In Virginia, the legislature has established a $30 million contingency fund to guard against federal reductions and the governor has asked agencies to prepare budgets that include across-the-board 4 percent cuts — just in case.
Fitch Ratings said Monday that the possibility that Congress will not avert the fiscal cliff poses the most significant credit risk to states in 2013.
Already, governors and mayors nationwide are saying that the uncertainty spawned by the deadlocked congressional negotiations is crimping economic activity and making budget planning an exercise in creativity.
“It is a very difficult time for all of us because we are trying to figure out what to do going forward,” said Gov. Gary R. Herbert (R-Utah). “It is almost like we have to prepare one budget if we solve it and one budget if they don’t solve it.”
In a late-morning White House meeting, members of the National Governors Association’s executive committee delivered that message to Obama and Vice President Biden. They also made a similar point in a meeting with congressional leaders on Capitol Hill later Tuesday, reminding lawmakers that their actions to solve the nation’s long-term budget problems will have immediate repercussions in state and local governments.
States rely on the federal government for about a third of their revenue, and the automatic spending cuts that are set to take effect in January would reduce funding for an array of social-service, education and housing programs. In addition, businesses that contract with the federal government also would face automatic budget cuts.
“States would be affected very differently, and for them, it adds to the uncertainty,” said Anne Stauffer, project director at the Pew Center on the States, which released a report last month on the state impacts.
In Charleston, S.C., longtime mayor Joseph R. Riley Jr. said he will present a budget to the city council on Wednesday that is based partly on conjecture.
“I am operating the city with nervous anticipation,” he said. “If we went over the fiscal cliff, I would have to quickly put into action major budget modifications.”
Going over the fiscal cliff would have the most direct impact on state budgets through the $110 billion in automatic spending cuts slated to begin in January if no agreement is reached to stop them.
Although some federal programs especially key for states — notably Medicaid — are exempt, many other federal grants to states would be cut. The Pew report said 18 percent of federal grant money would be subjected to the automatic hit. That includes Title I funding, which covers education programs for the poor and the disabled, medical research money, and health and human resource programs.