Amid anxiety about defense cuts, states brace for the other $500B hit

FILE: August 14, 2012: U.S. states fear proposed reductions to the U.S. budget in January will result cuts to job-generating grants for research in labs, like this FDA lab in Silver Spring, Md. (REUTERS)

Deadlocked lawmakers and defense contractors alike have been raising alarm about the more than half-trillion dollars in defense cuts poised to take effect starting in January because of Congress' failure to reach a more balanced deficit-reduction deal.

But there's another side to that budget ax that rarely gets mentioned -- another $500 billion in non-defense cuts that could do serious damage to education, research, safety net and other programs.

All those areas would be cut by nearly 8 percent over the next 10 years. Washington has already signaled drastic consequences for the automatic, across-the-board cuts known as sequestration, including the nonpartisan Congressional Budget Office which says the cuts could stunt economic growth, increase unemployment and send the country into another recession.

But state officials are also living in a state of uncertainty and anxiety over the non-defense cuts, as they consider where to find the money to cover the planned reduction in federal support.

“There is a lot of uncertainty,” said Scott B. Pattison, executive director of the National Association of State Budget Officers. “States are waiting to see. And in some cases they might just have to say ‘Sorry, we no longer have any money'” for that program.

Pattison and others say state officials have already started talking about the potential impact of the cuts. But the uncertainty about what might eventually happen in Washington means officials cannot make solid plans.

“States are not in a place to predict how the cuts will impact their budgets,” David Adkins, executive director of the Council of State Governments, told FoxNews.com on Wednesday.

The trillion-dollar cuts over the next 10 years would begin Jan. 2.

In this fiscal year alone, defense-related discretionary spending would be cut $54.6 billion, or 10 percent. And non-defense spending would be cut $38 billion, or 7.8 percent, should Congress leave the deal in place.

Some of the federal budget’s most expensive items – Medicaid, Social Security and Medicare – are essentially exempt from the cuts. But as a result, the across-the board cuts would fall on agencies such as the Education Department, the Army Corps of Engineers and the Federal Aviation Administration, which support state-level operations across the country. Programs such as energy assistance also could be cut, and states with military installations say the defense cuts could result in the loss of thousands of contractor and civilian jobs.

Adkins thinks cuts to the National Institutes of Health could have a major impact on local economies because universities would lose grant money for research, which would limit new discoveries that could lead to new jobs. He calls the research hubs “the incubators of the entrepreneur pipeline.”

While governors, especially those facing state budget shortfalls, might perhaps shrug off the de-funding of a federal security grant, they would likely have to scramble to find replacement money for schooling – including $1.3 billion less for primary and secondary education and a $1 billion cut to special education.

“In most cases they won’t have the money to backfill programs and will have to say ‘The federal government is cutting, not me,’” Pattison said.

Adkins points out the federal government provides less that 10 percent of state spending for special education, but the shortfall “comes at a time when states have been dramatically hit by the recession.”

He also hopes that Congress, no matter who is president, can broker a compromise before the economy falls off the so-called “fiscal cliff.” That's when tax hikes, as well as the scheduled spending cuts, are set to take effect.

Virginia Gov. Bob McDonnell thinks the situation should have – and still needs to be -- resolved before January.

“Virginia will be especially hard hit because of our proximity to the federal government and our large number of private contractors working for the federal government, said Jeff Caldwell, a spokesman for Virginia Republican Gov. Bob McDonnell. “The governor has been very outspoken calling upon President Obama to step up and lead on this issue.”