The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour tonight: A summary of today's news, then more on the lead story of the day, President Bush's homeland security strategy, including reaction from Senators Lieberman and Thompson, and Congresswomen Pryce and Pelosi; plus a report from Arizona on the money problems of state governments, and a debate over the proper way to account for corporate stock options.

NEWS SUMMARY

JIM LEHRER: President Bush announced a national strategy for homeland security today. The 90-page document warned of "a new wave of terrorism," possibly including weapons of mass destruction. Among other things, it called for tougher secrecy laws, expanded extradition agreements, and greater leeway for the military to operate within U.S. borders. The proposed Department of Homeland Security would oversee the strategy. We'll have more on this in a moment. The U.S. economy is on its way to a full recovery. Federal Reserve Chairman Greenspan offered that appraisal today at a Senate hearing. He said he expected the effects of recession, September 11, and accounting scandals to subside.

ALAN GREENSPAN: The effects of the recent difficulties will linger for a bit longer, but as they wear off and absent significant further adverse shocks, the U.S. economy is poised to resume a pattern of sustainable growth.

JIM LEHRER: Separate from Greenspan's appearance today, the Federal Reserve reported strong growth in manufacturing. Industrial production was up 0.8% in June. It was the sixth increase in as many months. Wall Street had another rocky day, despite Chairman Greenspan's upbeat report. The Dow Jones Industrial Average lost 166 points, or nearly 2%, to close at 8473. The NASDAQ Index fell seven points, to close at 1375. The House today approved new criminal penalties for corporate misdeeds. Violators would get 20-25 years for wire, mail, and securities fraud. That's double what the Senate adopted last night in its reform bill. The House measure passed easily, but only after Republicans and Democrats argued over its merits and its timing.

REP. RICHARD BAKER: It's not only bad for corporations, it's not only bad for shareholders, it's bad for the economy when people are afraid to trust the CEO, the accountant, the analyst, anyone involved in the process, and failing to make that investment, curtail the ability to create jobs and provide opportunities. What are they saying to us? Go get the bad guys, stop them from doing this in the future, and make them pay a price.

REP. ED MARKEY: This Republican majority opposed an independent accounting board oversight -- opposed it. And now it's looking for a legislative get-well card, as though now they are converted to protecting the investor.

JIM LEHRER: In April, the House approved a reform bill that did not include criminal penalties. That bill, plus the one approved today, must now be reconciled with the Senate bill. Palestinian gunmen ambushed a bus in the West Bank today, killing at least seven people and wounding 14. We have a report from Andrea Catherwood of Independent Television News.

ANDREA CATHERWOOD: Palestinians dressed in Israeli army uniforms detonated a roadside bomb, as this bus, carrying Israelis from Tel Aviv to the orthodox Jewish settlement of Emmanuel, in the West Bank, passed along the Israeli-controlled road. In response to previous attacks, this bus was armored; its windows bullet-proofed. But as the shaken passengers tried to flee after the blast, Palestinian gunmen hiding by the roadside opened fire on them. This is the first deadly attack in almost a month. It follows a lull in the violence since Israeli forces reoccupied the West Bank after a spate of suicide bombings in Israel. Today's ambush shows a change in tactics. These were not Palestinian suicide bombers. Instead, this was a planned military-style operation, in which the gunmen escaped despite a massive manhunt by Israeli forces.

JIM LEHRER: Three separate Palestinian militant groups claimed responsibility for the attack. The Palestinian Authority condemned it. The Irish Republican Army apologized today for civilian deaths it caused during 30 years of violence in Northern Ireland. In a statement, the group said: While it was not our intention to kill or injure non-combatants that was the consequence of our actions .We offer sincere apologies and condolences to their families. The statement came amid allegations the I.R.A. Is violating its five-year-old cease-fire. A federal grand jury in Virginia indicted Zacarias Moussaoui today for a third time in the September 11 conspiracy. He allegedly intended to be the 20th hijacker. The new indictment did not add new charges. Instead, it included new details to support a possible death sentence. A Supreme Court ruling last month means that information must be explained in the indictment, and be reviewed by a jury. In New York City today, city and state officials released six proposals for rebuilding the World Trade Center site. All would include memorials, plus commercial buildings. None would soar as high as the original twin towers, at 110 stories. Two plans would allow buildings on the actual tower sites, an idea opposed by relatives of some September 11 victims. Officials expect to work out a final version by December. And that's it for the news summary tonight. Now it's on to the President's homeland security strategy, budget problems in Arizona, and the stock options debate.

FOCUS HOMELAND SECURITY

JIM LEHRER: Homeland security strategy. Kwame Holman begins.

KWAME HOLMAN: President Bush invited several members of the Senate and House to the Rose Garden this morning. The gesture illustrated the cooperation the President hopes for and expects from Congress as it considers the complex legislation needed to execute his new national homeland strategy.

PRESIDENT GEORGE W. BUSH: There are a lot of tough decisions that will be made as we develop and discuss and debate how to move forward, but I'm confident that members of both parties and members of both chambers know that the security of our nation is the goal.

KWAME HOLMAN: The President's ideas for homeland security were contained in a 90-page document sent to Congress today.

