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Will state budget cuts blunt the recovery?

State and city budget cuts could offset the federal stimulus's effects.

By Alissa FigueroaCorrespondent / August 2, 2010

The recently boarded-up police recruiting center in Oakland, Calif., is one example of desperate measures by a hard-hit municipality. States and cities still wrestle with big budget gaps.

Paul Sakuma/AP

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Whatever oomph the federal stimulus gave the US economy, deficit-ridden cities and states are poised to take it away.

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With two years of depressed tax revenues, a third one expected, and rainy day funds all but exhausted, state and city governments are having to close huge budget gaps. If projections are correct, they could amount to $660 billion from fiscal 2009 through 2012, nearly rivaling the $789 billion stimulus from the federal government. Although these governments are raising some revenues through tax hikes and new fees, mostly they're cutting spending. That threatens to reduce safety net services, push hundreds of thousands of workers onto unemployment rolls, and derail a fragile recovery.

"State and local governments are going to be a serious drag on the economy over the next 12 to 18 months," said Mark Zandi, chief economist of Moody's Analytics, a Pennsylvania-based economic research firm. Their budget woes could trim a half percentage point from the United States' growth rate this year, he estimated.

Collectively, states must close a $127 billion shortfall for the 2010-11 fiscal year, says a National Association of State Budget Officers survey. Some states are in particularly bad shape:

California is on the brink of eliminating its entire $1 billion welfare-to-work program to close a whopping $19.9 billion deficit.

Arizona will cut some $1 million in Medicaid services in an effort to close a $3.1 billion deficit.

Colorado will slash education funding by $400 per student this coming school year.

That's for one year. Adding deficits in fiscal 2009 and 2010 with 2011 and 2012 projections from the Center on Budget and Policy Priorities (CBPP), the total comes to $602 billion.

Many cities are also in trouble. Boston will lay off 111 municipal and school district employees this year to close a $50 million budget gap, after letting 790 city workers go in 2009-10. Oakland, Calif., laid off 80 police officers, or about 10 percent of its force, to help close a $31 million deficit. Overall for the 2009-12 period, municipal deficits could add up to $43 billion to $73 billion, according to the National League of Cities.

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