June 30 (Bloomberg) -- California, with a $38 billion deficit, heads a pack of seven states still lacking budgets for the fiscal year that starts tomorrow in what a governors' group called their worst financial crisis since World War II.

Amid recession and a drop in federal money, the number of states without budgets at this stage has almost doubled from four a year ago. Those facing credit-rating reviews and higher interest costs, like California, are: Connecticut, New Jersey, Nevada, New Hampshire, North Carolina and Oregon.

Aside from California -- which has the lowest credit rating of U.S. states and higher borrowing costs than any other -- New Jersey has threatened to halt motor vehicle and even casino operations if a budget isn't enacted. Nevada is considering for the first time a tax on its state-sanctioned brothels to raise about $2.5 million.

Fewer states have met their mandate to pass balanced budgets because ``problems are so much more profound,'' said Nevada Treasurer Brian Krolicki, president of the National Association of State Treasurers. Cutting expenses ``just cannot provide the amount to balance these budgets'' and ``a far feistier political process'' ensues as higher taxes loom, he said.

Thirty states fell short of revenue targets, said the National Association of Governors. Health-care costs rose and revenue declined as stock market losses reduced capital-gains tax payments in the fiscal year ending Monday for 46 of the 50 states, the governor's group said.

Deadline? What Deadline?

California Governor Gray Davis, with the need to close the widest budget gap, confronts a political process that includes a possible recall election this fall and budget legislation that requires passage by a two-thirds majority. The state has failed to meet the deadline 11 times since 1990.

California's economy has been battered by recession and declining tax revenue. The state legislature's failure to pass a budget by tonight's deadline means nursing homes, community colleges -- and squabbling elected officials -- may soon be missing paychecks.

California, home to Intel Corp., Oracle Corp. and other technology leaders, now pays the highest municipal bond yields of any U.S. state. Credit-rating companies have said another cut is possible. The lack of a budget accord ignited the recall campaign in which 400,000 Californians signed petitions to oust Davis.

``We are perceived as a place of instability and political uncertainty, a place where businesses will hesitate to make future investments,'' said state Treasurer Philip Angelides two weeks ago in a speech.

`Dysfunctional'

Since October, California's borrowing cost relative to top- rated municipal bonds has tripled. The state's 30-year bond now yields about 5.09 percent, or 0.64 percentage point more than AAA debt, according to Municipal Market Data figures. California sold 30-year bonds last October at about 0.20 percentage point more than AAA bonds.

Democrats say the state needs to raise taxes; Republicans say the state spends too much and won't agree to any increase. The votes of at least eight Republicans in the Assembly and Senate are needed to pass a compromise budget in Governor Davis's Democratic- led legislature.

California's state legislature is ``totally dysfunctional,'' said Tom Spalding, who manages 18 funds with $15 billion of municipal securities at Chicago-based Nuveen Investments. The need of a two-thirds majority just complicates matters, he said.

Deficits in other states are also wider than in the past, though hardly as severe as California's. In Massachusetts, Governor Mitt Romney signed a $22.1 billion state budget, which eliminates 3,000 state jobs. The Republican governor vetoed $201 million of spending that included more money for the Boston courts and the Turnpike Authority. The Democrat-controlled Legislature is slated to consider overriding some of the vetoes Wednesday.

Veto Override?

Connecticut Governor John Rowland subpoenaed state legislators for a special session if lawmakers don't have a budget agreement by midnight. Connecticut is looking to fill a gap of about $1 billion in its $13.5 billion budget next fiscal year, and also has a revenue shortfall this year of $125 million. Rowland has said if Connecticut doesn't have a budget by July 1 the state's credit rating is likely to be cut.

The New Hampshire House of Representatives sustained a veto by Governor Craig Benson on a two-year $8.8 billion budget, which Benson said was $200 million out of balance. The Senate reconvened this afternoon to consider an override, said Demetrios Karoutsos, a spokesman for the governor.

Oregon, with the highest unemployment rate in the U.S., is about $800 million short of financing a proposed $11.2 billion budget for the two-year period beginning July 1. Oregon lawmakers have approved a stopgap measure to give state agencies spending authority through July 31 while budget negotiations continue.

Balky Lawmakers

In New Jersey, Republicans offered late last night to vote for more than two-thirds of the $817 million in tax and fee increases sought by Governor James McGreevey. The Republican proposal came less than 29 hours before the budget deadline. McGreevey has warned that failure to pass a budget may lead to a shutdown of non-essential state services such as parks and casino monitoring ahead of the July 4 holiday.

North Carolina lawmakers agreed on a $14.8 billion budget plan and Governor Mike Easley is scheduled to sign it. Easley had said earlier that he would veto the budget because of unrealistic revenue projections and $400 million out of balance over the next two years.

In Nevada, the fastest-growing state, Republican lawmakers have balked at approving almost $900 million in tax increases to finance the budget, which now includes the brothel tax. Democrats need Republican support to achieve the two-thirds approval required for tax increases. The state assembly is scheduled to meet again today.

`Unachievable Assumptions'

A late budget by itself typically doesn't trigger a credit rating cut, though it may highlight a budget imbalance or political standoff that does, according to Robert Kurtter, a Moody's Investors Service analyst and senior vice president.

Failing to meet the deadline often signals more gaps in subsequent years, he said. ``It can also result in budgets that are based on unachievable assumptions about the value of savings to be accomplished or the real cost of new programs,'' he added.

In California, for example, the state will halt payments starting tomorrow on $400 million for schools, said Steve Westly, the state comptroller. Until a budget is in place, the state also will stop payments to community colleges and elected officials and their staff, he said.

Delay won't ease California's financial troubles, said Elizabeth McNichol, a senior fellow at the Washington-based Center on Budget and Policy Priorities.

The longer the wait, ``the bigger the gap grows,'' she said. ``You're not just postponing the problem, you're making it worse.''

Last Updated: June 30, 2003 15:54 EDT