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Federal funding in limbo, U.S. states weigh paying for programs

By Lisa Lambert

WASHINGTON (Reuters) - As the battle in Congress over the U.S. budget grinds on, states say they may soon have to choose between putting their own dollars into federal programs for residents or letting vitally important services such as food stamps lapse.

"States have thus far managed to avoid closing or suspending most programs and services by using carry-over funds or, in some cases, by using state spending to fill in for missing federal dollars," the bipartisan National Governors Association said in a letter sent to congressional leaders on Thursday. "However, states are not in a position to be the bank for the federal government,"

The letter, which was copied to President Barack Obama, asked for reimbursements for expenses that states might incur while funding for federal programs is in limbo. This included paying for personnel whose salaries are supported, at least in part, by federal grants.

Programs such as Women Infants and Children, which provides food assistance to mothers and their offspring, have provisional funding measures until the end of the month. But states are uncertain about how much money is available.

States also do not know if they will be reimbursed should the shutdown extend past November 1 and they step in to cover the costs, according to the National Association of State Budget Officers.

States administer numerous federally funded programs including food stamps, bearing part of the operational costs and dealing directly with the recipients.

Several states have already furloughed federally funded employees and others notified workers of potential layoffs. Michigan this week sent out notices it could furlough 20,000 people after October 31.

Connecticut's Democratic governor, Dannel Malloy, ventured to a Head Start center in Bridgeport on Wednesday to announce the state would spend $800,000 to keep the federally funded preschool operating. Head Start provides education and care to young children from low-income families across the country.

"Obviously, Connecticut cannot pick up the slack for the entire federal government," Malloy said at the event. "But we can try to do what's possible in the short term to make sure our most vulnerable citizens receive the services they need."

States' revenues only returned to their pre-recession peaks at the end of 2012. Almost all states were forced to slash spending, hike taxes, raid reserves and turn to the federal government for help during the 2007-2009 downturn. Now they are focused on strengthening their budgets in case another economic storm strikes.

START OF CRISIS

Republican demands to defund or delay Obama's healthcare reforms as a condition of passing a broad government spending bill led to deadlock, triggering a partial government shutdown with the start of the new fiscal year on October 1.

Negotiations intensified on Friday, with Obama, a Democrat, meeting with Senate Republicans at the White House and speaking to House of Representatives Speaker John Boehner by phone. House Republicans will meet at the Capitol on Saturday to discuss their options.

Besides arguing over ending the shutdown that is 11 days old, political leaders are focused on raising U.S. borrowing authority and possibly finding longer-term government spending cuts.

Thirty states have Republican governors.

Kansas has "$430 million in the bank," Governor Sam Brownback, a Republican, said in a statement on Friday. "This strong ending balance provides us with flexibility in cash flow management that we can use to minimize the effect of the federal government shutdown on programs critical to the citizens of Kansas."

NASBO, though, said not all states have enough cash on hand to "backfill" federal programs and some states have looked into selling short-term assets.

Pew Charitable Trusts said states may struggle with tapping reserves to backfill, as well, as 10 states require approval special legislative approval to use rainy day funds, and four others can only use reserves for a shortfall or similar problem.

Pew said after sequestration a handful of states enacted policies to stave off potential federal shortages, including Vermont, which set aside $4 million from its recent surplus.

(Additional reporting by Karen Pierog in Chicago; Editing by Philip Barbara)

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