01/09/2012 04:59 pm ET Updated Mar 10, 2012

Budget Gaps To Exceed Revenues In Over Half Of U.S. States By July

By Lisa Lambert

Jan 9 (Reuters) - More than half the U.S. states will not have enough revenues to cover spending demands in the fiscal year starting in July, according to a think tank report released on Monday.

Altogether, the budget gaps for 29 states will total $44 billion, the Center on Budget and Policy Priorities found. Among them are California and Texas, the two most populous states in the United States.

"This number is almost certain to grow as governors release new gap projections along with their proposed budgets in the coming months," said the liberal-leaning group, which monitors states' fiscal conditions.

Over the past four years, states have had to close more than $530 billion in budget gaps, according to CBPP. All states except Vermont must end their fiscal years with balanced budgets, which has forced them to slash spending, raise taxes, borrow and turn to the federal government for help.

As the recession took its toll, many had to call emergency legislative sessions to fill new budget holes.

Last week California said it is projecting a shortfall of $9.2 billion.

Texas also has one of the largest budget gaps in terms of dollars, $9 billion, which represents 20.4 percent of its budget. But CBPP noted that states with biennial budgets, such as Texas, have addressed some of their shortfalls already.

Still, Texas shorted its Medicaid healthcare program for the poor in its biennial budget for fiscal years 2012 and 2013, "leaving a roughly $4 billion budget hole that will need to be filled in fiscal year 2013," according to CBPP.

Connecticut's gap is only $2.7 billion, but that represents 14.4 percent of the state budget, and Maine's $470 million gap constitutes 15.5 percent of its budget.

The group said the $1.2 billion gap it reported for Nevada, representing 37 percent of the state's budget, is "the midpoint of several estimates."

"These shortfalls are all the more daunting because states' options for addressing them are fewer and more difficult than in recent years," it said.

Only seven states have had gaps emerge in their budgets this fiscal year, for a total of $2.6 billion. They are California, Illinois, Kentucky, Louisiana, Maine, New York and Washington. The size of the shortfall is positive, though, as it is less than half the mid-year shortfall states faced last year, CBPP said.

Since the start of drafting budgets for this fiscal year, states have had to close gaps of $102.9 billion, equal to 15.9 percent of their total budgets.

Of late, states' tax revenues have begun growing again. According to the center, state tax intake grew 8.3 percent in fiscal 2011. But the think tank warned that over the last three decades, "state fiscal problems lasted for several years after the recession ended."

The recession that officially ended in 2009 was the longest and deepest U.S. economic downturn since the Great Depression.

"Unfortunately, that hole was so deep that even if revenues continue to grow at last year's would take seven years to get them back on a normal track," CBPP said.

"In other words, revenues probably won't come close to what states need to restore the programs that they cut during the recession unless states raise taxes, at least temporarily, or receive additional federal aid while the economy slowly recovers," the center said.

Both are unlikely. Federal deficit fights have left states worried that the money they receive from the federal government will be cut, instead of increased. The only tax increase measure on a state-wide ballot in November, in Colorado, failed.

Last week, credit rating agency Standard & Poor's said it would look at states' abilities to adjust to economic volatility, revenue contraction and potential funding changes at the federal level when gauging their credit soundness in coming months.

Mostly, current revenue strength "has helped to mitigate budget shortfalls," said William Pound, executive director of the National Conference of State Legislatures, in a recent statement. "It could help stave off some of the deep cuts that lawmakers have made in previous sessions."

The group, which represents state lawmakers, last week identified the "top 12 legislative issues of 2012," mostly money problems. Budgets, jobs and state economies, public pensions, education and transportation funding, and healthcare costs will dominate many legislative agendas this year. (Reporting By Lisa Lambert; Editing by Dan Grebler)