PRESIDENT GEORGE W. BUSH: This comprehensive plan lays out clear lines of authority and clear responsibilities-- responsibilities for federal employees, for governors and mayors and community and business leaders and the American citizens. With a better picture of those responsibilities, all of us can direct money and manpower to meet them.

KWAME HOLMAN: The President's strategy targets six so-called mission areas: Intelligence and warning, border and transportation, domestic counterterrorism, protecting critical infrastructure, defending against catastrophic terrorism, and emergency preparedness and response. The plan relies on the coordinated efforts of federal, state, and local governments -- more than 87,000 different jurisdictions in all, with cost- sharing determined by the function involved. For instance, intelligence gathering and border security are federal responsibilities, whereas first response to any emergency most likely would come from state and local officials. But the key to the President's plan is the creation of a new Department of Homeland Security, merging 22 federal agencies under one cabinet-level structure.

PRESIDENT GEORGE W. BUSH: And by acting together to create a new and single Department of Homeland Security, we'll be sending this world a signal that the Congress and the Administration will work together to protect the American people and to win this war on terror.

KWAME HOLMAN: Immediately after the Rose Garden session, members of the House Select Committee on Homeland Security reconvened to hear from four cabinet secretaries who, under the President's plan, would lose funding, resources, and responsibilities to the new department.

SPENCER ABRAHAM: Mr. Chairman, I believe the President's proposal will ensure greater security for all Americans. Our ability to identify, deter, and if necessary, respond to threats to our security will be enhanced. And the Department of Energy will stand ready to assist, as it does today, in any way it can.

KWAME HOLMAN: Health and Human Services Secretary Tommy Thompson was questioned by Ohio Republican Deborah Pryce.

REP. DEBORAH PRYCE: What changes will we see as this new law is implemented in how our local hospitals are going to be prepared?

TOMMY THOMPSON: In the upcoming budget for fiscal year 2003, there's an additional $518 million for hospitals to implement those plans that were being planned this year. And so that's an additional $518 million to do several things: To strengthen the emergency wards; to have coordination between the first responders and the police and fire departments in a community; to have a regional capacity this year... to have a surge capacity of 500 beds, to be upgraded to 1,000 beds next year; to have a place where if there was a smallpox epidemic that would need thousands of beds, that they would have some place in a large city or a large area that people could communicate. And we're strengthening the laboratory capacity; we're strengthening the communication and all of that. Now, that is going to be... the money is going to be transferred over to the new Department of Homeland Security.

KWAME HOLMAN: Meanwhile, at a Senate Health Committee hearing, Homeland Security Director Tom Ridge was answering similar questions.

SEN. BILL FRIST: In the response component, when you have a Secretary of Homeland Security acting through the Secretary of Health and Human Services, if there is a disagreement, if there is -- these two secretaries, in terms of either a response responding to emergency, a bioterror attack, which could have an impact greater than a nuclear weapon at the end of the day, how are disputes resolved between those two?

TOM RIDGE: There's an assistant to the President for homeland security and that is a coordination role and from time to time a monitoring role and a decision-making role, there's a specific process. Again, we don't want to get bogged down in process if you have to make quick decisions, but I think there is a decision-making capacity within the White House if there is a dispute that cannot be resolved between the principals to move this along as quickly as possible. More often than not, it may end up the assistant to the President getting it done. You mentioned and I recall you and I having lengthy conversation when we were dealing with the anthrax challenges confronting the Congress of the United States, and we know there were good, thoughtful, well-intentioned voices, but there were a lot of them. We know that there wasn't a great deal of coordination at the outset generally around this country. And I think the President's vision is that you work with HHS to direct some of this research. But if an incident like that occurred, the Department of Homeland Security would be the coordinator, but the medical and scientific response would still be through Health and Human Services. The investigative work would continue to be through the FBI and traditional law enforcement. So we would finally have one agency, one person accountable for coordinating the public response, public information, and overseeing the medical work, the medical work, the law enforcement work that might be necessarily associated with that. It is not designed to replace the scientific or medical expertise that HHS and NIH bring to public health generally or to a bioterrorism incident.

KWAME HOLMAN: Though more questions remain to be answered, Congressional leaders today said they're aiming for a homeland security bill that will be approved quickly and overwhelmingly.

JIM LEHRER: And to reaction from four key members of Congress from the Senate Governmental Affairs Committee: The Democratic chairman and the ranking Republican member, Joe Lieberman of Connecticut and Fred Thompson of Tennessee. From the House Select Committee on Homeland Security: Deborah Pryce of Ohio, the Republican Conference vice chairman; and Nancy Pelosi of California, the Democratic whip.

Senator Lieberman, what do you think of the President's strategy?

SEN. JOSEPH LIEBERMAN: Jim, there's not a lot new here, but nonetheless, it's an important statement of the urgency of the threat that we faced from terrorism, of the continuation of the threat, and of the possibilities here for a comprehensive, strong response in which we reorganize our government to focus agencies on homeland security and to use our strength to meet this latest challenge, unprecedented challenge to our security. So when I say there's nothing new, I mean that the President and a lot of us have said a lot of this for a while. But nonetheless, it's an important document and now the strategy needs to be connected to a department that can carry it out.

