“We’re approaching the cliff, and hopefully it’s a climbing down and not just jumping from the cliff,” Ganeriwala, Virginia’s treasurer, said Wednesday at the State & Municipal Finance Conference hosted by Bloomberg Link in New York.

If Congress doesn’t agree on how to reduce the federal deficit, states may lose funding and jobs when $600 billion in automatic tax increases and spending cuts take effect in January, said Ganeriwala, 56, who will head the association next year.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

That may further hinder progress for governments that cut jobs as tax revenue fell. The number of public positions in 2011 shrank by 1.3 percent, about 280,000 positions, according to data from the U.S. Department of Commerce. More than half those positions were from state and city administrations.

States already are confronting the “stupidity factor” of Congress’s waiting until the last minute to act, said Chipman Flowers Jr., the Delaware treasurer.

“They’re going to solve the problem,” Flowers said. “They’re just going to wait until the 11th hour.”

Ailing States

The economic health of 36 states, including Michigan, California and Connecticut, declined in April through June from three months before, according to the Bloomberg Economic Evaluation of States index. It was the worst showing since the third quarter of 2011, when all but five states declined.

States have a mixed financial picture heading into the Nov. 6 presidential election, said Susan K. Urahn, managing director of the Pew Center on the States in Washington, a nonpartisan group that studies and develops policy solutions. While their revenue has increased for 10 straight quarters, the take in 17 states hasn’t returned to levels seen before the 18-month recession that ended in June 2009, she said. Adjusted for inflation, 38 are below 2008 levels, she said.

Still, investors remain eager to hold municipal debt. Local-government interest rates remain near the lowest in a generation. The yield on 20-year general-obligation bonds fell to 3.67 percent in the week ended Sept. 27, according to a Bond Buyer index. In January the rate fell to 3.6 percent, the lowest since 1967.

Besides the potential impact of federal deficit reduction and uncertain prospects for economic growth, states face increasing costs for items such as infrastructure and health care, Urahn said.

“States are really in sort of a catch-up position,” Urahn said.