CHICAGO | Wed Dec 26, 2012 7:55pm EST

CHICAGO (Reuters) - Commerce on a key stretch of the Mississippi River could "come to an effective halt" earlier than expected next week due to low water levels, disrupting shipments of billions of dollars of grain and other goods, a group of shippers said on Wednesday.

The Waterways Council, which represents shippers and receivers of commodities, said in a message to its members that it received an advisory from the U.S. Army Corps of Engineers on Monday that indicated water levels around Thebes, Ill., could be too low for most vessels to operate by January 3 or 4.

A spokesman for the Army Corps did not immediately return a call for comment about the forecast.

Shippers for months have been watching the stretch of the Mississippi River between St. Louis and Cairo, Ill., which includes Thebes, due to concerns about a potential closure.

A shipping superhighway that carries billions of dollars in grain, coal, steel and other commodities every year from the central United States to the Gulf of Mexico, the Mississippi is near record-low levels due to the worst U.S. drought since 1956.

"Water levels are falling quicker than we anticipated," Ann McCulloch, spokeswoman for the American Waterways Operators, a sister organization to the Waterways Council, said in an interview. "We were hoping not to reach this point until mid January."

The Waterways Council did not specify how long the river could be effectively closed.

Shippers have said previously that rain is needed to replenish water levels to keep the river open.

Recent snowfall in the central United States should help increase water levels on the lower Mississippi River, said Army Corps spokesman Mike Petersen earlier on Wednesday. However, "we would need a lot more" precipitation to see a significant improvement on key stretches of the middle Mississippi near Thebes, he said.

The Mississippi River is the main shipping waterway for grain moving from Midwest farms to export facilities at the Gulf of Mexico. Some 55 to 65 percent of U.S. corn, soybean and wheat shipments exit the country via the Gulf.

Exporters stepped up shipments of grain and soybeans to the Gulf Coast before water levels fell to critically low levels, forcing barges to take on lighter loads. They also resorted to loading more of their goods on rail cars.

The disruption of river traffic due to low water has pushed up export prices for grain, especially soybeans that are in strong demand from buyers like China.

ORDERS CANCELED, ORDERS CURTAILED

The latest forecast calls for the Mississippi River gauge at Thebes, to be at 3 feet on or around January 3-4, with vessel drafts limited to 8 feet, according the Waterways Council. The majority of vessels require a 9-foot draft to operate.

The draft is the distance from the surface of the water to a boat's lowest point.

"Our members have been preparing (for an effective closure) by investigating other options to move their products, either by rail or truck," said Debra Colbert, senior vice president for the council. "We've seen orders canceled; we've seen orders curtailed. We've seen companies looking at potential layoffs."

The Army Corps last week began clearing rocks from a shallow stretch of the drought-hit river near Thebes to maintain the flow of goods to Gulf Coast ports.

The low water level on the Mississippi River after this year's devastating dry spell was exacerbated by the Corps' decision to reduce by even more than usual the amount of water that flows into the waterway from the Missouri River. The Corps reduces the Missouri River flow every autumn.

The move raised protests from Midwestern governors and senators who urged President Barack Obama to rescind the decision for fear that badly needed income would be lost through the disruption of commerce that flows through the river.

The river groups met last week with White House staff "and continue to implore them and members of Congress and the Corps to release additional water to sustain navigation on the Mississippi River," the Council said.

(Reporting By Tom Polansek; Editing by Diane Craft)

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NEW YORK | Wed Dec 26, 2012 5:05pm EST

NEW YORK (Reuters) - Temperatures across much of the northern half of the United States will be colder than normal during the first quarter, private forecaster Weather Services International said on Wednesday.

"After another unusually warm December across much of the U.S., the pattern is now transitioning to a more normal winter look," WSI chief meteorologist Dr. Todd Crawford said in a release.

The private forecaster also said that above-normal temperatures will likely dominate the southern half of the nation, especially the Southwest, during that period.

In January, WSI expects the Northeast (except northern New England), North Central and Northwest regions to see mostly colder than normal temperatures. Readings in southern tier states are expected to average warmer than normal.

In the release, Chris Kostas, a senior gas analyst at Energy Security Analysis Inc, said natural gas prices were likely to firm during the coldest periods in January, with New England and portions of northern New York possibly experiencing very sharp price spikes due to pipeline congestion.

But he said robust supplies from high inventories and strong shale production were likely to limit price strength.

