U.S. states' recovery to remain slow, steady: Fitch

WASHINGTON (Reuters) - The economic recovery will continue at a slow pace in fiscal 2014 for most U.S. states, with federal budget deals and healthcare reforms creating uncertainty in many budgets, according to a report released by Fitch Ratings on Wednesday.

For most states, the new fiscal year starts July 1 and legislators and governors are putting the final touches on their budgets. Fitch found that the automatic federal spending cuts that began on March 1, known as "sequestration", have had a limited effect on states' economies and finances.

"Most state budgets assume sustained, slow economic and revenue gains for the current and coming fiscal years," Laura Porter, managing director at Fitch, said in a statement. "While budgets have, for the most part, been devoid of surprises, a key uncertainty for state budget-makers is action at the federal government level."

According to a report released on Wednesday by the liberal-leaning think tank the Economic Policy Institute, states will lose out on $5.1 billion in grants this federal fiscal year, which ends in September, under sequestration. In recent years, they have received more than $600 billion in federal grants, according to EPI.

Medicaid, the health insurance program for the poor that states run with partial reimbursements from the U.S. government, has grown into a budget buster for many states. In fiscal 2012, it consumed 24 percent of total state spending.

The healthcare law known as Obamacare calls for expanding its coverage to more people, but states can choose not to enlarge their Medicaid enrollment. Currently, many are debating expansion, with some states saying the program is too costly and is poorly managed, and others wanting to take advantage of the higher reimbursement rates for the new enrollees.

Regardless of whether a state expands Medicaid, Obamacare will have an effect on its budget as other major provisions come on-line in fiscal 2014, such as establishing health insurance exchanges, according to Fitch.

State revenues have consistently grown for three years and most places have pulled out of the depths of the 2007-09 recession.

Still, some of the recent increases could be a blip, as taxpayers accelerated some of their investment decisions to avoid federal tax increases. At the same time, according to Fitch, the end of a payroll tax break at the beginning of the year has slowed down sales tax growth.

(Reporting by Lisa Lambert; Additional reporting by Caryn Trokie and Pam Niimi in New York; Editing by James Dalgleish)