States' budget planning suffers from U.S. spending uncertainty

WASHINGTON Wed Jan 9, 2013 4:01pm EST

WASHINGTON Jan 9 (Reuters) - The threat of the "fiscal cliff" has lifted, but the specter of spending cuts by the U.S. government at the same time it hits its debt ceiling in March is causing uncertainty for U.S. governors unveiling state budget proposals this month.

"That's been one of the hard parts of developing my budget. I had a meeting just this week and certainly Congress took action last week, so we're still week by week adjusting our budgets and our figures," said Oklahoma Governor Mary Fallin, a Republican, after speaking at the National Press Club on Tuesday.

It is a January ritual performed in many states: Governors kick off the legislative session by giving an address on their states' conditions and then propose spending plans for legislators to debate and finalize before the next fiscal year. For almost all states, the fiscal year begins in July and budgets or amendments to biennial budgets are approved months in advance.

"We also know, come March, that those numbers could change again and we'll be in the middle of our legislative session," Fallin added, saying she has asked her cabinet secretaries to identify possible spending cuts at state agencies.

The Jan. 2 deal to avert the fiscal cliff delayed the start of mandatory budget cuts, or sequestration, to the same month the United States will likely again reach its limit on debt. If sequestration takes place, state economies heavily dependent on defense and other federal spending would be particularly hit hard.

States are pinching pennies, keeping spending growth slow as the economy recovers from the 2007-09 recession and the federal government sends them less money. The National Association of State Budget Officers found state spending likely increased only 0.1 percent in the fiscal year that ended last June, the smallest rise since the group began tracking spending in 1987.

For most states, revenue has only recently reached pre-recession levels, leaving them with little room if the federal government slashes its spending and pushes costs for public programs onto them. Governors are taking that possibility seriously. For more than a year, they have asked Congress and President Barack Obama not to add to their costs.

In 2011, the U.S. government hit its debt ceiling and the resulting fight in Congress led to an agreement calling for $1.2 trillion of across-the-board spending cuts spread over a decade. Under the deal, those cuts, along with tax increases, would kick in at the beginning of 2013, potentially taking the U.S. economy over a fiscal cliff and plunging the country back into recession.

When the government last reached the ceiling, rating agencies warned some bonds in the $3.7 trillion municipal bond market could be downgraded.

"I think the level of uncertainty and confusion and chaos that could be created if we hit that debt limit would be unbelievable," said Delaware Governor Jack Markell, a Democrat.

Resulting increases in interest rates could keep businesses from hiring, while federal spending cuts would hurt public programs, he added.

"A lot of the attention tends to focus on what does it mean for us who are trying to get budgets together? That is very uncertain," he said. "But the bigger issue for me is: What does it mean for the people in my state who may not have jobs in the future?"

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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