CHICAGO - Ohio is facing a record $7.3 billion deficit in its next two-year budget cycle - as well as a $640 million shortfall in its current budget - raising the specter of steep budget cuts without an infusion of federal aid, top state officials warned yesterday.

The announcement comes as Gov. Ted Strickland attends the National Governors Association meeting in Philadelphia today and plans to lobby President-elect Barack Obama for federal aid the governor said is "essential to avoid potentially severe effects of budget shortfalls" in Ohio and other states.

In a press conference yesterday, Strickland and budget director J. Pari Sabety warned that Ohio's economy has deteriorated rapidly since September, the last time officials forecast revenue estimates. For the first time, Strickland said yesterday the state would likely dip into its recently rebuilt $1 billion rainy-day fund.

"In the last 10 weeks our [general fund revenues] have evaporated because of the national economy," Sabety said, adding that revenues have declined to their lowest point in the last 40 to 50 years. "These are indeed historic times."

Ohio's projected shortfall follows similar announcements from other Midwestern states, including Michigan and Wisconsin, which recently announced a record $5.4 billion deficit through its next two-year budget cycle. Ohio officials will craft the 2010-2011 budget in early 2009. The state's fiscal year begins July 1.

Strickland said he would meet with state and federal legislators, business leaders, and local government officials over the next few weeks to outline the grim budget picture.

In a letter to Obama sent yesterday, the governor proposed a federal state aid package that would include $100 billion in block grants for states, a form of aid that he said gives states the greatest amount of flexibility. The letter also asks for $3.2 billion in additional funds for Temporary Assistance for Needy Children funds, infrastructure investments, and aid to U.S. automakers as well as their suppliers, among other measures.

Ohio's revised revenue predictions come after the state has twice this year implemented rounds of budget cuts totaling around $1.2 billion to deal with an ongoing deficit now expected to reach $640 million through the current fiscal year.

Officials are projecting a $1.4 billion decline in personal income tax collection through 2011, the largest since the tax was implemented in 1972, said Sabety. Sales tax revenue, the state's other main revenue source, is expected to bring in $490 million less in 2010 than in 2008, the largest decline since 1950.

At current spending levels, Ohio faces a $7.3 billion deficit in the 2010-2011 biennium. Even if agencies slash 10% from their budgets, the state would be looking at a $4.3 billion shortfall, according to Strickland.

"That's a projected deficit nearly five times the amount that's in our current rainy-day fund," he said.

The state's $1 billion rainy-day fund is one of its top credit strengths, according to rating agency analysts. It was nearly depleted in 2002 and 2003.

"Will it be necessary to use the rainy-day fund at some point?" Strickland said. "Reason says it will be. But the question is how best to deal with the short-term projected deficit for '09 while understanding the challenges we face in 2010 and '11 are even more severe."

Fitch Ratings and Standard & Poor's assign a AA-plus rating to Ohio's general obligation debt with stable outlooks. Moody's Investors Service rates the debt Aa1 and maintains a negative outlook in light of Ohio's weak economic performance and budget pressures.

Ohio is currently operating under a $52.4 billion 2008-2009 operating budget enacted in June 2007, and a $1.3 billion capital budget approved last June. The Strickland administration continues to move forward with its $1.57 billion economic stimulus plan, officials said yesterday.

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