By Lisa Lambert
WASHINGTON (Reuters) - Many states are facing a paradox as they prepare for a new fiscal year: their revenues are improving but they still have budget shortfalls, the National Conference of State Legislatures said on Tuesday.
Most states begin their next fiscal year in July, and the group representing state lawmakers found at least 31 states and Puerto Rico expect shortfalls that total $86.1 billion.
Other groups, such as the Center on Budget and Policy Priorities, put the gaps at more than $100 billion.
"States experienced some significant drops in their revenue base," said Arturo Perez, director of the NCSL fiscal affairs division, adding revenues fell so far in the 2007-2009 recession that it may take years for them to return to pre-recession levels.
"They still have a lot of room to grow," he said.
The shortfalls come after three years of budget holes that states remedied by cutting spending, hiking taxes, borrowing money and turning to the federal government. All states except Vermont must end their fiscal years with balanced budgets.
That has left them few places to find savings for their new budgets, just as the extraordinary one-time assistance they received from the federal economic stimulus plan winds down.
So while revenues are rebounding -- 38 states say personal income tax collections are meeting or exceeding expectations and 37 say their general sales tax collections have met their targets -- they will still have to make tough funding choices.
According to NCSL, 19 states expect their gaps will equal 10 percent or more of their general fund budgets. Two states, Alabama and Nevada, anticipate gaps equal to nearly a third of their budgets.
While California's shortfall is closer to 28 percent, it has the largest projected deficit in terms of dollars in the country at $27.5 billion, said Perez on a call with reporters.
Michigan, one of the hardest hit by the longest and deepest economic recession since the Great Depression, has had to cut spending so steeply that it expects its expenditures in fiscal 2012 to be as low as what it spent in fiscal 1997.
Already, 19 states are projecting budget gaps for fiscal 2013 that total $30.9 billion, NCSL said. The group noted it would mark the fifth year in a row of shortfalls.
Many states hit peaks in revenues just before the recession and are eager to return to those levels.
As tax collections tick up, Delaware and New York both expect to reach their pre-recession peaks this fiscal year. Another nine states say they will return to their peaks in fiscal 2012, including Iowa, which moved up its forecast by a year because of a recent burst in collections.
One bright spot is that states' revenues are coming in closer to forecast, NCSL said.
At the recession's worst point revenues dropped below already depressed forecasts, forcing states to go back and make further spending cuts after their budgets were adopted.
This fiscal year, "mid-year shortages are less severe than past ones," the report found. Altogether, 18 state budgets sprang new holes after they were adopted for this fiscal year and the imbalances are equal to $13.4 billion, half as much as the mid-year gaps reported last year, NCSL said.
(Editing by James Dalgleish)