Even as the economy slides into recession, many state and local governments continue to spend freely and expand their workforces.

State and local spending jumped 7.4% in the third quarter compared with a year earlier, the U.S. Bureau of Economic Analysis reports. Hiring increased faster than in any sector except health care.

Total state and local revenue grew just 2.6% in the third quarter. Sales tax collections fell 0.6% as consumers cut spending.

The government spending boom has helped cushion the economic downturn. It also has put many states and cities on a path toward large budget shortfalls during the next year if spending isn't cut or taxes raised.

The National Governors Association estimates states' budget shortfalls at $26 billion this year, and that could rise sharply if the economy worsens. Governors in Arizona, California and several other states plan to call legislatures into special session in the next few weeks to fix budget problems.

The federal government may help state and local governments. President-elect Barack Obama says federal assistance is a top priority so the nation's economic troubles aren't compounded by government layoffs or tax hikes.

Ray Scheppach, executive director of the National Governors Association, says states have done a good job preparing for the downturn, including building nearly $80 billion in budget reserves.

•Hiring more. State and local governments added 160,000 workers in the past year, when the private sector cut 1.38 million jobs. The hiring continued in October: The federal government added 6,000 workers, and state and local governments added 17,000 — mostly in education — while businesses cut 263,000 jobs, for a net loss of 240,000.

•Borrowing more. States and cities borrowed heavily in recent years. Debt was on a record pace in 2008 until credit markets froze in September, reports The Bond Buyer, a financial newspaper. More borrowing is likely: Voters approved 82% of a record $67 billion in bond issues on the Nov. 4 ballot.

•Collecting less. Revenue is up from a year ago but fell from the second to third quarter. Income and sales tax drops pushed revenue down 0.4%.

Budget analyst Chris Edwards of the fiscally conservative [libertarian] Cato Institute says states should not be rewarded for high spending. "State governments are like drivers coming off the interstate and having a hard time slowing down," he says.