by Pamela M. Prah, Stateline.org Staff Writer

State leaders began the year knowing that the country was officially in a recession, but few could predict how dire their fiscal predicament would be. States closed $100 billion in shortfalls with the help of the federal stimulus, and by cutting programs, dipping into rainy day funds and raising taxes and fees.

At the same time states were grappling with billion-dollar deficits and spending their stimulus dollars, lawmakers also set their sights beyond the fiscal arena to pass historic laws on gay marriage, the death penalty and abortion.

Stateline.org has compiled state-by-state session summaries of 25 legislatures that have finished their 2009 sessions and looks at the trends developing in key issues such as education, health care, homeland security, social policy and transportation.
Even with the federal stimulus package dumping billions of dollars into the states, California, Kentucky, New York, Nevada and Washington faced the largest deficits in their states’ modern history.

Worse is yet to come

While 2009 is bad, states worry 2010 and beyond will be even worse. Even if the national recession ends this year as many predict, the outlook for states is bleak. State fiscal conditions historically lag behind national economic recovery. The year after a recession ends is typically when state budgets are hit hardest, because by then, Medicaid rolls have swelled with the higher numbers of the unemployed who have lost their health insurance.
Many state leaders also predict serious budget trouble when the flood of federal stimulus money ends in two years. At least six Republican governors came under fire for turning back a small portion of their stimulus share for fear of trouble funding new or expanded programs after the stimulus money runs out.

States are trying to balance their budgets at a time when state and local sales tax collections experienced their worst decline in 50 years and demands for state services are up dramatically as laid-off workers and struggling families seek unemployment benefits, food stamps and health care.

Eighteen months into this recession, the number of jobs lost is already more than twice what it was during the last big recession from 1981 to 1982, putting unprecedented pressure on state unemployment agencies, despite efforts to beef up staffing and phone lines. The more than $6.5 billion monthly tab for unemployment checks is siphoning so much money from states’ trust funds that all but a few have borrowed money from the federal government already or will soon need to.

Few states spared

States’ financial outlook is so bad that nothing is off the table. Kentucky, famous for its bourbon, ended its sales tax exemption for alcohol; the governor of Mississippi, Republican Haley Barbour, a former tobacco lobbyist, agreed to a 50-cent tax increase on a pack of cigarettes — the first hike in nearly 25 years. But it wasn’t enough. Both states expect to hold special sessions later in June to balance their budgets with Kentucky considering allowing slots at the state’s famed horse racing venues and incentives to attract a new NASCAR track.

Nowhere is the situation as serious as in California, where Republican Gov. Arnold Schwarzenegger has called for plugging the state’s $24 billion budget deficit by eliminating welfare for 500,000 families, terminating health coverage for nearly a million low-income children and closing 220 state parks.

New York, pummeled by Wall Street’s implosion, is bracing for deficits to climb to $6 billion over the next year after it closed a $17.7 billion deficit this year by raising income taxes on the rich and imposing a host of hefty fees on state services. Colorado, Kansas, Michigan, North Carolina and Washington are among states closing prisons this year to save money.

Even states that have been largely spared from the recession are being forced to make cuts. Idaho reduced year-over-year funding for elementary and secondary education for the first time in its history. Energy-rich Wyoming trimmed its budget for the first time in at least 20 years as it financial forecasts sobered.

Continue reading the full report at stateline.org.

Click here to see state-by-state reviews detailing how states are handling budget deficits and the federal stimulus package; the trends developing in key areas, such as education and health care; notable new legislation; and a chart of completed sessions and political control.