JIM LEHRER: Are you suggesting, Senator, that there should have been something new?

SEN. JOSEPH LIEBERMAN: No. I think this is an important first statement. In fact, the bill that our committee will consider next week would require such a strategy and an annual updating of it. So it's an important and very constructive statement. I think the spirit around the table at the White House today in the cabinet room was just as the President said. The President and the Congress of the United States, both parties, are going to show the world that we're going to work together to protect the security of the American people at home.

JIM LEHRER: Congresswoman Pryce, what did you think of it?

REP. DEBORAH PRYCE: Ithink it's a great step forward. The President gathered us all together in the cabinet room and later on as he addressed the nation. The elements are all in place and now it's time for Congress to do its job. We need to have our hearings. We're in the process of doing that from morning till night here in the House. And tomorrow we'll be willing to our committee chairman and women who have been doing the hard work of actually putting the language together. They have some differences with the Administration's plan, and we intend to hear them out and then eventually put a bill together, take it to the floor, and have the House work its will. I think that we all have something to add to this process. We have years and years of experienced chairman and staff members here on Capitol Hill that could probably help improve upon this product and that's the process and then we will, obviously, have to pass it and send it on to the President. But the good thing is that we're all working together. There is a spirit of non-partisanship, and that's sort of rare around here on Capitol Hill, but it's a good feeling that we can all proceed down the same path with the best interests of the country at heart. We're all going to have... we're going to have some differences, but I think that we're well on our way to producing a product that we can all be happy with and proud of.

JIM LEHRER: Do you have any fundamental differences with what the President outlined today?

REP. DEBORAH PRYCE: I do not. I think it's a very, very solid plan. There are a few minor things that we have been discussing that probably can change and I think the Administration will buy into many of the minor things, but I think it's a great proposal that he's put forward. But we have to pass a plan, and we would like to pass it with a large vote. And so we will probably take everyone's ideas under consideration and try to make it as good as we can.

JIM LEHRER: Congresswoman Pelosi, do you see it as a great proposal?

REP. NANCY PELOSI: Well, I was glad that we saw the strategy today, because we're going into the end of writing a bill that will come to the floor next week. And it was very important for us to see what the strategy was, what the mission is, so that we know what the legislation should be to achieve mission success. I have all along thought that the President's original proposal created too much bureaucracy. I fully support the President. I think he did the right thing when he established the Office of Homeland Security in the White House by executive order. I would like to see that made into law. That was a good step. I'd like to see those powers expanded in the White House. I think we should have an Office of Homeland Security. I think it could be much smaller than the bureaucracy that is proposed, which will have 170,000 employees. Of all the municipalities in our country, only about 125 of them are populated by more people than this Department of Homeland Security will be. So I'm hoping that we can subject the President's proposal to the scrutiny of what he has said is our mission, which is right, which is how can we best protect the American people? I think that some of these agencies may... should be coordinated by the Office of Homeland Security, but not necessarily have to be administered and managed by them. We have to do what is in the President's strategy, which is to reduce risk to the American people and to use our resources judiciously to do that. So I look forward to working in a bipartisan way to have something that is a department for the future thatis lean, that is technologically advanced and that reduces risk to the American people while protecting their civil liberties.

JIM LEHRER: But, Congresswoman Pelosi, is it fair to say that's a fundamental problem you have with the President, because he's proposing this massive new Department of Homeland Security. You basically oppose that, is that correct?

REP. NANCY PELOSI: No. I support the Department of Homeland Security. I just hope that we will listen... I'm very pleased that the chairman of our committee, of which I am the ranking member that Chairman Armey has said he is not wedded chapter and verse to every provision in the President's bill and that he will listen to the proposals of the chairman of his own party coming to our committee tomorrow. So I hope that we would make our decisions in favor of a leaner department that gives the Secretary, whoever he or she may be, the ability to use time and energy coordinating and thinking in a smart way rather than getting bogged down in administration. I know at the end of the day we'll agree to something that will protect the American people better.

JIM LEHRER: Senator Thompson, do you have any problems with what the President is proposing?

SEN. FRED THOMPSON: No, not really. I agree with what most of my colleagues have said. This is a big problem. This is a big step, and it's complex and what you're beginning to hear now are some of the details that we'll have some disagreement over. But I'm really impressed. We say around here all the time that we want to work together and this is going to be bipartisan and so forth. I think we really mean it this time. I think everybody wants to do what we can to make sure that this is a successful department. But this is the first step in a mighty long road. We shouldn't over promise. We should realize that we're not going to get -- in my opinion, anyway -- any immediate additional security from passing this bill. It's going to take a long time to put together; it's going to cost an awful lot of money. But we need to get about it and I think at the end of the day we'll be better off than before we started.

JIM LEHRER: Well, let's be specific, back to Congresswoman Pelosi's point, Senator Thompson. Do you share her concerns about the creation of this huge new agency?

