By Lisa Lambert
WASHINGTON (Reuters) - As they finalize budgets for the next fiscal year, many states are sending a message to the government about the effects of spending cuts known as sequestration on federally funded projects: You're on your own.
Since sequestration began on March 1, states have warned they would not step in to make up for lower federal funding on programs. A survey released by the National Conference of State Legislatures on Thursday showed that they indeed are not compensating for the reductions, but are setting aside reserves in case the cuts slow their future revenues.
The cuts, which are intended to total $1.2 trillion over 10 years, directly affect 20 percent of the grants states receive from the U.S. government. Rating agencies say sequestration also could have indirect consequences, primarily lowering states' revenues and pushing up spending demands.
For most states, fiscal 2014 begins July 1. The legislatures group found that only five states and the District of Columbia have budgeted sequestration offsets.
"We didn't feel it was our role, particularly at this juncture, to come rushing in to the rescue with state monies to replace lost federal monies," Colorado State Senator Pat Stedman, who chairs the legislature's joint budget committee, said of Colorado's decision not to offset sequestration.
"States don't know what to expect out of Washington. We're not seeing anything that instills confidence in the federal budget process," he added.
States will receive $18.02 billion less in federal aid this fiscal year compared with last, according to a March report from the Federal Funds Information for States, which tracks grants to states. Fiscal 2013 ends September 30 for the federal government.
Meanwhile, states addressing sequestration in their budgets are creating cushions in case their revenues drop as part of the cuts' broader economic effects, the survey showed.
One of the states that will feel the greatest impact, Maryland, has boosted its general fund balance to $298.9 million and will have a reserve fund of about $767.6 million. Utah, meanwhile, now requires federal aid reductions be included in calculations of rainy day fund deposits.
With the possibility of furloughs and lay-offs, as well as lower federal spending on rents, supplies and contracts, state tax revenues could easily fall, said Anne Stauffer, project director of the Fiscal Federalism Initiative at Pew Center on the States, who has worked in the New Mexico budget office.
"They'll have to decide whether they are going to find other sources of revenues.... or they're going to have cut back on services and programs that serve their residents," she said. "Those are always difficult decisions to make."
For many states, sequestration is a harbinger that the U.S. government will continue making massive spending cuts but not keep them abreast of where or when the reductions will occur. Details about sequestration are still trickling out even now, as Congress modifies some of the cuts.
"It really is the uncertainty and the lack of control," said Pew's Stauffer.
New Jersey has not included sequestration offsets in its budget, but is considering a proposal from Governor Chris Christie to set aside $4 million to meet future needs that could emerge from federal cuts, according to the survey.
Oklahoma is weighing legislation "to improve future contingency planning for sustained reductions in federal grants." Idaho is already talking about possible supplemental budgets next year, according to the survey.
Alabama lawmakers are scrambling to finish the state's budget in the remaining four days of their legislative session, according to Norris Green, director of the state's legislative fiscal office. In its version of the budget, the Alabama House of Representatives has left $66 million "on the table," to handle possible shortfalls from sequestration and the state's new tax credit bill.
"To me that would be the answer to the question of 'How did they react to things going on at the federal level?' They just didn't spend all the money that they hope or think would be there," he said. "They left some money in case they were wrong."
At the end of 2012, states' revenues finally returned to peaks they reached before the 2007-09 recession, when adjusted for inflation, according to the independent Rockefeller Institute of Government.
Still, states are nervous about any possibility their revenues will plunge. To keep their budgets balanced, they slashed spending, hiked taxes, raided reserves and turned to the U.S. government for help during and after the recession. Now, they are hoping to use any gains to restore spending or reduce taxes, not cover federal costs.
"Our tax revenues are starting to rebound," said Stedman of Colorado, where federal grants provide 7.3 percent of state revenue and federal spending makes up 7 percent of the gross domestic product, according to Pew. "But we've gone through three years of serious budget cuts and, with our state general fund, we are appropriating those dollars toward state responsibilities."
Generally, state officials' outlook "is one of stability, with a dose of uncertainty, as states continue to plod their way through an extended economic recovery," said NCSL, which represents lawmakers in all the states and territories.
The survey found that in 23 states and the District of Columbia, personal income tax collections, the largest revenue source for most states, are exceeding estimates and in 17 states they are on target. Only in Minnesota, Puerto Rico and the U.S. Virgin Islands are personal income taxes below forecasts. Not all states levy income taxes.
Sales taxes beat expectations in only five states and the District of Columbia and came in as forecast in another 27 states.
(Reporting by Lisa Lambert; Editing by Dan Grebler)