State finances hitting bottom

NEW YORK (CNNMoney.com) -- The good news is that states are expected to hit the bottom of their budget woes this coming fiscal year.

The bad news is that there are still painful spending cuts that must be made in fiscal 2011, which starts July 1 in most states, and beyond.

"From here on, for the next year or so, is going to be the bottom," said Raymond Scheppach, executive director of the National Governors Association, which released its biannual state fiscal report Thursday. "My hope is within two quarters, we begin to start to see some very, very small revenue growth."

Governors' recommended budgets called for a 3.6% increase in spending - the first after a record two years of declines, according to the report, which was conducted with the National Association of State Budget Officers.

That would bring general fund spending to $635.3 billion, still a far cry from the $687.3 billion expended in fiscal 2008, before the Great Recession hit.

Tax revenues are expected to climb to $495.8 billion in fiscal 2011, up from $477.4 billion the previous year but down from the $541.5 billion collected in fiscal 2008.

"The fiscal situation for states going into 2011 will still be worse than before the recession," said Scott Pattison, executive director of the state budget officers' group.

States still have to close budget gaps totaling about $127 billion between now and fiscal 2012. This means governors and lawmakers will have to continue to slash spending. Some 13 states are planning to cut expenditures in the coming year, while 18 states are recommending tax increases totaling $3 billion. New York, for instance, wants to implement a soda tax that would raise $1 billion.

Education and corrections are expected to take the biggest hit. Some 31 states have proposed cutting spending on K-12 and higher education, while 28 are slashing corrections budgets. Twenty states want to reduce aid to localities, while 19 are recommending layoffs of state employees.

The rate of both cuts and tax increases is slowing for fiscal 2011. Some 40 states estimated lower expenditures in fiscal 2010, while residents saw $24 billion in state tax increases.

Fiscal 2012 could be tough for states, since most will have used up all the federal stimulus money they were awarded, Pattison said. The funds, which primarily went to bolster state spending on education, Medicaid and infrastructure, prevented even deeper cuts.

State officials are now calling on Congress to send them another $24 billion in federal funds for Medicaid. The measure, which has been bouncing around Capitol Hill for months, was just stripped out of a House bill on jobs and taxes.

Without it, the states will have to cut the amount they pay doctors to take on Medicaid patients, which could hurt health care access, or slash the government payroll.

"If we don't receive this money, you are going to see additional cuts in reimbursement rates and more layoffs," said Scheppach, noting that 47 governors sent a letter supporting the additional funds.