SEN. FRED THOMPSON: Well, there's no question that we are creating a large new bureaucracy. Now, we're reducing in some other areas, but we are doing that and of course I'm concerned any time we do that. But these are extraordinary circumstances and I think that we've got to take a chance. We've got to do some things differently. We clearly were not sufficiently prepared. Our intelligence community needs some additional coordination and additional reform. Our infrastructure protection has not been what it should be. This is a big step, and I have some concerns about it. Now, I think that we'll be probably modifying it for years to come. That doesn't mean we shouldn't do it. I think we've got to take the chance that we can be smart enough to do some things differently, that we can pare down in some other areas as we build up in this particular area. We can reprioritize some things and quit acting like this is not a big problem that's going to cost a lot of money and maybe pare back on some other spending that we're doing up here and really reform our processes. So I think on balance it's something that has to be done and we can have honest disagreements on the details of what agencies, for example, should be inside the new department and what should be outside of it. But I think on balance that we've got to move in this direction.

JIM LEHRER: Senator Lieberman, what does moving mean at this point? Give me a realistic feel for what happens next and all this talk that all of you have made and the President has made about bipartisanship and this time it's going to be different. Okay. What does that mean?

SEN. JOSEPH LIEBERMAN: Well, let me start by saying that our Senate Governmental Affairs Committee reported out a bill in May and it's quite similar to the proposal that the President made, both of which recommend creating Departments of Homeland Security. So we're building on experience that's in common. And that's bipartisan experience. What this all means is that the House will take this proposal up from the special committee headed by Mr. Armey and Miss Pelosi next week. Senator Thompson and I and our committee are going to bark up our bill in the Senate next Wednesday, take it to the floor the following week, and if all goes well, these bills will pass both Houses before we leave here for the August summer recess and our conference committee will work together and I think as early in September as possible we'll bring out a common bill to the floor of each House. There's a real will to make this happen. There are some disagreements. They'll be argued out in the process, but I do think there's a sense of urgency and a sense of history here that if we don't get ourselves organized and we don't act urgently to prevent another attack, that it will occur. And so I'm very optimistic that we're going to seize the moment and make something good happen for the American people.

JIM LEHRER: Congresswoman Pryce, are you as optimistic as Senator Lieberman is that this all can be done by the fall?

REP. DEBORAH PRYCE: Well, it's a major lift, I'll tell you. It's not going to be easy, but we are working around the clock. Our staff is working around the clock, and we're on a timetable to do it. But I think that we all have to be cautious not to sacrifice a good quality bill just to make an artificial deadline. We'd all like to have it done by September 11, there's no question. That means something to every American and we'd like to have this signed into law by then. But we don't want to rush and sacrifice doing it right in order to make this artificial deadline. And so... but right now I think we're on target and it's very possible that we could do this, and it would be a great thing and I think American people would like to know that their government can move expeditiously and efficiently and we're trying.

JIM LEHRER: Congresswoman Pelosi, what about Senator Thompson's point that even if a bill does pass very quickly, that the American people shouldn't be believed that suddenly the United States of America is going to be safe from terrorism just because this legislation passed. Do you agree with time there, that we need to be more realistic about timetables in terms of effectiveness?

REP. NANCY PELOSI: Well, I don't think there are any guarantees, but we certainly can reduce risk. And I associate myself with remarks of all of my colleague and the Senators when we say that Dick Gephardt, our Democratic leader, has said that we should have a bill signed into law by September 11. We hope to do that. We hope to send a message to those who watch us, both friend and foe alike, that we are better prepared. We hope to give some comfort to the families who were affected by September 11 that there is reduced risk and that we can hopefully take some of the fear out of their lives, because they have a heightened sense of fear after what they have been through. So this will be not a guarantee but a giant step forward. And, yes, we will be working on it for a long time to come to perfect it as we see what works and what doesn't. But as long as we have a fair and open process-- which I anticipate that we will-- in the few weeks ahead, I have no doubt that we will come forward with a bipartisan support for reducing risk to the American people, giving comfort to the families affected by September 11, protecting the civil liberties of the American people, and doing in the a way that judiciously makes use of our resources.

JIM LEHRER: But Senator Thompson, the idea that the President today offered a 90-page outline of strategy for homeland security and that in a very few weeks the Congress of the United States is going to have a bill on his desk that will implement all of that, that's not we're talking about here, is it?

SEN. FRED THOMPSON: Well, it's going to be... yes. (Laughter)

JIM LEHRER: Oh, it is what we're talking about? It can be done? Laws can be passed. They can take that, what he outlined today and put it in a way that it will... the government of the United States will be reorganized and be functioning along the lines that he outlined?

SEN. FRED THOMPSON: Well, first of all, it's not all of government.

JIM LEHRER: Sure.

SEN. FRED THOMPSON: I think it should be, but that's a different subject. But this is not the first time that we've been apprised of these issues. We've been working on this, as Joe Lieberman said, we ve been working on this for some time. So we're familiar with all of the issues involved and how best to... people's ideas about how best to protect our infrastructure and our borders, how best to protect... integrate our intelligence system into this new department -- all the things things that we have been discussing for a long time. Frankly I think in a perfect world we'll still have additional time, but....

JIM LEHRER: Additional time meaning before another attack?

