to increase revenues by increasing cigarette taxes, business taxes, and gambling revenues while avoiding increases in income or sales tax rates. States reduced spending by implementing across-the-board cuts, delaying planned program expansions, and reducing state labor costs and payments to private providers. Federal maintenance of effort requirements in TANF and high matching rates in Medicaid and SCHIP protected these programs to some extent. As the budget crisis deepens in FY 2004, cuts in social programs are likely to be larger. The report is based on visits to 7 states.