In February, WSI forecasts colder than normal temperatures for the Northeast and North Central regions, with warmer readings expected across the southern tier and in the Northwest.

WSI expects warmer than normal temperatures to dominate most of the nation in March, except in the Northwest, which could see colder than normal readings.

The WSI seasonal outlooks reference a standard 30-year normal from 1981-2010.

(Reporting by Joe Silha; Editing by Phil Berlowitz)

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LONDON | Wed Dec 26, 2012 7:47pm EST

LONDON (Reuters) - The UK is on track to meet its 2020 renewable energy targets after low-carbon electricity generation grew more than a quarter in the year to end-June 2012, thanks largely to new solar and offshore wind projects, a government report said.

The Department of Energy and Climate Change (DECC) said renewable energy accounted for over 10 percent of total electricity supplied in the 12 months to end-June.

Renewable power output grew 27 percent from July 2011, according to the UK's latest Renewable Energy Roadmap status report released on Thursday.

"Renewable energy is increasingly powering the UK's grid, and the economy too," Energy Secretary Edward Davey, who heads DECC, said in a statement that accompanied the report.

"It's a fantastic achievement that more than 10 percent of our power now comes from renewables, given the point from which we started," he said.

Britain has a target to produce 15 percent of its energy, including electricity, heat and transport, from renewable sources by 2020 in a bid to cut climate-warming emissions.

This means that 30 percent of the UK's electricity must come from renewables by the end of the decade, the government said, with wind playing a leading role.

"Right now, getting new infrastructure investment into the economy is crucial to driving growth and supporting jobs across the country ... I am determined that we get ahead in the global race on renewables and build on the big-money investments we've seen this year," Davey said.

DECC has identified around 12.7 billion pounds ($20.6 billion) of confirmed and planned renewable investment by companies between April 1, 2011 and July 31, 2012, potentially creating around 22,800 jobs.

The department, which expects the growth in renewables to continue or accelerate, predicts the industry will support 400,000 direct jobs by 2020, up from around 110,000 jobs currently.

Government subsidies have played a key role in encouraging investment, however, and economic difficulties have put pressure on support schemes.

Government departments have reined in spending, though officials say the falling costs of the technology mean that less support is required to encourage take-up.

Offshore wind power capacity grew by 60 percent to 2.5 gigawatts (GW), while onshore wind grew by 24 percent to 5.3 GW, according to figures in the Renewable Energy Roadmap report.

Solar photovoltaics recorded the highest growth with an increase of five and a half times to 1.4 GW in capacity by the end of June 2012, the report said.

Industry group RenewableUK welcomed the findings of the report.

"The update is spot on. It highlights the sector's dynamic growth and the healthy pipeline of wind, wave and tidal projects to come," RenewableUK Deputy Chief Executive Maf Smith said.

"It's right to note that costs are falling steadily, so renewables will continue to offer even better value for money for all of us," he said, adding that it will help stabilize the price of energy.

In November, Britain set out plans to triple support for low-carbon power generation by 2020 in order to help replace ageing fossil fuel power plants with less polluting alternatives.

The outlay will be clawed back through higher energy bills.

Under the agreed Levy Control Framework, spending on low-carbon power generation will increase to 7.6 billion pounds a year in real terms by 2020, from the current 2.35 billion pounds, to reduce dependence on gas.

(Reporting by Oleg Vukmanovic; editing by Jane Baird)

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1 of 5. Storm clouds are seen on the east coast of the United States in this NASA handout satellite image taken at 1955 GMT, December 26, 2012. The severe winter weather that hit parts of the central and southern United States on Christmas Day moved eastward on Wednesday, causing flight delays and dangerous road conditions in the Northeast and Ohio Valley.

WASHINGTON | Thu Dec 27, 2012 1:02am EST

WASHINGTON (Reuters) - A powerful winter storm forced the cancellation of about 200 U.S. flights on Thursday, snarling holiday travel as heavy snow and high winds pummeled the northeastern United States.

The National Weather Service forecast 12 to 18 inches of snow for northern New England as the storm moved northeast out of the lower Great Lakes, where it dumped more than a foot of snow in parts of Michigan.

The storm front was accompanied by freezing rain and sleet. The Ohio River Valley and the Northeast were under blizzard and winter storm warnings.

Snow will fall in northern New York, Vermont and New Hampshire at up to 2 inches an hour, with winds gusting to 30 mph (48 km per hour), the weather agency said.