SEN. FRED THOMPSON: No. Additional time for us to consider this. It's A... you know, it's a rare circumstance around here when Congress gets accused of moving too fast. (Laughter) And perhaps my concerns are misplaced. But I would like to see a little bit more time to consider some of the details, but I think that you know, we're devoting a lot of time and effort and concentration. Sometimes you can take calendar time and not really get much done. What we're really doing, I think is really concentrating now in the House and the Senate on these remaining issues. And I think we can wind up doing a good job, and I think the reality of the circumstances is that we've got to get it done and we need to get it done by the end of this year. I'm not wed to September 11 by any stretch of the imagination. I think it would be a mistake if we pushed ourselves too hard on that date. If we can do it, fine. If we can't, it doesn't hurt my sensibilities at all. But I do think there's really no reason why we can't finish it before we go out this year.

JIM LEHRER: Okay. Thank you all four very much and good luck.

SEN. JOSEPH LIEBERMAN: Thank you, Jim.

FOCUS DEALING WITH DEFICITS

JIM LEHRER: Still to come on the NewsHour tonight: State budget deficits, and how to account for stock options.

Boosting state economies is the top agenda item for the nation's governors now meeting in Idaho. They and their legislatures face a collective deficit of over $45 billion in state budgets.

We look now at the budget problems in one state, Arizona. The reporter is Ted Robbins of KUAT-Tucson.

TED ROBBINS: Until eight years ago, the state of Arizona took a slice out of every private country club and health club membership. Pricey initiation fees and monthly dues brought in millions to state coffers -- but not any more. There's no sales tax on pet grooming, either-- just two of more than 100 sales tax exemptions and exclusions, many handed out in the last decade, exemptions the State Department of Revenue says costs Arizona about $2 billion a year.

JOHN LOREDO: Massage parlors, pet grooming services, interior decorating services. The list goes on and on and on.

TED ROBBINS: Democratic state representative John Loredo recently co-sponsored a bill to end some tax exemptions. Tax breaks on food and medicine are necessary, he says, but not taxing country club memberships is just the result of successful lobbying at the legislature.

JOHN LOREDO: And the good-old boys got together and decided that they didn't want to pay taxes on their membership anymore. So they came to the capital, found some friendly legislators, and they bought themselves a tax exemption.

TED ROBBINS: Pet groomer Barbel Whiton says she wouldn't mind collecting a sales tax.

BARBEL WHITON: No, I don't think it would, you know, dramatically change anything. Most people, they are surprised that we don't charge sales tax.

TED ROBBINS: Arizona could use the money. Its deficit was nearly $1 billion going into the next fiscal year. Arizona is not alone, more than 40 states face budget deficits. Arizona's just happens to be one of the worst-- about 14% of its total budget. There's a big difference between the federal government and state government. The federal government can, and does, operate at a deficit. Most state constitutions prohibit that.

WILLIAM POUND: The situation is as bad as it has been or worse than it's been in at least a decade.

TED ROBBINS: Bill Pound is executive director of the National Conference of State Legislatures.

WILLIAM POUND: Where you see some of the dramatic shortfalls, it is clearly in income tax collections, and the... I think today, in hindsight, that it is apparent that our income tax collections, that the boom years are not only... of the national economy and state economy were inflated by a lot of capital gains, revenues, you know... out of the market. And those have simply disappeared.

TED ROBBINS: Sales tax revenues are down, and in Arizona, half of all state revenue comes from sales taxes. That dependence on sales tax is the result of a decade's worth of cuts in the state income tax, a boom-time policy Republican State Senator Scott Bundgaard defends.

SCOTT BUNDGAARD: It was very wise for us to be... to be cutting taxes, because the government should only be using as much money as it needs to exist. By sending money back to the people, that is money that we are not going to be able to spend. Had we not handed over a billion dollars in tax cuts back to the taxpayers in Arizona, that's another $1 billion we would be obligated to find a way to pay for because that money would have invariably been spent on social programs.

TED ROBBINS: But many Arizonans say there's nothing wrong with spending money on social programs, health care, and education. When the state schools were consistently ranked among the worst in the nation, Arizona voters passed ballot initiatives forcing a recalcitrant legislature to spend money on education. Daniel Cooper is the principal of Alfred Garcia Elementary in South Phoenix. He says the legislature has been out of touch with what voters want.

DANIEL COOPER: We have so many tax loopholes in this state, we... you know, we've cut taxes and cut taxes. I mean, things cost money. You want roads? They cost money. You want good hospitals and good, you know, facilities for the state? It costs money. Well, good schools cost money, and people just... in the state legislature, can't seem to get over that. And then these are the brand new bathrooms over here...

TED ROBBINS: Cooper says the initiatives helped 60-year-old Garcia Elementary get new roofs, new bathrooms, and higher teacher salaries. Voters also passed initiatives increasing state health care coverage for the poor and the mentally ill. Democratic Senator Ruth Solomon heads the Senate Appropriations Committee. She says these voter-mandates programs consume nearly two- thirds of the entire state budget.

RUTH SOLOMON: And so, if the people tell us that they want us to spend several hundreds of millions of dollars on any one of a number of things that they do, in fact, deserve and should have, we've got to do that even if we don't have the revenue source to do that.

