States, territories anxious about long U.S. shutdown

WASHINGTON Thu Apr 7, 2011 5:50pm EDT

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WASHINGTON (Reuters) - As a federal government shutdown looms, states and territories are anxious about the effects on their vulnerable economies if the interruption stretches for a long time.

A prolonged shutdown could slow the flow of cash from the federal government, which would leave states with stretched budgets scrambling.

Places where the government has a large presence would have to deal with furloughed employees, closed buildings and laid-off contractors.

Members of Congress have been negotiating to avoid shuttering the U.S. government when a short-term spending bill expires just before the stroke of midnight on Friday.

"Illinois uses federal funding to provide critical medical, human and education services for our state's most vulnerable residents," the state's comptroller, Judy Baar Topinka, wrote members of Congress. "Those dollars are particularly important given the state's precarious financial situation."

The state receives $77 million each day in federal funding for a range of programs, from healthcare to roads, Topinka said. Because it is facing a huge backlog of bills, Illinois "does not have the dollars on hand to 'front' funding for federal initiatives," she said.

In Texas, which is in better fiscal shape, Governor Rick Perry believes discussing the possibility of a shutdown is premature and aims "to make sure that the federal government is as inconsequential in Texans' lives as possible," said his spokeswoman, Katherine Cesinger.

"TOUGH SITUATION"

However, a shutdown could put the more than 11,000 federal employees in Puerto Rico, in a "tough situation," Resident Commissioner Pedro Pierluisi said.

"I don't anticipate major disruptions in services offered to Puerto Rico," Pierluisi, Puerto Rico's sole congressional representative, added.

Puerto Rico is heavily dependent on federal funding, which reached $21.4 billion in fiscal 2009.

"A week we can deal with, but a shutdown that lasts longer could paralyze programs," Pierluisi said.

Shutdowns are rare, and of the 10 since 1981 only one lasted longer than a week, crossing from December 1995 through January 1996.

Moody's Investors Service has said a shutdown of less than 30 days would not greatly impact the $2.9 trillion municipal bond market.

Some issuers depend on payments from the federal government to support bonds, such as those sold in anticipation of federal grants for highway projects, and debt on facilities that are leased to federal agencies, Moody's said.

The National Association of State Budget Officers said a shutdown of several months could cause problems for programs that are federally funded but state run and for state employees whose salary is partly paid for with federal funds.

Perhaps no place will feel the effects more than the nation's capital, Washington, D.C. It risks losing as much as $6 million each week during a shutdown from lower income and sales tax revenues. The shutdown could also hit the city's international Cherry Blossom festival this weekend.

But the state of New York, still saddled with budget problems caused by the housing bust, financial crisis and recession, is also nervous about the possibility.

"A federal shutdown would be disruptive in the short term and damaging in the long term," said State Comptroller Thomas DiNapoli.

More than a third of New York's general funds are federally financed, DiNapoli said, representing almost $50 billion.

States' revenues have ticked up lately, but they still face budget gaps totaling more than $100 billion for their next fiscal years -- which for most begins this summer -- and they are worried further drops in revenue will make the gaps grow.

(Additional reporting by Michael Connor in Miami, Karen Pierog in Chicago, Edith Honan in New York and Corrie MacLaggan in Austin; Editing by Kenneth Barry and Diane Craft)

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