About 200 U.S. airline flights scheduled for Thursday were canceled a day ahead of time, according to FlightAware.com, a website that tracks flights.

American Airlines had the most canceled at about 30. A total of about 1,500 U.S. flights were canceled on Wednesday.

New York state activated its Emergency Operations Center late on Wednesday to deal with the first major storm of the season.

Governor Andrew Cuomo warned the heads of seven utilities they would be held accountable for their performances. Utilities near New York City were criticized for lingering outages after Superstorm Sandy devastated the region in October.

The storm comes as New York state has seen little snow during autumn and winter. Buffalo, New York, was 23 inches below normal for the season before the storm, said Bill Hibbert, a National Weather Service meteorologist.

"We're short and even this big snow isn't going to make it up for us," he said.

The storm dumped record snow in north Texas and Arkansas before it swept through the U.S. South on Christmas Day and then veered north. The system spawned tornadoes and left almost 200,000 people in Arkansas and Alabama without power on Wednesday.

At least five people were killed in road accidents related to the bad weather, police said.

(Reporting by Ian Simpson and Neale Gulley; Editing by Paul Simao)

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Hard-edged reporting, insight and analysis, Reuters TV breaks ground creating informative news and financial videos. Showcasing Reuters’ 3000 award-winning journalists, Reuters TV delivers high-energy investigative journalism with concise explanations. Check it out and let us know what you think.

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Hard-edged reporting, insight and analysis, Reuters TV breaks ground creating informative news and financial videos. Showcasing Reuters’ 3000 award-winning journalists, Reuters TV delivers high-energy investigative journalism with concise explanations. Check it out and let us know what you think.

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Women carry shopping bags through Times Square in New York, July 27, 2012.

WASHINGTON | Fri Dec 21, 2012 12:47pm EST

WASHINGTON (Reuters) - The U.S. economy showed surprising signs of resilience in November despite the approach of the so-called fiscal cliff as consumer spending rose by the most in three years and a gauge of business investment jumped.

Consumer spending rose 0.6 percent when adjusted for inflation, while new factory orders for capital goods outside the defense and aerospace sectors - a proxy for business spending plans - jumped 2.7 percent, the Commerce Department said on Friday.

Economists had pinned earlier weakness in investment plans on worries lawmakers and the White House might fail to strike a deal to avoid the brunt of tax hikes and government spending cuts scheduled to begin in January.

They also worried consumers would hold back as the end-of-the-year deadline approached with both parties far apart on how to avoid the potential hit to the economy. But Friday's data suggested both consumers and businesses had mostly shrugged off the cliff, at least in November.

"It appears that the looming fiscal cliff hasn't been nearly as disruptive as we had feared," said Paul Ashworth, an economist at Capital Economics in Toronto.

Still, another report provided ample reason for caution as U.S. consumer sentiment slumped in December, with households apparently rattled by on-going negotiations to lessen the fiscal tightening that could easily trigger a recession next year.

The Thomson Reuters/University of Michigan's final index of consumer sentiment in December tumbled more than expected to 72.9 from 82.7 a month before.

U.S. stocks fell sharply after a Republican proposal for averting the fiscal cliff was abandoned late on Thursday, eroding optimism that a deal could be reached quickly. At the same time, U.S. government debt prices rallied and the dollar gained ground as investors sought a safe haven.

Economists still expect economic growth to cool in the fourth quarter as companies slow the pace at which they have been re-stocking their shelves, but the data on Friday suggested consumers are offsetting some of that drag.

Consumer spending is on track to grow at a 2.2 percent annual rate in the fourth quarter, faster than during the prior three months, said Michael Feroli, an economist at JPMorgan in New York.

Forecasting firm Macroeconomic Advisers raised its forecast for fourth-quarter economic growth by four tenths of a point to a 1.4 percent annual rate. In the third quarter, the economy expanded at a 3.1 percent rate.

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

WORRIES AHEAD

Those concerns are not going away.

In November, many analysts on Wall Street said they expected Washington would largely avert the fiscal cliff, and optimism had grown over the last week that a deal was within reach. Since Wednesday, however, negotiations have fallen into disarray.

If Congress and the White House do not reach a deal in time, taxes will go up for all Americans beginning in January and the government will cut spending on a host of programs. Running off the fiscal cliff would slash the nation's trillion-dollar budget deficit nearly in half in just one year.

