July 1 (Bloomberg) -- Seven U.S. states from California to Connecticut began the fiscal year today without spending plans in place as they battle over tax increases and other measures to balance budgets amid declining revenue.

Democratic Illinois Governor Pat Quinn refused to sign a budget after lawmakers failed to approve raising the income tax, said his spokeswoman Ashley Cross. Connecticut is at an impasse after Republican Governor Jodi Rell rejected a tax increase passed by the Democrat-led Legislature.

The recession that began in December 2007 dealt a blow to state finances as rising unemployment, cutbacks in consumer spending and a $7 trillion plunge in the U.S. stock market last year slashed tax collections. States faced a combined $166 billion in revenue gaps that had to be closed as they tried to craft budgets, the Center on Budget and Policy Priorities said.

“We have no idea when it will end,” said Mississippi Governor Haley Barbour, referring to the drop in tax revenue, which he said was as much as 15 percent below estimates in the final months of the fiscal year. Barbour, a Republican, signed a budget after the Legislature passed it late last night.

California Governor Arnold Schwarzenegger said today he will shut down government offices for the first three Fridays of every month and force lawmakers into an emergency session to tackle the state’s growing budget deficit.

The Legislature’s failure to produce a budget before the fiscal year began pushed the size of the spending gap to more than $26 billion from $24 billion, he said. Without revisions to account for a 20 percent drop in revenue, California is set tomorrow to begin paying some of its bills with IOUs to avoid running out of cash.

Before the Deadline

The other states that are still working on their budgets are North Carolina, Ohio and Pennsylvania. Standard & Poor’s said today it doesn’t expect to make any credit-rating changes as a result of the late budgets.

“Most states have a process for continuing payments for debt service and, in most cases, operations,” S&P said in a report.

Republican Arizona Governor Janice Brewer signed a budget today after vetoing portions of the plan to add back funds for “vital services and public safety.” She also called for a special session of the Legislature to deal with issues including education funding.

States still haven’t “hit bottom” yet, in terms of the drop in their revenue collections, according to Scott Pattison, executive director of the National Association of State Budget Officers. “We’re still seeing shortfalls” even after spending cuts and tax increases, he said.

Ohio, North Carolina

Democratic Ohio Governor Ted Strickland is at an impasse with a Republican-led Senate that refuses to approve video lottery terminals without a voter referendum, and “other, smaller ways’ to close a deficit, said spokeswoman Amanda Wurst. In North Carolina, the biggest U.S. tobacco producer, Governor Bev Perdue, a Democrat elected in November, faces legislative opposition over her plan to raise cigarette taxes by $1 a pack.

Pennsylvania’s state credit union and several banks will offer public employees zero-interest loans of as much as $1,000 if a standoff between Governor Edward Rendell and lawmakers over an income tax increase results in delays in meeting payroll, according to Rendell’s spokesman Chuck Ardo.

Indiana, Delaware

Indiana’s Legislature passed a $27.8 billion two-year budget yesterday and Governor Mitch Daniels signed it at his desk in Indianapolis at 8:05 p.m. last night, said Brad Rateike, his spokesman. Delaware Governor Jack Markell signed a budget early this morning, according to his Web site.

All but four states -- New York, Alabama, Michigan and Texas -- begin their budget years today. In New York, a battle over political control of the Senate has stalled legislation needed by New York City and other local governments to balance their budgets for the fiscal year that started today.

New Jersey Governor Jon Corzine, a first-term Democrat, signed a $29 billion budget on June 29 that raises taxes on cigarettes, wine, liquor and the wealthy, and implements worker furloughs and wage freezes to help reduce expenses. The Democrat-led Legislature passed the spending plan last week as all Republican lawmakers voted against it.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net.

Last Updated: July 1, 2009 16:13 EDT