State budgets are slowly beginning to bounce back despite few new sources of revenue according to two new reports from the National Conference of State Legislatures (NSCL). The State Budget Update released yesterday shows that states are cautiously optimistic at the start of a new fiscal year as the steep drop off in revenues evens out and fewer budget gaps are springing up. NCSL’s State Tax Update also shows that the first half of 2012 has seen relatively little in the way of significant tax changes.

State budgets are much improved since the end of the Great Recession,Image but they still face considerable challenges. Ten states are reporting that they will end FY 2012 with year-end balances of ten percent or more, an improvement over the years coming out of the 2008 financial crisis where many states were lucky to report that figure at 1% or above. Year end balances contain both general-fund and rainy-day fund amounts. If the early reports hold true, this will be the fourth consecutive year of year-end balance growth for many states.

“State budgets remain susceptible to any economic shocks. The uncertainty at the federal budget level and Medicaid spending are a concern,” said William Pound, executive director of NCSL. “The bottom line: State budgets still face considerable challenges.”

No states are expected to end FY2013 (the fiscal year that just began) with a deficit. For FY2012 only two states reported deficits – California and Washington. Data estimates that without the American Recovery and Reinvestment Act (ARRA) more commonly known as the stimulus, states would have taken a significantly larger budget hit seeing larger deficits than they originally saw during the height of the crisis and likely recovering much more slowly than they currently have.

The recovery is also notable given the rise in spending states have had to contend with as the amount of post-stimulus federal funding dropped considerably and is not expected to return in any significant way. Despite that, a survey of state officials included in the report shows a generally stable to cautiously optimistic outlook for state budgets.

State pensions, Medicare costs and concerns over federal sequestration do however, weigh on state officials. Sequestration if allowed to go forward, or another federal budget deficit measure is likely to include even more cuts to state funding. Even so, states have yet to look at raising taxes ahead of such measures. Kansas, New York and Michigan reported significant income tax cuts adding potential weakness to those state’s financial situations.

The situation could change in November when California voters decide on three separate ballot measures. Two of them, including one initiated by Governor Jerry Brown, would result in large broad-based tax increases and up to $10 billion in new revenues,while the third would cut business taxes.

Other state increases were mostly on vice taxes to cigarettes, alcohol and miscellaneous items. The full report is available on the NCSL’s website and was released during their yearly legislative summit currently underway in Chicago, Illinois.

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