States, many of which have been cutting budgets since 2008, are going into the budget year facing continued economic uncertainty, the loss of federal stimulus dollars and tax collections that remain below prerecession levels. Total general-fund revenue remains 3.6 percent below prerecession highs, even though several states have increased taxes, according to the National Governors Association and the National Association of State Budget Officers.

After recessions in 1991 and 2001, funding for education, health care and other services was restored as the economy recovered. That is no longer assumed.

"It is the big unknown," Perez said. "The question is whether there will be a shift back."

Shedding Workers

New Jersey Governor Chris Christie used a line-item veto to cut almost $1 billion from the budget he signed June 30, reducing funding for schools, police and tax credits for the working poor. Hours before Illinois began its fiscal year July 1, Democratic Governor Pat Quinn sliced $376 million from Medicaid and school transportation programs. Illinois has accumulated a $4 billion backlog of unpaid bills to vendors.

At least 17 states have raised retirement costs for public employees while others, including Wisconsin and Ohio, have curbed collective-bargaining rights for most government workers. Other states are following Wisconsin's lead in targeting unions.

State government employment is down to early 1999 levels, or in terms of employees per 1,000 population, the lowest since 1976, according to a June 13 report from RBC Capital Markets. In May, the state and local government workforce dropped by 30,000, with 17,500 lost jobs coming from the education sector, the report said.

Cutbacks at the state level have directly affected local governments, which are already struggling with prolonged unemployment. Miami had its credit rating cut June 27, as did Cook County, Illinois, which encompasses Chicago, on June 16.

Facing a projected budget deficit of $587 million, Chicago Mayor Rahm Emanuel told city unions June 29 that he will fire 625 workers unless they agree to work-rule changes.

BMO's Hoogendoorn said cuts are aggravating pressures on local governments feeling the squeeze of declining property tax revenue.