More pain coming: State budget gap is $89 billion

NEW YORK (CNNMoney.com) -- States will have to find a way to close an $89 billion budget gap before their 2011 fiscal year begins in July, according to a report from the National Conference of State Legislatures released Wednesday.

But there might be one sign of improvement on the horizon: In what the conference calls a "noteworthy turn," 42 states estimate that revenues will actually grow above current-year levels.

Texas is expected to post the largest increase, at 7%, followed by Hawaii (6%), Minnesota (5.6%) and Vermont (5.4%).

But since the growth will only be modest in most states, budget woes will linger.

And while revenues may be growing, spending demands are continue to rise. "Although the bulk of state fiscal problems can be traced to revenue declines, spending pressures are mounting," according to the report. "Far and away, Medicaid was the most common program exceeding budgeted levels, with 22 states reporting Medicaid overruns."

California faces the largest budget gap at $13.8 billion, the report said, with Illinois at $12.5 billion and New Jersey at $11.0 billion following close behind. The remaining states have balanced budgets for the year, and Alaska reported a $355 million surplus.

States are especially agonizing the wind down of federal stimulus funds, which will disappear by fiscal year 2012. State officials from 31 states and Puerto Rico forecast a $73.5 billion budget gap for that year, and 21 states project a $64.7 billion deficit for fiscal year 2013.

By the end of fiscal year 2013, the conference estimates states will have closed a combined $531 billion budget hole since the start of the recession.