The impact would only come gradually, but economists expect it would be enough to knock the country into recession in the first half of the year.

So far, uncertainty over the talks appears to have had only a limited impact on the economy.

New orders for durable goods, items meant to last three years or more, rose a greater-than-expected 0.7 percent in November due to gains in machinery, fabricated metal products, and computer and electronic products. Those increases were offset by a decline in volatile aircraft orders.

The report also showed a rise in shipments, brightening the prospects for fourth-quarter economic growth.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the government's measures of gross domestic product, gained 1.8 percent, after rising by a softer 0.6 percent in October.

(Additional reporting by Ellen Freilich and Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann)

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U.S. President Barack Obama hosts a bipartisan meeting with Congressional leaders in the Roosevelt Room of White House to discuss the economy, November 16, 2012. Left of President Obama is Speaker of the House John Boehner.

WASHINGTON | Sun Dec 23, 2012 12:49am EST

WASHINGTON (Reuters) - The "fiscal cliff" deadline is days away and the U.S. Congress and President Barack Obama have left town for Christmas.

But even if they were still here, it wouldn't have mattered, according to Steny Hoyer, the second-ranking Democrat in the House of Representatives. He says they were going nowhere to resolving the disagreement over how to fix the nation's fiscal problems.

Last month's dreams of a "grand bargain" of tax hikes and spending cuts seem long gone. They had been reduced to more modest bargains in mid-December, and as 2013 approaches, are on the verge of relegation to a "stop-gap measure," at best the sort of temporary fix that Congress undertook in 2011.

A stop-gap that puts everything off for a while but resolves nothing is now the most promising alternative, if there is to be one, to the across-the-board tax hikes and spending cuts described as a "fiscal cliff" because they threaten to send the U.S. economy plunging into another recession.

It is also the way fiscal showdowns have ended in Washington in recent years.

Such a fix, at best, would delay the spending cuts and tax hikes further into 2013 as well as work to address in a long-term way a government budget that has generated deficits exceeding $1 trillion in each of the last four years. Even worse, it would set up a huge fight in January and February over raising the U.S. debt ceiling, which controls the amount of money the federal government can borrow.

Dysfunction in Washington was specifically cited as one of the reasons rating agency Standard & Poor's cut the U.S. debt rating to AA-plus after a battle over the debt ceiling in 2011. That alone - not to mention going over the cliff - could lead to another rating cut.

At worst, the new year could start with a full-fledged jump off the 'cliff,' with an understanding, communicated to financial markets, that Congress and the White House would come back and try again for a solution.

Given the apparent deadlock, some congressional aides this week said that Washington needed to begin telegraphing to Wall Street that markets should not panic if a "fiscal cliff" deal is not struck in December.

The goal, one aide said on condition of anonymity, is to avoid starting 2013 with a steep stock market drop like the one the U.S. suffered in 2008, when the country's financial industry was falling apart and Congress was divided over what to do.

On Friday, Obama acknowledged that only small steps might be possible with so little time remaining.

Those, the Democratic president said, would consist of extending benefits for the long-term unemployed and keeping income tax rates low for 98 percent of Americans - meaning raising taxes on households with net incomes above $250,000 a year but not for those earning less.

He held out the possibility of something "comprehensive," as he put it, but it had a hollow ring at the close of a work week that saw House Speaker John Boehner step back from negotiations and pursue a partisan plan that even some of his fellow Republicans could not stomach.

MARKET PRESSURE

The steps that Obama outlined were immediately rejected by Republicans, who have given ground on their previous steadfast opposition to any tax hikes but are still demanding that the White House agree to more substantial spending cuts.

"The president has failed to offer any solution that passes the test of balance," declared Boehner spokesman Brendan Buck, minutes after the end of Obama's statement on Friday.

On Saturday, a spokesman for Senate Republican leader Mitch McConnell was similarly dismissive, noting Obama's call had neither bipartisan support nor spending cuts to ride along with tax increases.

McConnell, on Friday, suggested bringing up a House-passed bill that extends current tax rates for all Americans, including the top earners, and then pushes for comprehensive tax reform next year that theoretically could raise new revenues to help cut deficits.

But Obama has promised repeatedly to veto any extension of the expiring Bush-era tax cuts that fail to hike rates for the wealthy.

