Which states are facing the worst budget deficits in 2010?

The national economy may be in recovery, but most states haven’t yet hit bottom – and many are already facing massive budget gaps halfway through their fiscal year, despite basing those budgets on dismal forecasts.

“Unless you’re North Dakota, you’re probably a state that has had some degree of difficulty or crisis involving finances,” says Arturo Pérez, a fiscal analyst with the National Conference of State Legislatures (NCSL), which released its survey of state budget situations earlier this month. “It’s the worst situation states have faced in decades, perhaps going as far back as the Great Depression in some states.”

The result: furloughs, deep cuts to state programs and services, fee and tax hikes.

“The next couple of calendar years will be some of the worst in terms of the tough choices that elected officials will have to make,” says Scott Pattison, executive director of the National Association of State Budget Officers, adding that the stimulus funds that benefited states will soon be drying up, make the situation even more difficult. “There’s not a lot left to do that aren’t really really tough political choices.”

Heading into 2010, here are some of the states facing the toughest fiscal challenges:

California. The state has come to symbolize the budget crisis for many people, because of its massive shortfalls and the extreme measures the state has already been forced to take: mandatory furloughs for all state workers, teacher layoffs, aid to the university system reduced by 20 percent, and massive cuts to education, corrections, and social services. It already faces a $6 billion budget gap, and projections from the state’s Legislative Analyst’s Office show that by the time the state has to come up with its next budget, it will have a $20.7 billion budget gap on its hands. On the plus side, the outlook isn’t worsening, and state revenues appear to be stabilizing.

Oklahoma. Until recently, Oklahoma wasn’t doing too badly, helped by oil and natural gas prices. The big drop in those prices are one of the reasons the state is now facing a budget gap that’s 18.5 percent of its general-fund budget. Revenues for the first quarter of the fiscal year were 26 percent below the estimates.

Arizona. Like California, Florida, and Nevada, Arizona is one of the states that was hit worst and earliest by the housing crisis. “The fiscal situation is dire,” state officials states in NCSL’s survey, citing major shortfalls in all budget categories. Lawmakers are forecasting a 30 percent budget gap in the next fiscal year.

Illinois. The Land of Lincoln is already facing a budget gap of 16.5 percent through the first five months of this fiscal year, and the outlook for next year – particularly with looming pension payments – is gloomy, with a gap of at least $11 billion.

Hawaii. Three-day-a-month furloughs, a reduced school year, and an income tax raise on top earners haven’t been enough to help the state make up its budget gaps: It already faces a shortfall of 13 percent since the fiscal year began in June, and is projecting a 21-percent gap for the next fiscal year.

New Jersey. The state has the third-highest projected budget shortfall for FY2011 (behind Nevada and Arizona) – 27.5 percent – and incoming Gov. Christopher Christie (R) is eyeing cuts of up to 25 percent, on top of $800 million in cuts already outlined. The state’s unemployment fund is forecast to have a $1.2 billion deficit within three months, and will trigger a controversial automatic tax increase on employers.

New York. The state already has a $3 billion budget gap (6 percent) since its fiscal year began in July, which is expected to double by the next budget. Gov. David Paterson (D) ran into controversy earlier this month by proposing to delay payments to schools, hospitals, and cities to keep the state from running out of money. He and the legislature have been battling over how to balance the budget, and he is threatening to use executive powers to cut about $1.6 billion from the budget.

Nevada. One of the hardest hit by the housing crisis, the state faces a projected shortfall of 33 percent for its next budget year. The good news is that the legislature has already approved actions to close that gap.

Colorado. The governor has proposed big cuts to try to eliminate a budget gap of at least 10 percent next fiscal year. Efforts to balance the budget are hobbled by laws that limit state revenue and require annual increases in K-12 spending.

Michigan. Michigan entered the recession long before any other state, and has continued to suffer as the auto industry gets hammered. Currently, unemployment is 14.7 percent – the worst in the nation – though it’s stabilizing.

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