Senator Eliot Shapleigh - El Paso, Texas

WASHINGTON, Dec. 16 - The fiscal condition of the states improved this year, but soaring health costs have made it difficult for them to recover from the worst fiscal crisis in six decades, the National Governors Association said Thursday.

States ended the 2004 fiscal year with balances totaling $25.3 billion, equal to 4.8 percent of state spending. That represents a significant increase from the previous year, when balances totaled $16.4 billion, or 3.2 percent of state spending.

Such balances provide a financial cushion for states, with a 5 percent cushion considered healthy. Twenty-three states had balances of 5 percent or more, up from 12 in 2003.

A recession in 2001 sharply reduced state revenues for two years. Now, the governors said, tax collections are more stable - but still not sufficient to pay for the growth of Medicaid and other health costs.

"We have just come through a tremendously difficult fiscal period," said Raymond C. Scheppach, executive director of the governors association. "The light at the end of the tunnel is beginning to appear, but unfortunately it's a long tunnel."

Scott D. Pattison, executive director of the National Association of State Budget Officers, echoed that view. The latest nationwide survey showed "relative improvement from the fiscal malaise of the past few years," Mr. Pattison said, but "the states' fiscal situations will remain difficult for the foreseeable future."

Spending from state general funds - the pots of money not earmarked - increased by 3 percent this year, to $523.5 billion, after two years of hardly any growth.

Despite the signs of a recovery, states are keeping a tight lid on spending, and nine states reported a decline in general fund spending from 2003 to 2004. They were Alaska, Colorado, Maryland, Michigan, Minnesota, Nebraska, South Carolina, Texas and Wisconsin.

One mystery of the last recession is why welfare rolls continued to decline even as unemployment increased. States have poured money into education, training and child care to help welfare recipients get and keep jobs. Forty-four states said they would maintain cash assistance benefits in 2005 at the levels in effect this year. Five states - California, Illinois, Michigan, South Dakota and Texas - said they planned to increase cash assistance benefits next year, while West Virginia said it was planning a substantial cut.

Collections of sales, personal income and corporate income taxes equaled or exceeded projections in 45 states this year. But, the report said, revenues came in lower than expected in five states: Colorado, Georgia, Kentucky, Ohio and Oregon.

States had two favorite sources of new revenue. They increased cigarette and tobacco taxes by a total of $888 million, and they approved sales tax increases totaling $710 million.

In 2002, the governors association reported that "nearly every state is in fiscal crisis," with the worst budget problems since World War II.

Congress provided $20 billion in fiscal relief to the states last year. But the aid expired in June, and Congress has no plans to renew it.