Budget solutions still evade some U.S. states

CHICAGO (Reuters) - A week after a new fiscal year began for the majority of U.S. states, several still lacked balanced budgets on Wednesday and a few of those were likely not to reach a deal for at least another week.

"States are facing the largest challenge they've had since World War II," said Richard Raphael, an executive managing director at Fitch Ratings. "Given the size of the shortfalls, the solutions required are such very difficult choices."

Protracted budget negotiations could force some states to run out of cash like California, pressure bond ratings, impair state services and hurt cities, schools and other local governments that count on state funding, analysts said.

However, the situation is not unprecedented, according to Robin Prunty, a Standard & Poor's analyst, pointing to a flurry of late budgets following the 2001 recession, when big deficits and difficult political choices sent some states into overtime.

Fitch, S&P and Moody's Investors Service said they were not concerned at this point about payments on billions of dollars of outstanding debt sold by these states.

Topping the late list is California, where a solution to closing a whopping $26.3 billion fiscal 2010 budget gap remains elusive.

California Governor Arnold Schwarzenegger and lawmakers remain at odds, with both sides saying deep spending cuts will close most of the shortfall. The Republican governor has ruled out tax increases and Democrats who control the legislature last week agreed with him.

But Schwarzenegger and Democrats have since sparred over whether cuts to education spending are needed, and Schwarzenegger also wants reforms to crack down on welfare fraud included in budget talks, a demand Democrats say is a distraction from the job of balancing the budget.

Ohio Governor Ted Strickland signed into law a second seven-day budget on Tuesday after the Republican-controlled Senate continued to block his plan to allow video lottery terminals at racetracks to raise $933 million in new revenue for the two-year budget.

The Democratic governor said the temporary budgets were costing the state, which faces a $3.2 billion budget gap, at least $13.8 million a week.

Illinois was on track to be without a budget until at least July 14, when the General Assembly returns to session to potentially override Governor Pat Quinn's budget vetoes.

Quinn has so far rejected two out of five budget bills as he continues to push for an income tax increase to help erase a $9.2 billion fiscal 2010 deficit.

In Pennsylvania, Republican lawmakers are deadlocked with Democratic Governor Ed Rendell over his proposal to raise the personal income tax rate to 3.57 percent from 3.07 percent for three years to help bridge a $3.2 billion budget gap.

Rendell says it's not possible to balance his proposed $29 billion fiscal 2010 budget without revenue increases, while GOP leaders refuse to accept the tax hike -- which would raise $4.5 billion over its planned life -- and insist the shortfall can be closed with cuts alone.

The governor on Monday proposed $72 million in new cuts and said a further $200 million should be achievable. But the two sides are still "billions" of dollars apart and no new meetings are scheduled, said Barry Ciccocioppo, a Rendell spokesman, on Wednesday.

Lawmakers in North Carolina are weighing new taxes and increases to close a projected $4.7 billion budget gap and are aiming for a deal by July 15.