Hold off on cutting police and school band

Other experts echo this cautious optimism.

"While the hangover from the budget crisis of the last two years has not completely dissipated, there is now reason to hope that there will be no more bad news from the revenue side of the budget equation," the Rockefeller Institute reports. "At least for now."

Some states are balancing their budgets by hiking "sin" taxes - directly on alcohol and tobacco, and indirectly though more reliance on state-sponsored gambling. North Dakota joined the "Powerball" multistate lottery, Maine now allows slot machines at race tracks ("racinos"), and Iowa will issue more casino licenses.

But for the most part, increasing state revenues have yet to translate into spending hikes for government services.

"Spending growth remains weak and the recovery continues to be uneven" says Scott Pattison, executive director of the National Association of State Budget Officers. "To balance their budgets in fiscal 2004, states ... used a combination of layoffs, furloughs, early retirement, reductions to local aid, reorganization of programs, and a variety of other methods."

Fifty-four percent of state budgets consist of just two items: education and Medicaid, the low-income healthcare program. And of those two, only education is discretionary - meaning that state lawmakers and governors can (and have) cut state funding to the point where some school districts have had to eliminate programs or reduce the number of days school is in session.

But Medicaid is mostly mandatory. As demographics change, Medicaid costs to states have been increasing at more than 10 percent a year.

Writing for Stateline.org, a nonprofit online news organization that reports on state government, National Governors Association executive director Raymond Scheppach says, "The existence of a federal entitlement healthcare program that states administer and partially fund, but have limited ability to control costs, creates a serious bias in state budget priorities."

That means that Medicaid and national healthcare reform must become a national priorities, says Dr. Scheppach. Intended or not, such an assertion has heavy political overtones in an election year.

State economies and budgets are sure to be a factor in the presidential race, especially in swing states like Oregon. Here, George Bush's supporters say the administration's policies have helped jump-start the economic recovery.

Officials with the campaign of presumptive Democratic nominee John Kerry point out that there were nearly 24,000 personal bankruptcies in the state last year - 42 percent more than in the last year of Bill Clinton's presidency.

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