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WASHINGTON, Feb 26 (Reuters) - U.S. states could have to cut their spending or raise taxes to make up for the loss of $5.8 billion of federal funds this fiscal year under the sequester set to begin in three days, the National Conference of State Legislatures said on Tuesday.
All states except Vermont must balance their budgets. When they have lower revenues than expected or when demand for programs such as unemployment benefits spikes, they must raise taxes or move funds from other areas to avoid budget gaps.
With the automatic federal spending cuts expected to begin on March 1, many also fear they will see a flood of "unfunded mandates," where the U.S. government requires states to carry out a program without providing money to operate it.
"If the federal government reduces funds for state-administered programs, yet keeps in place strict standards and requirements, states would be forced to make up for the money gap by reducing other programs, raising revenue, or some combination of the two," the group, which represents statehouses across the country, said in a statement.
In coming months, most states will have to finish crafting new budgets "and will face the near-impossible challenge of balancing their budgets without knowing how much federal funding to expect," the legislators said.
Both Democratic and Republican governors met on Monday with President Barack Obama to press for an alternative to the cuts. Almost all said sequestration would hurt their states' economic recoveries from the 2007-09 recession, although they also said the U.S. government must reduce its deficit.
Programs that provide the bulk of federal funds to states - Medicaid health insurance and the Highway Trust Fund - are exempt from the $85 billion of cuts scheduled for this federal fiscal year, which ends Sept. 30.
Out of a total of $606.44 billion in federal money designated for states and territories this fiscal year, $109.97 billion comes from programs that fall under sequestration, according to the Federal Funds Information for States. Under the formula used in sequester, that means they will lose $5.83 billion total by the end of the federal fiscal year on Sept. 30.