As the deadline for their approval approaches, many states are having trouble balancing their budgets. Although most states will manage this year, many are worried about the future, when they will no longer receive federal stimulus money.

California is in the biggest trouble. Gov. Arnold Schwarzenegger warned last Tuesday that unless the budget was balanced by June 15, the state would be unable to borrow the money it needs to pay its bills after July.

Altogether, the states need at least another $230 billion beyond what they will take in through taxes in order to make it through the 2009-2011 fiscal years. The federal government will give roughly $130 billion of stimulus funding to the states to spend flexibly, but this is not enough to cover the total shortfall. An additional $120 billion of stimulus funding may also be available, though this comes with more—and costly—strings attached.

But it is the years beyond 2011, when federal money will no longer be available, that really worries state governments. Many of the financial factors that states are struggling with will not vanish overnight. Economists predict that tax revenues will not reach the same level they were at the start of the recession in 2007 until at least 2012. Government forecasts predict that unemployment will remain high through 2011.

Research by Leslie McGranahan and Richard Mattoon, economists at the Federal Reserve Bank of Chicago, also shows that states have become more sensitive to the business cycle, in part because they now rely on capital-gains taxes for a large proportion of their revenue. This means they will have trouble balancing their budgets until the whole economy improves.

At the same time, costs are expected to rise. Many states have seen their pension fund investments absolutely devastated in the economic downturn. Health-care costs are also expected to climb.

This puts states in a bind. Unlike the federal government, state governments are generally expected to balance their budgets. Yet, naturally, no state is keen on raising taxes or cutting spending in the midst of a recession.

The federal government has crippling debt, and now the states are struggling to balance their budgets. Is there a solution to these economic problems? For the answer, read our article “Can the Financial Flames Be Stopped?” from the April issue of the Trumpet.