When the U.S. Supreme Court ruled in a 1989 Michigan case that state tax exemptions could not be given to retired state employees and withheld from retired federal workers, Utah knew it faced potential trouble since it had the same kind of arrangement.

Utah subsequently changed its system but still was faced with possible refunds to some 34,000 such workers for the years 1985-88. The feared bill came due this week in the form of a 3rd District Court ruling that said the state must refund $137 million to federal retirees.The verdict will be quickly appealed, but given the way court rulings have been going in other states, Utah had better brace itself for a huge blow to the budget. The issue is not over treating retired state and federal workers the same, but making it retroactive and forcing the state to pay refunds.

Long delays in appealing the case could be expensive, since a big chunk of the money already awarded represents interest - $37 million worth.

If Utah loses the appeal, it will be a full-blown crisis. The state may not go bankrupt, but it will be left with its back to the wall. This is especially true if revenue forecasts for the coming year fall short because of the recession.

The news is particularly troublesome since the Legislature just finished putting together a budget that fails to cope with many needs. Education and human services were especially hard hit. Some $10-15 million more in each case would have made a tremendous difference, but the money was not there. To now have to find more than $137 million will be exceedingly painful.

A tax increase could be one answer, but House Speaker Craig Moody, R-Sandy, says lawmakers - who discussed the problem posed by the lawsuit several times during the session - are against a tax hike.

Legislators regard raising taxes as a last resort. They say the money could be provided in other ways, such as raiding the state's "rainy day fund" for its $63 million and taking another $74 million out of the just-approved supplemental budget and its many crucial projects.

Lawmakers failed to pass a bonding bill in the closing hours and face a special session to deal with that issue. That failure could turn out to be a blessing in disguise, since a still-open bonding bill could provide for some projects that would otherwise be lost if $74 million is taken from the supplemental budget.

Utah could survive such a financial onslaught, but it would be left with nothing in the rainy day fund, a long list of unfunded projects, and very little wriggle room in dealing with financial needs in the next few years.

For those who complained that Utah was running too much "surplus" in recent years, the court ruling on AMAX property tax, the backlog of unmet needs, and now the decision on retiree rebates, show how close to the edge the state really has been.

The Bangerter administration and the Legislature deserve credit for keeping Utah in a financial position that offers some ways to absorb such a blow - even though the situation is going to be difficult and painful.