By Corrie MacLaggan

AUSTIN, Texas (Reuters) - Texas does not face a fiscal meltdown and its economy remains strong, Governor Rick Perry said on Tuesday in the face of a massive state budget shortfall.

Texas, the second most populous state behind California, is about $27 billion short of the money it needs to extend current programs and services through 2012 and 2013. The state has a two-year budget cycle.

Texas has been doing better financially than most other big U.S. states including California, New York and Illinois. Two of the three major bond ratings agencies give it a top AAA rating.

But critics say the situation is not as rosy in Texas as portrayed by its governor.

"The mainstream media and big-government interest groups are doing their best to convince us that we're facing a budget Armageddon," Perry, a Republican, said in his state of the state address. "Texans don't believe it and they shouldn't because it's not true."

Perry won reelection in November after campaigning on how well Texas has weathered the U.S. economic downturn. He reiterated his desire not to raise taxes or dip into the state's $9.4 billion "rainy day" fund during his speech to a joint session of the Texas House and Senate.

Reiterating a major theme of his reelection campaign, Perry called for the federal government to stop interfering with states, saying the federal government has not done enough to secure the border and the federal health reform law puts many states "on a collision course with bankruptcy."

He slammed states such as Illinois that have decided to raise taxes, saying they "care more about the expansion and extension of government than they do about the freedom and prosperity of their citizens."

Instead of raising taxes, lawmakers at the Republican-controlled Texas Capitol are proposing slashing everything from mental health services to payments to school districts, which are bracing for thousands of layoffs.

In his speech, Perry revealed few details of spending cuts. He called for consolidating certain state functions and suspending the Texas Historical Commission and the Texas Commission on the Arts until the economy improves.

The governor, who submitted his own proposed budget on Tuesday, also challenged colleges and universities to develop bachelor's degrees for $10,000.

DON'T MESS WITH TEXAS

But Texas Democrats said Perry's rosy picture is not realistic in a state where nursing homes face closures and teachers are losing jobs.

The state ranks last in the country in percentage of adults with a high school diploma and first in the share of the population without health insurance.

"Governor Perry has been waking up in a very different reality than most citizens of Texas," State Senator Wendy Davis, a Fort Worth Democrat, said at a press conference. "Their reality is becoming starker by the day."

The governor also called on state lawmakers to quickly approve a list of "emergency" proposals. These include implementing stricter voter identification requirements, requiring women seeking an abortion to first view a sonogram, targeting cities that provide sanctuary to undocumented immigrants, strengthening the rights of property owners in cases of eminent domain and calling for a balanced budget amendment to the U.S. Constitution.

The emergency designation puts the proposals on a fast-track during the legislative session that began January 11. Perry's designation of these conservative priorities as emergencies has fueled speculation he will jump into the race for the Republican nomination for the U.S. presidency.

But Texas' longest-serving governor, in office since late 2000, has repeatedly said he is not interested in doing so.