This is the VOA Special English Economics Report.

The recession may be easing, but American states are still feeling the pain. Most of the fifty states began their budget year July first. Almost all states require balanced budgets. Already, some predict new deficits.

Congress included state aid in the two-year stimulus plan approved in February. But states have had to find other ways to fill budget holes.

The recession has hit especially hard in California, home of the world's eighth largest economy and one out of eight Americans.

This was what Governor Schwarzenegger said last week when he proudly announced a deal with lawmakers.

ARNOLD SCHWARZENEGGER: "The budget that would have no tax increases, a budget that is cutting spending -- we deal with the entire twenty-six billion dollar deficit, around fifteen billion dollars in cuts that we are making."

That was in addition to fifteen billion in cuts passed in February.

But the Republican governor angered some Democrats when he vetoed several additional spending items before he signed the budget. The money will be held as an emergency reserve. The governor himself compared the budget to the old Western movie "The Good, the Bad and the Ugly."

Education faces the biggest reductions. Prisons and health care also face big cuts.

California's finances have become so bad, this month the state began to buy goods and services with promises to pay later. Now, California has a budget. The state can seek loans to pay its bills until more tax money comes in later this year.

But California also has the lowest credit rating of any state. All of the rating agencies still rate California as worthy of investment. However, downgrades have increased its borrowing costs.

Some people blame Californians themselves for the current troubles of the Golden State. There is debate over "budget by ballot" -- putting tax questions to popular votes. Voters in the last few years, and most recently in May, have rejected several ballot measures that would have raised taxes.

California may rewrite its tax system. The state depends heavily on income tax. But those revenues fall sharply in bad economic times.

Critics say even with the budget agreement, California is still in trouble. They say some of the cost cuts are simply accounting tricks that cannot be repeated next year.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.