And Democrats, who control the Senate, have dismissed the McConnell idea, arguing that Obama ran his successful 2012 re-election campaign on a promise of forcing the wealthy to bear more of the burden of deficit reduction.

Democratic aides in Congress think their own bill implementing Obama's $250,000 income threshold, which passed the 100-member Senate in July with 51 votes, could breeze through this month, or next year after the "fiscal cliff" is breached.

The prospect of a breach is being discussed far more seriously now, and not just as a bluff or to set up the other side for blame.

"I think we're going to go over the cliff," said Republican Representative Patrick Tiberi of Ohio. "I don't see something getting done."

In an MSNBC interview Friday, Hoyer, a 31-year veteran of Congress from Maryland, said it wouldn't matter if everyone was in Washington instead of on holiday.

"Frankly, we've been in town for four weeks and members haven`t been doing much," he said, calling it "one of the least productive times that I've been in Congress."

Even Obama speaks of "a mismatch" between how people are thinking about the looming tax hikes and spending cuts "outside of this town and how folks are operating here. And we've just got to get that aligned," he said in his statement.

ITG Investment Research Chief Economist Steve Blitz on Saturday said sliding the "fiscal cliff" negotiations into the new year was not a huge deal. "I think markets will pressure for a deal in January," he said.

The "pressure" could be in the form of a significant stock market drop, which would hit workers' retirement plans, threaten to deter consumer and business spending, and possibly rattle other countries' economies at a time when the global economy is far from robust.

(Additional reporting by Rachelle Younglai; Editing by Martin Howell and Paul Simao)

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1 of 2. U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

WASHINGTON | Sun Dec 23, 2012 5:33pm EST

WASHINGTON (Reuters) - Some lawmakers voiced concern on Sunday that the country would go over "the fiscal cliff" in nine days, triggering harsh spending cuts and tax hikes, and some Republicans charged that was President Barack Obama's goal.

"It's the first time that I feel it's more likely that we will go over the cliff than not," Senator Joe Lieberman, an independent from Connecticut, said on CNN's "State of the Union."

"If we allow that to happen it will be the most colossal consequential act of congressional irresponsibility in a long time, maybe ever in American history."

"It looks like to me that obviously this is going to drag on into next year, which is going to hurt our economy," Republican Senator Bob Corker of Tennessee said on CBS "Capitol Gains."

The Democratic president and Republican House of Representatives Speaker John Boehner, the two key negotiators, are not talking and are out of town for the Christmas holidays. Congress is in recess, and will have only a few days next week to act before January 1.

On the Sunday TV talk shows, no one signaled a change of position that could form the basis for a short-term fix, despite a suggestion from Obama on Friday that he would favor one.

The focus was shifting instead to the days following January 1 when the lowered tax rates dating back to President George W. Bush's administration will have expired, presenting Congress with a redefined and more welcome task that involves only cutting taxes, not raising them.

"I believe we are," going over the cliff, Republican Senator John Barrasso of Wyoming said on Fox News Sunday. "I think the president is eager to go over the cliff for political purposes. I think he sees a political victory at the bottom of the cliff."

Some Republicans have said Obama would welcome the fiscal cliff's tax increases and defense cuts, as well as the chance to blame Republicans for rejecting deal. Obama has rejected that assertion.

Democrats have charged that Boehner has his own self-interested reasons for avoiding a deal before January 3, when the House elected on November 6, is sworn in and casts votes for a new speaker.

Democratic Senator Charles Schumer of New York said on NBC's "Meet the Press" that Boehner has been reluctant to reach across the political aisle for fear it could cost him the speakership when he runs for re-election. "I know he's worried," said Schumer.

Boehner, who so far has no serious challenger for the job of speaker, has said that he has no such concerns.

Such finger pointing has been under way since Congress returned after the election, but it has gained intensity in the past few days, with the heightened prospect of plunging off the cliff.

Congress started the clock ticking in August of 2011 on the cliff. The threat of about $600 billion of spending cuts and tax increases was intended to shock the Democratic-led White House and Senate and the Republican-led House into bridging their many differences to approve a plan to bring tax relief to most Americans and curb runaway federal spending.

Economists say the harsh tax increases and budget cuts from the fiscal cliff could thrust the world's largest economy back into a recession, unless Congress acts quickly to ease the economic blow.

MARKETS COULD TUMBLE

The most immediate impact could come in financial markets, which have been relatively calm in recent weeks as Republicans and Democrats bickered, but could tumble without prospects for a deal.