SPOKESPERSON: The state is undergoing a fiscal crisis.

TED ROBBINS: Even lawmakers and Arizona's governor Jane Hull admits some of their generosity was mistaken, like a tax rebate to residents who converted vehicles to alternative fuels, like propane. That cost the state $110 million, far more than planned. Paying off the conversions drew down the state's rainy-day fund, last year's deficit exhausted it.

SCOTT BUNDGAARD: Arizona's in a deep hole because during the good times, we didn't set enough money aside for the challenging times, and then when September 11 came along and the drop in the market had really exacerbated the problems that we were bound to face.

TED ROBBINS: Arizona legislators could have raised taxes this year, but ten years ago, voters threw them a curve: They passed an initiative saying any tax increase had to be passed not just by a majority, but by a super majority, two-thirds of the legislature. Democrat Solomon says that's politically impossible, and voters should repeal the law.

RUTH SOLOMON: You get a simple majority of members to put the question to the taxpayers and to ask them if they're willing to have their taxes raised, because this body won't do it.

TED ROBBINS: Republicans like Scott Bundgaard don't think it's necessary to raise taxes.

SCOTT BUNDGAARD: What we've done is, during the fat years, the seven fat years, if you will, that we had over the past couple of years, we did not budget wisely. We did not... we created all kinds of social programs that had a constituency attached to it. Now it's time to probably back up some of the work that we've done, and cut.

TED ROBBINS: But you were ordered to do a lot of that.

SCOTT BUNDGAARD: In some of those cases, you're right, we were ordered to do that.

TED ROBBINS: With almost two- thirds of state spending mandated, only a few state agencies are left to absorb big cuts in the budget passed at the end of May. The Arizona state parks department must cut almost half its upcoming budget. Tourism is critical to Arizona's economy, but the popular Catalina State Park near Tucson, and six other parks, may close until enough money is saved to reopen them.

GUIDE: So let's go ahead and head on up to the tunnel.

TED ROBBINS: Arizona's Kartchner Caverns already attract a quarter million visitors a year. It was set to expand, but those plans will now be put on hold. Three state universities, including the University of Arizona, are also cutting back for the second straight year. Administrators recently met with worried staff members to discuss layoffs. Researcher Michael Gizinski has already lost his job.

MICHAEL GIZINSKI: ...And now there's two undergraduate students who are going to be doing the work that I was doing and if the university is looking to maintain its standing, how can that be doing something like that?

PETER LIKINS: When we are obliged to take tens of millions of dollars out of the operations of the university, the quality of our performance will diminish.

TED ROBBINS: University of Arizona president Peter Likins worries that short-term budget cuts will damage the school's and the state's long-term prosperity.

PETER LIKINS: If we don't have first-class educational institutions top to bottom, we will not succeed as an economy. I want to serve the people, and I can't do that if somebody doesn't invest in the universities.

TED ROBBINS: So far this year, most states have raised only so-called "sin" taxes on liquor and cigarettes, but says Bill Pound, that's not likely to solve the problem next year.

WILLIAM POUND: I don't think this is a probably that's going to disappear anytime soon. Typically, state revenues lag the national economy. The states don't hit a downturn quite as fast as maybe the private sector does, and they don't come out of it quite as fast. And I think with what we're seeing on state tax collections here in this spring, that it will probably be another year of budgetary difficulty, at least through 2003.

TED ROBBINS: That may mean continued tough times for Arizona and other states which just patched up their budgets for the fiscal year. It won't be long before they'll have to figure out what to do for the following year.

FOCUS WEIGHING OPTIONS

JIM LEHRER: Finally tonight: The stock options debate, and to Margaret Warner.

MARGARET WARNER: Federal Reserve Chairman Alan Greenspan said today that "infectious greed" gripped corporate America during the stock market boom of the '90s, and that s because, he said, so many executives and managers were receiving stock options as compensation.

ALAN GREENSPAN: The highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising. The incentives they created overcame the good judgment of too many corporate managers. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.

MARGARET WARNER: Many American companies, particularly high- tech firms, grant stock options-- more than $160 billion worth in the year 2000, according to one study; triple the amount just three years earlier. Another study said four in ten large companies now grant options to their workers. A stock option gives an employee the right to buy shares in company stock sometime in the future at a preset price. If the stock rises in the meantime, the employee pockets the difference when he or she exercises that option. Companies are not required to count options as expenses against earnings.

SPOKESMAN: Proposes an amendment to...

MARGARET WARNER: Senator John McCain tried, but failed, to change that. His amendment to a corporate reform bill to force companies to count options as expenses never came up for a vote last week.

SEN. JOHN McCAIN: The fix is in, as we say all too often in the sport of boxing. The fix is in, and we will now have cloture invoked and there will not be a vote on stock options.

MARGARET WARNER: The "fix," in his words, reflected heavy lobbying by technology companies against a change in the law that would dramatically affect their financial statements. If options were counted as expenses, according to one brokerage firm, Intel last year would not have earned 19 cents a share, but 4 cents a share. Another brokerage firm said Cisco Systems' total income last year would not have been $4.6 billion, but $2.7 billion. Whether Congress acts or not, some firms have decided to make the change on their own. Sunday, Coca-Cola announced it would begin treating future stock option grants as employee compensation. The "Washington Post" company followed suit the next day. Greenspan said today that the private-sector financial accounting standards board, or FASB, also night step in to issue new standards.

