For the past four years, U.S. states struggled to close more than $500 billion of budget shortfalls caused by the recession, ushering in tax increases, spending cuts and clashes with public-employee unions.

With the economy recovering, officials gathering in Washington today for the National Governors Association winter meeting are beginning to face a welcome choice: how to spend extra money.

Michigan Governor Rick Snyder, whose state is rebounding with the automobile industry, may use a possible $670 million surplus to hire state troopers whose ranks thinned during the past decade. Colorado may set more aside for education. New Jersey's Chris Christie is seeking to cut taxes and bolster an underfunded pension.

“After an extremely difficult period when revenues were crashing and a series of cuts had to be made quickly, state budgets are stabilizing,” Scott Pattison, the executive director of the National Association of State Budget Officers in Washington, said in a telephone interview. “In some cases you're beginning to see improvement in revenues coming in ahead of forecasts.”

State tax revenue has been rising at the fastest pace since 2006, before the housing-market collapse, U.S. Census figures show. In the three months through September, the first quarter in most states' fiscal years, such collections rose 5.6 percent from a year earlier, the seventh-straight gain. That outpaces the 1.6 percent revenue growth states assumed when drafting their budget plans, according to a Nov. 28 report by the NGA and the National Association of State Budget Officers.

Fiscal officers in 27 states and Puerto Rico think revenue is “stable” and should meet fiscal 2012 estimates, according to a survey in October and November by the National Conference of State Legislatures.

Officials in 16 states said they were “concerned” about meeting projections, while seven states are “optimistic” because collections exceed projections, according to the report.

“I'm fairly optimistic for the spring tax collection period, barring something unforeseen,” said Pattison. “There's continued, gradual improvement.”

The three-day NGA event starts today and features a governors-only meeting with President Barack Obama at the White House on Monday and a black-tie dinner with the president and Michelle Obama on Feb. 26. There will be private meetings among governors and their staffs and public-policy sessions including tomorrow's opening panel: “Growing State Economies.”

Lurking Stress

In Michigan, where the unemployment rate dropped to 9.3 percent in December from a high of 14.1 percent in August 2009, the state ranked second for economic health from 2010's third quarter through the same period of 2011, according to the Bloomberg Economic Evaluation of States. It trailed only oil-booming North Dakota.

Still, states' tax collections have yet to fully rebound to 2008 prerecession levels, and budgets in more than half are smaller than in 2008, according to the November report by the Governors Association and budget officers.

Unemployment remains “stubbornly high,” 8.3 percent nationwide in January, and there are uncertainties about whether the European debt crisis and efforts to reduce the federal deficit will stall recoveries, the NCSL report said.

“State policy makers have good reason to feel optimistic about the recent and positive economic news,” said Kil Huh, who follows budgets for the Pew Center on the States. “But when it comes to budget matters, there may be reasons to hedge. There's stress still lurking in state budgets.”

Ohio Governor John Kasich, a Republican, said that with the exception of $2 million he promised to children's hospitals for research, he doesn't plan to increase spending this year. Tax receipts for fiscal 2012 are running $147.1 million ahead of projections, according to the state Office of Budget and Management.

“This economy is still a roller coaster,” Kasich told reporters in Columbus yesterday. “We're not going to be in the business of spending money.”

The increase in collections hasn't lifted all states from their troubles. Illinois Democratic Governor Pat Quinn, who passed a record tax increase last year, this week proposed increasing spending by $800 million, including a 1 percent jump for schools. With a $9 billion backlog of unpaid bills, he still proposed a $2.7 billion cut to Medicaid.

In California, Democratic Governor Jerry Brown is counting on a tax increase next year to forestall cutting $4.8 billion from planned spending for schools.

Rocky Mountain Higher

Even so, any revenue increase is a welcome shift. When Michigan's Snyder took over last year, his first budget contended with a $1.5 billion deficit. The state is now looking at a surplus.

In New Jersey, Christie proposed a $32.1 billion budget on Feb. 21 that would cut income taxes 10 percent and raise spending $2.4 billion over the budget he signed in June. The governor's budget would more than double to $1.1 billion the state's pension payment and increase school aid by $213 million.

Colorado Governor John Hickenlooper has recommended restoring previously proposed cuts over two years that include $97 million for primary and secondary education and $30 million for college financial aid.

“We are able to recommend all of this because the economy has shown welcome improvement,” Hickenlooper said in a press statement.

Bloomberg News

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