A big untold story in the emerging economic “recovery” is the precarious position of many state budgets.

Unlike the federal government, most states do not have the ability to run deficits. They must balance budgets each year.

Following the “End of Welfare as We Know It” in the ’90s, and the collapse of the stock market after Bush took office, many states have found themselves overwhelmed with challenges of the long recession without reserves, and with big losses in market-indexed capital assets.

States are facing the largest budget gaps in half a century, ranging from $70 billion to $85 billion this year. Many are still figuring out how to close last year’s deficits, which totaled $50 billion. The Bush administration is making the problem worse through new tax cuts that drain resources from states.

States have performed virtually all the budget patchwork they can – accounting gimmicks, higher fees, reduced services, reduced payrolls, tapping tobacco settlement money, and resorting to bonds to maintain roads. They have cut back on homeland security and public safety. These policies are leading to more layoffs and slower economic recovery.

Hundreds of thousands of people nationwide have already lost Medicaid coverage due to state budget cuts. That number will climb to 1.7 million people if the cuts proposed by governors in 22 states are approved.

Now very difficult choices are the only choices left to avoid draconian cuts in essential services.

1. States can borrow, charging today’s spending to tomorrow’s taxpayers. Arnold Schwarzenegger, with his $15 billion bond measure, is suddenly the poster child for state borrowing. Other state leaders are clearly tempted, and are stretching their constitutions’ restraints on deficit spending.

2. States can cut spending by “reinventing” and only budgeting for “critical functions.” Gov. Gary Locke balanced Washington State’s budget that way last year. But states have already made all the easy cuts.

3. States can raise taxes, and reform tax systems. Politically, this has been a perilous course. Still, under great pressure, some 17 states raised taxes significantly in the current fiscal year, and some 25 governors have proposed raising taxes for the coming year. These increases usually have fallen most heavily on working people, with tax-the-rich proposals failing or being reduced to tokens.

The question on many minds is: Will the much-awaited economic recovery produce a surge of revenues, relieving politicians of these tough decisions?

State budget and revenue experts at the Rockefeller Institute of Government in Albany, N.Y., believe the severe crunch on state budgets will endure for quite some time to come.

• State tax collections fell off precipitously in 2001-2002, much deeper and faster than in past recessions.

• Reserve funds are depleted.

• State tax receipts are recovering, but slowly. Legislation to let states tax fast-growing Internet sales has not passed Congress.

• Medicaid and corrections obligations are growing rapidly.

According to the Rockefeller Institute, state fiscal fortunes make a big difference for the entire nation. They pay more than 90 percent of the bill to educate 48 million children in 93,000 public schools. They provide higher education for 12 million students and run massive law enforcement, corrections and health programs. They’re the front line of defense in homeland security.

State funding for higher education has taken the biggest hit, despite the fact that higher education provides individuals with skills to participate in the increasingly competitive global economy. Demand for higher education will increase, as more students graduate from high school each year.

Meanwhile, Medicaid and corrections spending have been increasing. Projections for the cost of Medicaid show rapid growth as health costs continue to spiral in the absence of a national health care system.

In this regard, Democratic presidential candidate John Kerry’s health care plan has focused on federal aid to states in coping with high Medicaid costs. In exchange, states would have to cover SCHIP (State Children’s Health Insurance Program) for kids and parents. This would assure states an extra $15 billion in the first years.

The link between a tangible gain in health coverage for millions of workers and improved state budgets is an excellent campaign issue in the battleground states.

The author can be reached at pww@pww.org.