STATE and local leaders will meet with the White House over the next 60 days to set priorities for federal funding of services ranging from municipal libraries to subsidized housing. In the controversial ``New Federalism'' proposal outlined in the 1992 budget released last week by Office of Management and Budget director Richard Darman, states are to manage some $15 billion in federal funds.
Proponents say that the $15 billion transfer, an unrestricted grant, will allow states to set their own agenda for the funds, instead of spending this sum according to federal mandate.
Critics charge that the federal government seeks to increase the discretionary power of the states, while decreasing its funding. Community leaders view the states' potential increase in power as a mere replacement for the federal bureaucratic hurdle for local interests.
``It moves a lot more power to the state and not to the local level. That's why the governors like it, and the mayors hate it,'' says Rudolph Penner, former Congressional Budget Office director, now a senior fellow at the Urban Institute.
Both Republican and Democratic governors have endorsed the plan in principle, welcoming the transfer of authority and spending flexibility.
But governors are protective of state treasuries. During the next two months, they will seek reductions in federal demands for increasing state funds for federally mandated programs.
The US Conference of Mayors strongly opposes the plan. In particular, mayors are concerned about a $3.2 billion Community Development Block Grant that since the mid-1970s has provided federal funds directly to cities.
The mayors fear their priority community projects will be jeopardized by the administration's intention to cut community development assistance to $2.9 billion and lump it with 10 other programs in the single block grant to the state governments.
Is the block-grant plan a guise for reduced federal financing of state projects?
Mr. Penner says the plan for block grants is certain to ``reduce grants in the long run.'' Specialized grants, by contrast, are protected by special interests, who lobby to at least maintain, if not increase, levels of funding.
State-legislature lobbyists see this as a major flaw. The block grant, they say, is vulnerable in Congress. The only constituency for it becomes the state and local governments, rather than the fiercely competitive special-interest groups.
STATE mental-health facilities are among programs on the endangered list. Past closure of such institutions has contributed to urban homelessness, which exacerbates the strain on state services, say observers.
John Martin, speaker of the Maine House of Representatives, says that ``block grants are the easiest to cut, because no one on the Hill or in the White House will see what they're cutting.''
Mr. Martin warns that ``a $15 billion `turnover' of funds for programs will have little impact if other proposals in the budget impose costly mandates on the states. Already, almost 50 bills have been introduced that would force states to spend billions on new initiatives in a wide range of areas, including health care, telecommunications, radioactive waste ... and child welfare.''
``The administration is looking for a way to cut federal funding to the states,'' says Ronald Snell, fiscal director of the National Conference of State Legislatures in Denver.
``It's a bad time to do so, because the states' fiscal situations are getting worse. Since 1979, federal grants to states have been in decline, while every session of Congress has produced more program demands on states through federally unfunded or partially funded mandates,'' he says.
Federal budgetary spending caps and the country's ballooning deficit, which economists say may reach $350 billion for 1991, will leave states fending more for themselves in 1992. But unless they raise taxes or cut spending, well over half the states will run their own deficits in 1991.
State legislatures in Michigan, Florida, and North Carolina are already cutting their budgets to avert deficits. Mr. Snell says that while the economic problems are most severe in the Eastern states, they will spread west. ``All states face expenditure pressures.''
Penner favors spending-power transfers to the state and local level, in part because it is designed to chip away at the federal deficit. He says states will be increasingly forced to raise their own money.
``Part of the problem of resolving the deficit at the federal level is that citizens don't trust the federal government these days. They vehemently oppose new federal taxes because they believe they'll be frittered away,'' he says.
Penner argues taxpayers are less resistant to state and local tax hikes, because they see these levels of government as more responsive to their needs.