Aug 7 (Reuters) - Their revenues are improving and their budget shortfalls are disappearing, but U.S. states face both domestic and international economic threats that could cut short their nascent recoveries, according to a report released on Tuesday.
"While there are signs of improvement, the turnaround has been slow and uneven across the nation," the National Conference of State Legislatures said in a budget update. "Moreover, the newfound flexibility that lawmakers expect from improving revenues may be hobbled by mounting budget pressures."
The European debt crisis, still-high jobless rates in many U.S. states, funding demands from healthcare reform, and the U.S. deficit are all some of the "considerable challenges" confronting states, the study found.
"Fortunately, state budgets today are better positioned to handle these challenges," the bipartisan NCSL said. "As reported by legislative fiscal directors, year-end balances are rising, with more states shoring up their rainy day funds."
The financial crisis, housing bust and 2007-09 recession caused revenue in many states to collapse just as demand for services from the newly homeless and jobless workers spiked. States cut spending, raised taxes, raided reserves and turned to the federal government for help in the hopes of keeping their budgets balanced.
The situation is now turning around. Only California and the state of Washington currently are projecting deficits for fiscal 2012, according to NCSL. At the same time, resource-rich states like Alaska, Wyoming and North Dakota expect big balances for fiscal 2012, which ended on June 30 for most states.
For fiscal 2013, none of the states are projecting deficits, with 10 states and Washington, D.C., eyeing balances equal to 10 percent or more of general fund spending, the NCSL reported. However, year-end balances of just 0.1 percent to 4.9 percent are projected in nearly a quarter of the states.
Many states consider the surpluses and revenue gains small respites - instead of muscular recoveries - from their budget crises.
While fiscal 2012 general fund revenue increased by 2.9 percent and spending rose by 3.1 percent over fiscal 2011 levels, "the robust return of state revenue collections that typified previous recoveries remains elusive," according to the NCSL.
States' fiscal 2013 revenue is expected to climb by only 3.7 percent, with spending rising by 2.4 percent over fiscal 2012 levels.
The slow recovery is apparent in federal data, too. In 2011, U.S. real gross domestic product by state grew 1.5 percent, compared with 3.1 percent in 2010, according to the U.S. Commerce Department.
The improvements vary from state to state.
Total state revenue has now increased for nine straight quarters. But in 2012's first quarter, 12 states reported declines in total tax revenue, while another 12 reported double-digit increases, the Rockefeller Institute of Government reported last week.
The slowness and unevenness has put many state budgets into uncertainty. Debt problems in Europe that could roil markets pose a large threat to many states, especially those that rely heavily on income tax collections.
The U.S. Congress has scheduled cuts of up to $1.2 trillion affecting states as part of last summer's deficit deal, while it is seeking savings by pulling back other federal grants. States with a heavy military presence are concerned the defense spending cuts that could lead to lay-offs.
Meanwhile, the healthcare reform law passed in 2009 is now coming on-line, and no one is certain if states can handle the costs of creating insurance exchanges or expanding eligibility for Medicaid, the health insurance for the poor.
Still, even with a hodge-podge of economic threats, legislative fiscal directors in 32 states have a stable economic outlook, while 11 were concerned and six were optimistic, according to the legislators' group.
"The prevailing economic outlook is one of continued growth but at a slow to moderate pace in most states," the NCSL reported.