WASHINGTON — California tops the list of 10 states that have been so severely hit by the recession there could be “potentially damaging consequences for the entire country,” the Pew Center on the States warned in a new report.

The other states included California’s neighbors, Arizona, Nevada, and Oregon, as well as Illinois, Michigan, and Wisconsin in the Midwest, and Florida, Rhode Island, and New Jersey in the East.

But at least one state, Wisconsin, is protesting the results. Wisconsin Administration Secretary Michael Morgan said in a statement that his state balanced its budget and predicted a budget surplus for fiscal 2011.

Meanwhile, two state groups warned that the states’ fiscal deterioration, including plummeting tax revenues, will continue into fiscal 2012 and will result in a full decade of financial struggles in the future. The National Governors Association and National Association of State Budget Officers made their prediction based on preliminary results of a biennial survey.

The survey shows similar trends to other recent economic surveys — sharply declining sales, personal income, and corporate income tax revenue. The survey found fiscal 2009 collections had fallen 7.4% for all three of the tax categories — 4.7% for sales, 8.3% for personal income, and 16.1% for corporate income.

The $135 billion of emergency funding provided to states from the American Recovery and Reinvestment Act has “helped states avoid draconian cuts to state services,” but budget gaps between fiscal 2009 and 2011 are expected to total $250 billion, the groups said.

States will have an additional $14.5 billion in budget gaps this fiscal year and at least $21.9 billion in fiscal 2011. To address the gaps, 42 states have already cut spending this fiscal year by $53.5 billion and enacted $23.8 billion of tax and fee increases and $7.7 billion of other revenue measures to generate more income.

The budget cuts for fiscal 2009 enacted by more than 80% of states were more than twice as large as those enacted in fiscal 2002 and 2003, the worst years for such cuts during the last period of fiscal distress, the survey showed. States have pulled back by furloughing employees, increasing taxes, draining rainy-day funds, and cutting spending.

“As bad as the economy is, the fiscal collapse of state and local governments is not an inevitability,” said Christopher Mier, analytical services managing director for Loop Capital Markets. He said states can recover by making debt service payments their first priority, and that they should balance their budgets through spending cuts first, then tax increases — or in dire situations, both.

Mier also proposed a different use of the Troubled Asset Relief Program than the White House’s current consideration of using the funds for deficit reduction.

“Maybe it’s a better use of this TARP money to shore up these state and local governments,” he said. “If there is an acute problem in the short run, [states] may have to go to the U.S. Treasury for help.”

This period of turmoil is unique because it is universal for states, said NASBO executive director Scott D. Pattison. Western states such as Montana, North Dakota, Wyoming, and New Mexico may have an easier recovery “mostly because of agriculture, commodity” industries, he said. But “just about everyone across the country, every state, is hurting,” he added.

Earlier this week, analysts from the Center on Budget and Policy Priorities and Mark Zandi, chief economist of Moody’s Economy.com, called for sustained federal aid to states beyond ARRA’s mandatory expiration date of Sept. 30, 2011. They said $20 billion to $50 billion of additional federal money would be necessary to avoid state budget cuts that would further dampen the national economy.

But despite grim results from its survey of states, the NGA has not reached a consensus on whether to ask the federal government for more help after the ARRA provisions expire, said NGA executive director Raymond C. Sheppach.

“I hate to use the word 'desperation,’ but ... anything’s going to help,” Pattison said of extended federal recovery aid to states. “Obviously something that gets to our general fund shortfall” would help most, he said, such as increased Medicaid matching funds provided through ARRA.

The Pew report scored all 50 states on six factors — foreclosure rates, unemployment, state revenue declines, budget gaps, legal obstacles to balancing budgets, and “poor money-management practices.”

The report stressed that it is not “a comprehensive diagnosis of states’ fiscal health, which also is affected by issues such as demographics, debt burden, and public pension liabilities. But each of the six factors we highlight is a warning sign.”

It noted that five states assigned negative outlooks by Moody’s Investors Service showed up in its top 10 worst-off list. The other five had not been re-rated by Moody’s in 2009, and none of the states had a bond rating higher than AA-plus, the report said.

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