Markets will be open for a half-day on Christmas Eve, when Congress will not be in session, and will be closed on Tuesday for Christmas.

Wall Street will resume regular stock trading on Wednesday, but volume is expected to be light throughout the week with scores of market participants away on a holiday break.

If Congress fails to reach any agreement, income tax rates will go up on just about everyone on January 1. Unemployment benefits, which Democrats had hoped to extend as part of a deal, will expire for many as well.

In the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts for 2013 that most lawmakers want to avoid.

Once tax rates go up on January 1, it could be easier to keep those higher rates on wealthier taxpayers while reducing them for middle- and lower-income taxpayers. Lawmakers would not have to cast votes to raise taxes.

Some lawmakers expressed guarded hope that a short-term deal on deficit reduction could be reached in the next week or so, with a longer, more permanent deal hammered out next year.

But a short-term deal would need bipartisan support, as Obama has said he would veto a bill that does not raise taxes on the wealthiest Americans.

Democratic Senator Kent Conrad, chairman of the Budget Committee, said Obama and Boehner are not that far apart and that both sides should keep pushing for a long-term big deal.

"I would hope we would have one last attempt here to do what everyone knows needs to be done, which is the larger plan that really does stabilize the debt and get us moving in the right direction," Conrad of North Dakota told Fox News Sunday.

But most Republicans are now looking past January 1 to what they consider their next best chance of leveraging Obama for more cuts in the Federal budget - a fight over the debt ceiling expected in late January or early February. At that time, the administration will need Congress' authorization to raise the limit on the amount of money the government can borrow.

"That's where the real chance for change occurs, at the debt-ceiling debate," Republican Senator Lindsey Graham of South Carolina said on "Meet the Press."

(Reporting by Thomas Ferraro and Richard Cowan; Editing by Fred Barbash and Vicki Allen)

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WASHINGTON | Fri Dec 21, 2012 12:41pm EST

WASHINGTON (Reuters) - State and local government spending grew at a 0.3 percent annual rate in the third quarter, after 11 straight quarters of contraction, the U.S. Commerce Department said on Thursday.

The last time state and local spending expanded was in the third quarter of 2009, at a much more robust rate of 2.2 percent. Then, for nearly three years, spending contracted sharply, with the biggest drop in the first quarter of 2010 at 5.5 percent.

States are pinching pennies, keeping spending growth slow as the economy recovers from the 2007-09 recession and the federal government sends them fewer funds.

"The recent improvement in the national economy has not translated to strong growth in total state expenditures," said the National Association of State Budget Officers (NASBO) in a report also released on Thursday.

Total state spending likely grew only 0.1 percent in fiscal 2012, the lowest level since the group began tracking state spending in 1987, NASBO said. Most states' fiscal years end in June, which means that many have already started fiscal 2013.

The 2007-09 recession caused states' revenues to plunge and, because all states except Vermont must end their fiscal years with balanced budgets, many slashed spending, calling special legislative sessions to make emergency mid-year cuts.

The federal government stepped in to help with the 2009 economic stimulus plan known as the American Recovery and Reinvestment Act (ARRA), which included the largest transfer of federal funds to states in U.S. history.

NASBO said state expenditures grew 3.8 percent in fiscal 2010 and 2.8 percent in fiscal 2011, mostly due to the assistance. By fiscal 2010 federal money made up nearly 35 percent of state spending, compared with 26.3 percent in fiscal 2008.

Now that the burst of stimulus money is over, states must once again shoulder the costs of public programs, even though their revenues are only beginning to return to pre-recession levels. Federal funds likely only represented 31.2 percent of state spending in fiscal 2012 and will continue to shrink, NASBO said.

"State revenues have not increased as fast as ARRA funds have declined, leading to a unique situation in which total state expenditure growth has slowed during the same time that the national economy has been improving," it reported.

Meanwhile, spending demands continue to grow, particularly for the Medicaid healthcare program for the poor that states operate with partial reimbursement from the federal government.

Over the last three years, the portion of state spending going to Medicaid has risen to 23.9 percent from 22.2 percent. Many states worry that Medicaid will eat up their budgets, and leave fewer dollars for other areas.

Spending on education dipped to 19.8 percent in fiscal 2012, the first time on record that the portion has been less than 20 percent, NASBO said.

(Reporting by Lisa Lambert; Editing by Nick Zieminski)

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