Recovery draws closer in US states, but pain persists

WASHINGTON Dec 1 (Reuters) - The recession that began in 2007 may have stopped pummeling the economies of U.S. states, but a report released on Wednesday shows they will remain bruised and bleeding for at least another year.

"After two of the most challenging years for state budgets, fiscal 2011 will present a slight improvement over fiscal 2010," the report from the National Governors Association and National Association of State Budget Officers said.
Still, states "forecast considerable fiscal stress," they added.

Most states began fiscal 2011 on July 1.
The housing market collapse, financial crisis and longest and deepest recession since the Great Depression created a unique disaster for most states as tax revenue dried up, demand for social services spiked and credit markets froze.

According to the groups, states had to cut general fund spending in both fiscal 2009 and fiscal 2010.
"These back-to-back declines, only the second and third time that state general fund spending has declined in the history of this report, also mark the first time in which states have had consecutive years of lower general fund spending," they said.

The recession officially ended in the summer of 2009, and recent indicators have shown that states' economies may have stopped their decline. Unemployment rates fell last month in most states, and tax revenue has begun to increase.

"Highlighting the slight improvement in fiscal 2011 is that 35 states enacted budgets with higher general fund spending compared to fiscal 2010," the report said.
It found that spending for this year is forecast at 5.3 percent higher than in fiscal 2010.
Still, even as revenue increases this year, collections will likely remain well below their 2008 levels, the report said.

All states except Vermont must balance their budgets, and currently 11 states are reporting nearly $10 billion in budget gaps that must be closed by the end of fiscal 2011. Twenty-three states say they will have to close deficits of $40.5 billion in drafting their budgets for fiscal 2012.

Already, 17 states foresee budget gaps totaling $40.9 billion for fiscal 2013.
The states will struggle to find places to pare spending after slashing their budgets for two years. Since fiscal 2009, they have had to close $230 billion in total budget gaps, mostly with spending cuts. In fiscal 2010, states increased taxes and fees to raise a little over $30 billion.

They also drew down their rainy day funds, which peaked in fiscal 2006 at $69 billion, representing 11.5 percent of general fund expenditures. By the end of fiscal 2010, those reserves had fallen to $39.2 billion and they are expected to drop again in fiscal 2011, to $36.2 billion, or 5.6 percent of general fund spending, according to the report. END OF STIMULUS PLAN