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Budget shortfalls plaguing states

Health-care costs are up. The housing crisis has cut sales of costly items, shrinking tax revenue.

Budget shortfalls are developing for state governments nationwide as rising health-care costs and the housing crisis put pressure on revenue and spending, a report released yesterday said.

States already are spending less in the 2007-08 budget year than they were a year earlier, according to the analysis by the National Governors Association and the National Association of State Budget Officers. Most states have fiscal years running from July 1 through June 30.

"People aren't moving into larger houses, they're not buying rugs and carpets and that type of thing, plus they can't pull the home equity out any more because there isn't any," said Ray Scheppach, the governors group's executive director. When homeowners cut back purchases of big-ticket items, states lose taxes from those sales, he said.

State spending is expected to grow only 4.7 percent this fiscal year, which would be below the historical average.

A few states also are talking about tapping their rainy-day funds to address budget shortfalls caused by lower-than-anticipated revenue. States' total reserves - a combination of year-end balances and rainy-day funds - remain ample, but are also starting to decline, the report said.

Scott Pattison, the budget officer group's executive director, used a sports analogy to describe the downturn states were facing.

In the last couple of years as the economy grew, states were so well off they "would have no problem running the Marine Corps Marathon," he said.

"Now we're starting to see some sluggish growth," Pattison said. "They can do a walk-run of a 10K but [they're] not necessarily at the peak where they could run a marathon."

Several states have announced budget shortfalls since the report was completed this fall, said Scheppach, the governors group's executive director.

The survey of states' financial condition for the fiscal year that, for most, ended in June found:

General-fund spending grew 9.3 percent, which is significantly higher than the 30-year average of 6.4 percent, as states used surpluses to cover tax cuts and bolster previously underfunded programs.

States budgeted more modest revenue growth in the current fiscal year, with seven states enacting budgets that were smaller than last year.

States were expected to end the current fiscal year with total balances of $47 billion, down from $63 billion in 2007 and $69 billion in 2006.