Spending Cuts Threaten State Recoveries, Governors Say

Feb. 23 (Bloomberg) -- Oklahoma Governor Mary Fallin, a Republican and vice chairman of the National Governors Association, talks about the need for President Barack Obama and Congress to find a way to prevent $85 billion in across-the-board spending cuts from taking effect starting on March 1. U.S. governors say Congress's failure to prevent the sequestration could undermine state recoveries. Fallin talks with reporters at the NGA meeting today in Washington. (Source: Bloomberg)

Federal budget cuts will probably push the U.S. back into recession by damaging states’ economies recovering from the worst fiscal crisis since the Great Depression, governors said.

President Barack Obama and Congress need to find a way to prevent $85 billion in across-the-board spending cuts from taking effect starting on March 1, said Republican and Democratic governors who are in Washington this weekend for a meeting of the National Governors Association.

The cuts, known as sequestration, will lead to dismissal of teachers and firefighters, and reduce projected spending by $1.2 trillion over the next nine years, with half in defense spending and half from domestic spending. Governors said the threat of cuts has already damaged their economies, which they said will worsen if the president and lawmakers can’t agree.

“I don’t think there is any doubt about it” that the required reductions “could put us right back where we were,” Jack Markell, the Democratic governor of Delaware and the chairman of the National Governors Association, said on “Fox News Sunday.” The cuts would have “a real big impact on the economy and jobs,” he said.

Federal Spending

Federal spending reductions could lower the gross domestic product by 0.6 percent and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office. The U.S. economy unexpectedly shrank in the fourth quarter, logging the worst performance since the second quarter of 2009, the last time the world’s largest economy was still in the recession, Commerce Department figures said on Jan. 30.

Photographer: Andrew Harrer/Bloomberg

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Photographer: Andrew Harrer/Bloomberg

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Cuts would be especially visible in states where federal spending is higher, including Maryland (BEESMD), Virginia (BEESVA) and Hawaii. In a Feb. 18 letter to Obama, Virginia Governor Robert McDonnell, a Republican, said the reductions could force his state into a recession.

Maryland may lose 12,000 jobs because of a drop in federal employment, contract spending and medical research grants, Maryland Governor Martin O’Malley, a Democrat, said.

Federal money for state-administered programs will be reduced by $5.8 billion this year, according to estimates by Federal Funds Information for States, a Washington-based group created by the governors association and National Conference of State Legislatures. Medicaid, the state-federal health care program for the poor, and state road funding won’t be affected because they are specifically exempt.

Hardships Predicted

Federal officials last week warned that the budget cuts would cause hardships for federal workers, consumers and some recipients of government aid.

The Pentagon would furlough as many as 800,000 civilian employees, requiring them to take unpaid time off. Puerto Rico Governor Alejandro Garcia Padilla, a member of the Popular Democratic Party, said that teachers and firefighters may be dismissed.

State leaders fired workers and pared spending to eliminate budget shortfalls that emerged after the 18-month recession that ended in June 2009. That created a drag on the economy that didn’t lift until the third quarter of last year.

Harming States

“The uncertainty of sequestration is really harming our states and our national economy,” Oklahoma Governor Mary Fallin, a Republican, said at a news conference kicking off the meeting in Washington. “We’re talking about real lives. We’re talking about families. We’re talking about their pocketbooks.”

The spending reductions may lead to a loss of 20,000 jobs in Oklahoma, where businesses are already hesitant to invest because of questions about the federal budget, Fallin said.

The March 1 cuts will probably go into effect, Republican Senator Tom Coburn of Oklahoma and Democratic Senator Claire McCaskill from Missouri said on “Fox News Sunday.”

“The president should be calling us over somewhere, Camp David, the White House, somewhere, and sitting down and trying to avert these cuts,” Senator John McCain, a Republican from Arizona, said on CNN’s “State of the Union” program today.

U.S. Education Secretary Arne Duncan, appearing on CBS’s “Face the Nation,” called the cuts “dumb” and said sequestration could lead to as many as 40,000 teachers losing their jobs.

Even with the threat of sequestration, yields in the $3.7 trillion municipal-bond market have remained close to the lowest levels since the mid-1960s. While data compiled by Bloomberg show that muni interest rates have risen during March in 14 of the last 20 years, that trend may be offset in 2013 by anticipation that the spending reductions will slow the U.S. economy, said Michael Pietronico, who manages $875 million of munis as chief executive officer of Miller Tabak Asset Management in New York.

Spending Reductions

The spending reductions are part of an agreement in mid- 2011 that allowed Congress to pass a debt-ceiling increase. They were designed to be so unpalatable and arbitrary that lawmakers would find a way to replace them. Congressional Republicans and Democrat Obama have so far been unable to reach a compromise.

Louisiana Governor Bobby Jindal, a Republican, speaking on NBC’s “Meet the Press” today, urged Obama to present an alternative to sequestration that would delay programs that haven’t yet been implemented, such as Medicaid expansion or health-care exchanges.

Hawaii Governor Neil Abercrombie, a Democrat, said defense spending cuts would idle 19,000 civilians who work for the U.S. Pacific Command, based in Pearl Harbor. Congress may delay the cuts once the public understands the plan’s impact, he said.

“There will be a reaction in the country that will cause, at a minimum, an immediate relief from the sequester,” he told reporters.

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Michael C. Bender in Tallahassee at mbender10@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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