States, cities brace for budget deal cuts

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By Lisa Lambert

WASHINGTON | Fri Apr 15, 2011 3:38pm EDT

(Reuters) - The budget deal the Congress passed late Thursday and that President Barack Obama is expected to sign on Friday has state and local governments worried they may have to make up for cuts in some federal programs.

The resolution to keep the government running for the rest of fiscal year 2011 reduced Community Development Block Grants by 16 percent.

Cities, towns and counties rely on the relatively small program to fight homelessness and blight. For months they have campaigned to preserve every cent of the grants as states pull back on aid to local governments.

The cut of roughly $600 million threatens the economic recovery in many places because it will end job-creating projects, said a coalition of groups representing local governments, including the National League of Cities and the Conference of Mayors.

States had been expecting a 5 percent reduction in the federal funds they receive, but the cut will likely be less, closer to 3.8 percent, according to Michael Bird, legislative counsel for the National Conference of State Legislatures.

Mostly, states leaders are worried about cuts in spending on services their residents heavily use and they fear they will have to step in with their own funds to make up for the reduced dollars.

They have already warned that the impending end of the extraordinary aid they received in the 2009 economic stimulus plan -- the largest transfer of federal money to states in U.S. history -- will drop them off a "funding cliff."

The recession that ended in 2009 ravaged states' revenues, forcing them to slash spending, hike taxes, borrow and turn to the U.S. government for help. Despite taking those steps, they still face a total shortfall of more than $100 billion in the budgets most must pass this summer and they are nervous about new spending demands.

The resolution cuts federal discretionary spending by $20 billion to $25 billion, according to the Congressional Budget Office.

Altogether, states will lose about $656 million for health and human services, according to the Federal Fund Information of States. That includes a 27.5 percent reduction in money for community health centers from fiscal 2010.

States will also lose more than a quarter of their funding for clean water and for Department of Homeland Security programs.

(Reporting by Lisa Lambert; Editing by Chizu Nomiyama)