By Lisa Lambert
WASHINGTON (Reuters) - Increasing demands for healthcare and other services, along with weakening in the national economy, could knock U.S. state budgets off their current path of slow, incremental improvement.
"We have growth, but it is slow. It is tepid growth. And, most importantly, we are not yet back ... to pre-recession levels," said Scott Pattison, executive director of the National Association of State Budget Officers.
The group, along with the National Governors Association, found that in fiscal 2011, 38 states had higher general fund spending than the year before, according to a survey they released on Tuesday.
In a sign of further improvement, almost all states -- 43 -- pushed up spending in the budgets they drafted for the current fiscal year.
Fiscal 2011 ended for most states this summer, and fiscal 2012 began on July 1.
But for fiscal 2012 total spending will increase only 2.9 percent, well below the historical average of 5.6 percent a year.
"In all large areas of expenditure for state governments, there has not been an increase. It's basically flat or, in the case of higher education, there's been a decline," Pattison told reporters on a conference call. "The only increase has been a close to $20 billion year-over-year increase in aggregate spending on Medicaid. So, the new dollars are going to Medicaid."
In fiscal 2011, enrollment in Medicaid, the healthcare program for the poor, grew 5.5 percent, and it is estimated to rise 4.1 percent this fiscal year, according to the survey.
The program is administered by the states with reimbursements from the federal government. It can account for a third of a state's spending.
Over the three years of economic turmoil, enrollment in Medicaid spiked 17.7 percent, a rate greatly exceeding enrollment growth that peaked at 9.5 percent in fiscal 2002 in the last recession, the report found.
Medicaid enrollment will increase as the sweeping healthcare reform passed last year makes more people eligible for coverage, while states will have to stretch their dollars to carry out other parts of the law.
"Additionally, state revenue collections will continue to be affected by this less than robust economic recovery, especially in light of the disruption experienced by the national economy earlier this year, as unemployment remains high and consumer spending remains weak," the report found.
Total spending in all states' budgets this year, at $666.6 billion, is still 3 percent below the $687.3 billion of fiscal 2008, the last fiscal year before the recession hit state treasuries.
Also, for fiscal 2012, 39 states had to close $95 billion in budget gaps, and 17 states are already expecting gaps of $40 billion combined for fiscal 2013, the groups found.
HELP GROWS SCARCE
All states except Vermont must end their fiscal years with balanced budgets, which means that, unlike the federal government, they cannot spend more than their revenues allow.
As states' revenues plummeted from the housing downturn, financial crisis and recession, legislatures slashed spending, hiked taxes and turned to the federal government for help. They also raided reserves.
Now, the temporary tax hikes are expiring and voters are showing little appetite to raise levies.
State "rainy day funds" are depleted and revenues are coming in lower than expected in many places. After thinning almost all spending categories over the last three years, states have fewer places to cut.
Revenues have returned to pre-recession levels in 21 states, Pattison said, adding those are "for the most part, lower populated states." Many are also rich in commodities. Some states do not expect to return to pre-recession revenue levels until fiscal 2014, he said.
At the same time, the last of the extraordinary assistance in the 2009 economic stimulus plan -- the largest transfer of federal funds to states in U.S. history -- has been spent.
With the U.S. Congress passing smaller appropriations bills and instituting spending cuts as part of a summer debt deal, "it would seem state and local governments are in for further reductions in federal funding," Dan Crippen, the executive director for the governors' group, said on the same call.
(Editing by Leslie Adler)