Alabama announces deep cuts to balance budget

* Most U.S. states to spend less in fiscal 2012

* Education cuts likely the main budget battleground

* Alabama has one of lowest tax bases in the country

By Verna Gates

MONTGOMERY, Ala. March 1 (Reuters) - Alabama's governor announced deep cuts to education and other spending programmes on Tuesday in a bid to balance its $19 billion budget at a time of falling revenues.

A $163 million shortfall in the state's $5.3 billion Education Trust Fund will force cuts, though a priority remains preserving teachers and maintaining the number of school days, Republican Governor Robert Bentley told legislators.

Up to 1,000 state employees could be laid off amid cuts of up to 45 percent in some state agencies, but funding remains at 2010 levels for critical services such as prisons, and will be increased for Medicaid, state officials said.

"In the budget I am presenting there will be sacrifices. There are losses. But it's what we must do to maintain and sustain a budget that taxpayers can afford, one that is responsible, realistic and balanced," Bentley said.

"I can tell you we will come out on the other side of this difficult time stronger," he said in a speech in the state's legislative chamber.

Nearly all U.S. states are considering spending less in the coming fiscal 2012 than in 2008, according to the Center on Budget and Policy Priorities. That was the last year before recession devastated state revenue.

Other governors struggling with weak local economies, including Republican Rick Scott in neighboring Florida, are also mixing proposals for tight spending and tax reductions in the fiscal 2012 budget-writing season now underway.

In Alabama, a separate General Fund of $1.5 billion faces a $110 million deficit and cuts to a variety of state agencies will be required to close the gap, said Bentley, who took office in January.

There was no deficit in the $12 billion Earmark Fund, though some cuts will be made in spending associated with it.

LOW TAX BASE

Alabama's GDP stood at $170 billion in 2008 and the state has one of the lowest tax bases in the country, according to Andreas Rauterkus, finance professor at the University of Alabama at Birmingham.

With sales tax revenue falling, Alabama must make cuts or raise taxes to balance its budget as state law mandates, he said. The expiration of federal stimulus dollars has shrunk the state's fiscal base further.

And Jefferson County, home to the state's largest city, Birmingham, faces a separate fiscal problem: a crisis over a $3.2 billion debt run up as the county sought to refinance an upgrade to its sewer system.

Education is likely to be the budget's main battleground. Teachers will pay 7.5 percent of their retirement benefits instead of the 5 percent established in the 1970s, according to government officials.

Funding for supplies and university research will rise but cuts are planned to arts programmes and scholarships to private colleges and dental colleges, government officials said.

"We cannot balance budgets on the back of teachers and state employees," said Democrat Craig Ford, the house minority leader.

Some agencies, such as Alabama's renowned School for Deaf and Blind will remain at current funding but money for the Helen Keller Foundation will be eliminated entirely.

(Writing by Matthew Bigg, Editing by Daniel Magnowski)