Recent reports suggest that between now and the end of fiscal year 2004 state governments' budgetary shortfalls will exceed $100 billion. To balance their budgets, states are planning large cuts in state spending. This paper explores the likely fiscal impacts of these budget cuts on local governments and school districts. Limited evidence suggests that states will enact substantial cuts in state aid and will shift responsibilities to local governments without transferring adequate resources. The paper also explores how local governments and school districts are likely to respond to sharp reduction in state resources.