Glimmers of improvement, but state woes remain

The National Conference of State Legislatures said states faced a collective budget gap of $83.9 billion when creating their budgets for fiscal 2011, which for most began on July 1.

Officials surveyed by the group, which represents state lawmakers, said revenue was beginning to pick up or at least slow its rate of decline. Nearly every state expects tax collections this fiscal year to surpass last year's.

For the first time in a long time we're seeing some slight improvement in the state revenue situation, Corina Eckl, the NCSL's fiscal program director, said in a statement accompanying the report. But glimmers of improvement are tarnished by looming problems.

Already, 33 states are forecasting budget gaps for fiscal 2012 and 23 anticipate shortfalls for fiscal 2013, highlighting the fragile state of their finances. Last year's collapse in state revenue -- one of the largest on record-- has shaken all parts of the U.S. economy.

Investors in the U.S. municipal bond market wonder about the future of debt issuance as state deficits swell.

Public employees see threats to their livelihoods and pensions as governments turn to layoffs. Citizens worry how the revenue crash will affect spending on schools and other services, and whether their tax bills will rise.

There are also concerns states will lead the country into a double dip recession. All except Vermont are required by law to balance their budgets.

Last week, Federal Reserve Chairman Ben Bernanke said state and local government budgets are reducing the speed of the recovery from the economic recession that began in 2007. He warned that in order to balance budgets, those governments would likely cut several hundred thousand jobs.

White House Chair of the Council of Economic Advisers Christina Romer has said state budget shortfalls will be equal to about 1 percent of the country's gross domestic product.

The Center on Budget and Policy Priorities, a think tank that tracks state economic conditions, said earlier this month the recession had caused the steepest decline in state tax receipts on record and that more than 30 states raised taxes.

At least 46 states started fiscal 2011 addressing a shortfall. The Center estimated budget gaps for the fiscal year will total $121 billion, 44 percent higher than the forecast from the state legislatures.

The U.S. Census has also found state revenue is picking up, with state and local government tax revenue rising 0.82 percent in the first quarter of 2010. The Rockefeller Institute of Government, a New York-based research group, recently said overall state tax revenue rose 2.5 percent in the first quarter.

Still, those increases are not enough to push revenue back to pre-recession levels, the NCSL found.

State lawmakers are going to need extra stamina to push through this next round of budget challenges, said William Pound, executive director of the NCSL. It will be a long march before state revenues return to their pre-recession levels, not to mention other hurdles lawmakers have to clear.

The economic stimulus plan passed last year included the largest transfer of funds from the U.S. government to states, at $135 billion, but the aid runs out in less than six months.

Measures in Congress to extend some of that aid have stalled over fiscal conservatives' concerns about the deficit. Without the extension of Medicaid money, states will face new budget shortfalls topping $10 billion, the NCSL found.

Medicaid is the healthcare program for the poor, jointly administered by states and the U.S. government, which takes up 20 percent of state budgets. The stimulus boosted federal reimbursements for the program, freeing up money for other programs.

At least 25 states will have new budget gaps if the enhanced reimbursements are not continued for another six months, according to the NCSL, with 21 of those gaps greater than $100 million. Texas, North Carolina, New York and California risk having budget shortfalls of more than $1 billion.

(Reporting by Lisa Lambert; Editing by Dan Grebler)