"Fiscal cliff" budget cuts could devastate states, cities

(Reuters) - States, cities and towns, still wounded by losses of jobs and tax revenue during the recession, warned Washington on Thursday that they are in poor shape to withstand another hit if Congress takes no action to stave off sharp automatic budget cuts mandated at the "fiscal cliff" deadline.

Conveying concern to Congress, 14 U.S. mayors visited Capitol Hill on Thursday, while the Pew Center on the States, a think tank, released a study saying some jurisdictions would fare far worse than others.

"If we go over the cliff, not only will the job losses send us back into recession, but the psychological impact would be such a blow ... I don't think we'd ever get over it, really," said Greg Stanton, mayor of Phoenix, Arizona.

He estimated Arizona would lose 38,000 defense and aerospace jobs if federal government budget cuts threatened by the "sequester" portion of the fiscal cliff go through. The sequester is a collection of year-end automatic budget cuts set up by Congress that many lawmakers are now trying to avoid.

Cuts in defense would also hurt Virginia, Maryland and Hawaii, but Oregon would barely feel it, the Pew Center said.

Roughly 18 percent of federal grant dollars flowing to the states would be subject to across-the-board cuts in 2013 under the sequester, including funds for education and public housing, according to the Pew study.

State revenue is recovering, but below pre-recession levels, leaving states in poor shape to bear another fiscal blow.

Over the past four years states have cumulatively laid off 600,000 employees and cut a half-trillion dollars in spending, said Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities, a think tank.

The states are already slated to lose billions in federal aid over the next decade under last year's Budget Control Act. "States really can't absorb big new cost shifts from the federal government right now," said Leachman.

One in three dollars of state revenue comes from federal spending today, versus one in four in 2000, the Pew Center said.

The worst case scenario for states would not be sequestration, said CBPP's Leachman, but the kind of cutbacks House Republicans approved in the budget measure they voted on earlier this year. Under that bill, non-defense discretionary funding, of which states get about 25 percent, would be cut three times deeper than it would under sequestration, he said.

(Reporting by Nanette Byrnes; Editing by Kevin Drawbaugh and David Gregorio)