Rising Medicaid and school costs outstrip improving revenues. By Jennifer Schonberger, Staff Writer June 7, 2011 Arturo Perez is fiscal affairs program director for the National Conference of State Legislatures.Jennifer Schonberger: What's ahead for state budgets for fiscal year 2012, which, for most states, starts July 1? Perez: States are facing a budget paradox: Revenues are improving across the board, but increasing costs for programs such as Medicaid and K-12 education continue to create a sizable shortfall between projected revenues and spending. Further, states are trying to make up for the loss of federal stimulus dollars they received over the past three years. Are we looking at more and deeper spending cuts? Advertisement That's happening right now. States are reducing the level of funding for higher education, which often leads to increases in tuition and fees. They're also cutting K-12 education. As a result, we expect to see more teacher layoffs along with larger classroom sizes. This also means cuts in funding for buses, school building expansion and extracurricular activities. Overall, we expect states to continue pay freezes, hiring freezes and furloughs this year. States are also paring back aid to local governments, which will have to make adjustments to balance their own budgets. What will state workers see? Employees are picking up a larger percentage of premiums on health insurance or a larger percentage of retirement contributions. Employees have to save more before retirement contributions are matched, and the percentage that state employers are matching is coming down. Should we expect to see more tax hikes? Advertisement In general, states aren't relying on tax increases to balance budgets, but it's too soon to tell. How long before states return to prerecession revenue-collection levels? For some states it could occur as soon as the upcoming fiscal year. Others may not return to peak revenues until fiscal 2013, 2014, 2015, even as far out as 2016. Which states are in the best shape and which ones are in the worst? North Dakota was not affected by the housing collapse, and revenue collections there have continued to grow. Michigan saw revenues peak in 2000 and doesn't expect to return to that level until 2020. Nevada has been dealing with shortfalls in recent years of 25% to 30% of its budget.