SEN. PHIL GRAMM: Do you believe that Congress ought to vote on the issue of setting an accounting standard with regard to how stock options are treated?

ALAN GREENSPAN: Well, I frankly don't think that one needs to do anything, as best I can judge what's happening. My own impression is that FASB will rule in a manner which, I think, from listening to what the various discussions are... in a manner which would appropriately expense stock options, which I think is a very important issue.

MARGARET WARNER: Greenspan also predicted more companies would make the change voluntarily, as Coca-Cola did.

MARGARET WARNER: So is Alan Greenspan right? Should companies count options as expenses? We join that debate with Rick White, president and CEO of TechNet, a national association representing more than 300 senior executives from technology and investment firms -- He's a former Republican Congressman from Washington State; and Jennifer Arlen, a professor of law at New York University, specializing in securities fraud and business crime.

Let's start, before we get into the accounting issues, to both of you, starting with you, Rick White, just your view on whether this practice of granting so many stock options is healthy for the companies involved and for business as a whole.

RICK WHITE: Well, I think it's clear and, frankly, I think there's a consensus that stock options are general is a good thing. We want employees to have a piece of the action, to feel like they're committed to the company. And so I think stock options in general are largely considered a good thing. There have been some abuses, as Chairman Greenspan said, and there should be some ways to deal with those abuses. But what we're concerned about is if you start by expensing stock options, you end up making the whole system much more difficult to implement.

MARGARET WARNER: Jennifer Arlen, do you agree that options in general, at least, are healthy because they give employees a stake in the company and the company's success?

JENNIFER ARLEN: (network audio difficulty) Managers who work hard for the firm get to participate in the profit. But the amount of options we've seen goes way beyond what is probably appropriate. But the only way to know whether the options are too high is to ask the shareholders. And the only way to ask the shareholders is to tell them what the options are costing them and let them choose. And we can't do that unless we expense stock options.

MARGARET WARNER: So... I'm sorry, we had a little audio problem with you, but what impact would it have, then, if companies were required to, essentially, deduct the cost of options from earnings?

JENNIFER ARLEN: My impression is that having to deduct options will result in executives receiving fewer options. This would not be the case if executives are getting the right amount of options. Shareholders would say "Well, listen, this cost is worth it to us, you're doing such a wonderful job." The expensing of options will only hurt executives if the shareholders look at the cost and say "it's not worth it, you're not doing enough for us."

MARGARET WARNER: What about that, Rick White?

RICK WHITE: I agree with about 80% of what the professor is saying. I think you have to make sure that shareholders know what the option packages are. Frankly, I think you should make sure that shareholders approve stock& option packages, at least for executives. The concern we have is that if you deduct these charges from companies' earnings, you'll artificially make earnings look lower than they actually are. The fact is, you know, when somebody gets a stock option, the company's cash doesn't go down, its assets don't go down, nothing changes except the future distribution of stock on shareholders. And so it's entirely appropriate for the shareholders to have information about what that future delusion might be, but it's frankly misleading. If your company makes a profit of a million dollars this year without stock options it has a profit of a million dollars, it has a million dollars in the bank. If it grants a whole bunch of stock options, it still has a million dollars in the bank. So to artificially deduct something from that I think would be a mistake.

MARGARET WARNER: Explain this a little further. Let's say an employee is granted the option to buy ten shares of the stock at $50 and four years later he or she exercises that option, only on the market that stock now is worth $60. He or she makes a $10 per share profit. Who pays for that differential?

RICK WHITE: Well, the employee has to buy the stock at the $50 number, then sell the stock on the marketplace if they want to. They're certainly entitled to hold the stock if they want to. So other investors who decide that $60 is the right price pay that and so the employee gets the benefit out of the marketplace. There hasn't been any payment from the company whatsoever and the company's assets stay exactly the same as if this transaction has never happened.

MARGARET WARNER: Jennifer Arlen, do you agree that there is no direct cost to the company?

JENNIFER ARLEN: No, I couldn't disagree more. The cost to the company is the value of the options themselves. The question is, how much money could the company have made if it had sold the options on the market instead of giving them to the executives? If it's the case that had the company sold the options on the market they would be worthless, then he's right, giving the executives options cost the company nothing. But if people expect the company's stock to go up, then the company could have made money by selling the options on the market, and that's what it costs the company: The value of the options had they been sold on the market. And that's a real cost. And the company's balance sheet should reflect that cost. They've given something up.

MARGARET WARNER: Rick White?

RICK WHITE: No, it really isn't a real cost. It's not the sort of cost that we normally account for. It's not money or assets taken out of the company; it's an opportunity cost and in economic analysis, that's certainly one way to look at it. But from an accounting standpoint, the assets of the company haven't increased or diminished whatsoever. They still have the same amount of cash, the same amount of assets and, frankly, they still have the same amount of stock outstanding. It's just when it's exercised later shareholders may have a slightly different percentage based on the exercise of these options. So really I think it's misleading from an accounting standpoint to say there's a cost here that ought to be accounted for, like the cost of writing a check.

