By Joan Gralla
NEW YORK (Reuters) - States may go their own way in adopting fiscal policies and turn to more borrowing if Congress on Monday enacts a last-minute compromise plan raising the federal debt ceiling.
Across the nation, local officials -- who spent the last month fretting that the United States would default for the first time -- now fear the debt-cap bill will cut the federal deficit by yanking billions of dollars of aid from them.
The resulting cuts in all levels of government spending could further crimp consumers' lifestyles, make poverty worse and threaten public safety. Also at stake are job-creating government contracts for healthcare and defense companies, and possibly heightened risks for public pension investments.
Tom Cochran, executive director of the U.S. Conference of Mayors, said the federal cuts in the debt-ceiling agreement "mean fewer cops, fewer firefighters and less money for job- creation projects, housing and elderly care."
To make up for the federal cuts, he called on Congress to close tax loopholes for corporations and individuals.
Philip Fischer, a managing principal at eBooleant Consulting, LLC, said in a report: "The federal, state and local governments cannot justify the reduction in the standard of living that must occur to reduce a trillion-dollar federal deficit without a crisis."
Saying the deficit crisis will continue, he added, "Severe cutbacks in all federal programs seem inevitable."
Fischer said states might boost long-term debt to replace lost federal aid.
"To maintain their own fiscal integrity, the states will need to assert more autonomy," he said.
THE DANGERS OF DEPENDENCY
Some states, for instance, have sued to block the Obama administration's healthcare law, while others have sought waivers from Medicaid program requirements.
"The degree of dependence on the federal government now becomes a state credit issue and rainy day funds a critical tool," Fischer said.
Four states depend on federal aid for more than 40 percent of their spending: Arkansas, Illinois, Missouri and North Carolina, according to a report by RBC Capital Markets.
Eighteen states get over 30 percent of their spending from taxpayers around the country -- Florida, Georgia, Idaho, Indiana, Louisiana, Maine, Michigan, Mississippi, Montana, Nevada, New Mexico, New York, Ohio, Pennsylvania, South Carolina, South Dakota, Tennessee and Texas.
Still, John Miller, chief investment officer of Nuveen Asset Management, told CNBC that states in the category of "above 30 percent" might be able to absorb a 5 percent across-the-board cut in federal aid spread out over 10 years, which might work out to only 1.5 percent of all the revenue a state gets.
To New York state Comptroller Thomas DiNapoli, who runs the $146 billion state pension fund, the struggle to raise the federal debt ceiling has inflicted "collateral damage" by raising doubts about the U.S. government's AAA credit rating.
As Florida and Texas demonstrate, the deficit deal's impact could spread to many industries that are vital local employers. The Texas Health Care Association said the prospect of even more Medicare cuts "places seniors and caregiver jobs in an extremely perilous position."
South Florida, home to Miami and Fort Lauderdale, has at least $400 million at risk this year in the anticipated $2.4 trillion of budget cuts agreed by Washington leaders, according to an analysis by the Miami Herald newspaper.
"Pentagon spending -- a top target of the plan if Congress can't agree to other cuts -- looms large in the region," The Miami Herald said, adding that two local companies each year sell $50 million of armored vehicles and vests to the U.S. military.
Los Angeles Mayor Antonio Villaraigosa, who is also the president of the U.S. Conference of Mayors, urged Congress to now address the "sky-high unemployment rates that persist across the country."
Connecticut was one of 24 states that lost payroll jobs in June, state Comptroller Kevin Lembo said, predicting that at the current rate of job growth, it will take more than a decade for the state to win back the more than 100,000 jobs lost due to the recession.
(Reporting by Joan Gralla; Additional reporting by Karen Pierog in Chicago, Michael Connor in Miami and Lisa Lambert in Washington; Editing by Jan Paschal)