Though state revenues are ticking up slightly, the Government Accountability Office's annual report on state and local fiscal health predicts bigger budget gaps than projected this time last year. The primary driver: rising health care costs, particularly in the Medicaid program.

On the revenue side, overall state and local tax revenue reached pre-recession (2007) levels last year, but flat growth in property tax revenue over the last year accounted for the report's larger than previously projected state and local budget gaps.

The GAO's predictions assume the Affordable Care Act remains intact, which would require the federal government to take on a substantially larger share of Medicaid funding starting in 2014. Instead of its current 50 percent share, Washington would pay as much as 63 percent of the costs for the more than $470 billion federal-state health care program for the poor.

Even so, states will continue to see shortfalls in the revenues needed to cover basic Medicaid program costs, the GAO predicts. That's because states' remaining share of Medicaid will grow faster than any other state and local expense and faster than the nation's gross domestic product (GDP), according to the report.