MARGARET WARNER: Professor Arlen, do you think if companies were forced to make this change, would we see a lot of major restatements of companies' balance sheets?

JENNIFER ARLEN: Well, it depends on whether we make this prospectively or retrospectively. Assuming we do it prospectively, I expect that many companies will reconsider their current balance between options and cash bonuses and also will lower executive compensation. But at existing options levels, yes, I think many companies will have lower reported earnings than they have now and whether they have lower share prices or not depends on whether shareholders understood how much companies were paying their executives in options or not. If shareholders already understand this, it shouldn't affect share price at all.

MARGARET WARNER: What do you think would be the effect, Rick White, on the earnings, particularly, say, of a lot of companies in the high-tech field?

RICK WHITE: Well, what we're particularly concerned about is the effect will be is that companies can no longer give options to rank-and-file employees. The problem we have is that if you have to deduct these... some number accounting fees options from your earnings, a company that just gives these options to the top five executives, or the top twelve executives doesn't take a big hit to its bottom line. There isn't... even if they're highly compensated, it's not a huge number. But if you give options to 20,000 employees, you spread it out among your employees like we want to encourage people to do, then that's a big number. And so your stock always looks worse than the guy down the street who does the wrong thing and just gives it to the top executives. That s what we re trying

MARGARET WARNER: So you're saying...

RICK WHITE: It's the ability to motivate all your employees.

MARGARET WARNER: It would have a real effect on the bottom line, at least for some companies, or would appear to?

RICK WHITE: Yeah. If you expense your stock options, that means you deduct some number and of course it's very difficult to figure out what that number should be. But you end up deducting some number from your earnings if you have a lot of stock options. If you're a company that limits them to just the senior executives, you don't have as many and you don't have to deduct as much as so your earnings look better. That's the concern we have.

MARGARET WARNER: Professor Arlen, do you see it that way, that if companies were forced to do this that it would be the average employee that would take the hit versus the big executives?

JENNIFER ARLEN: No, I don't. I mean, the average employee is getting a relatively small amount of options and the truth is that part of what's going on, which he even suggested earlier is that options do come out of the pocket of shareholders because it will affect share value. So it's important for companies to be honest about how much they're spending on compensation whether for executives or for their lower-level employees. And I don't really believe that the lower-level employees are the ones who will get hurt. It will be difficult now to award tens of millions of dollars a year to executives in options, if not more than that, right? And those are the options that will be cut back on, not so much the lower-level employees.

MARGARET WARNER: So,Rick White, I know you watch Congress very closely as a former member. Do you agree with Chairman Greenspan's prediction that either this financial accounting standards board will move to institute this change or do you agree that a lot of companies will do this voluntarily if Congress doesn't act?

RICK WHITE: Well, I agree with Chairman Greenspan's statement that Congress shouldn't decide this accounting rule. I mean, I think that's the last thing in the world a body like Congress can really determine accurately. They're not accountants so that's not the right place for them and I think he made that very clear today. I think what I hope will happen is that FASB will take a careful look at this and consider lots of different things that they have to consider, including the effect on the economy and the effect on our ability to encourage people to take risks and innovate. So I think the jury is still out on exactly what FASB would do. In terms of other companies, you know, you have to make a distinction between companies who really live or die based on whether they can innovate and take risks and have entrepreneurship and companies in more established industries. If you looked at Coca-Cola, for example, you know, they've got the formula for their product that's been locked in a safe if in Atlanta for 120 years. They're an established company. They have a little different way that they have to motivate their employees. For a technology company who has to kind of reinvent the technology every year otherwise they go out of business, it's really vital to maintain that entrepreneurial atmosphere, that willingness to take risk and innovate and be creative. And that's why our people feel so strongly that they have got to be able to give people a stake in the company in order to be able to continue that.

MARGARET WARNER: And, Professor Arlen, your prediction -- do you think companies will do this voluntarily or do you think this financial accounting board will do it?

JENNIFER ARLEN: I'm not sure whether either will do it. I think it's critical that companies be able to pay options and shareholders, fully informed will certainly let them, they just may not let them at the same level. Whether or not FASB will do this really depends on how much pressure the institutional investors put to bear on them. I see no reason why, for example the SEC cannot say that to do appropriate full disclosure you have to disclose your options expenses. The IRS, by the way, allows expensing of options. That's effectively an accounting rule. Why shouldn't the SEC also step in and say....

MARGARET WARNER: On that note

JENNIFER ARLEN: if you want to deduct it on your taxes, do it for us, too.

MARGARET WARNER: Sorry to interrupt you but we have to leave it there, we're out of time. Thank you both.

RECAP

JIM LEHRER: Again, the other major developments of the day: President Bush announced a national strategy for homeland security. The 90-page document warned of "a new wave of terrorism." Federal Reserve Chairman Greenspan told Congress the U.S. economy was on its way to a full recovery. And the House of Representatives pushed through a bill to punish corporate fraud. We'll see you online, and again here tomorrow evening. I'm Jim Lehrer. Thank you and good night.