Debt Ceiling Uncertainty Puts States at Risk


gov-bob-mcdonnell-of-virginiaBy Michoel Cooper

The federal debt ceiling debate is already complicating life for state and local governments.

Maryland is postponing a bond sale that had been scheduled for Friday, after the state was warned that its credit rating would probably be lowered in the event of a federal downgrade. California, which typically issues short-term bonds at this time of year, is working to arrange bank loans instead, citing the market uncertainty. And state officials across the nation are trying to figure out what will happen to the federal payments they rely on for everything from Medicaid to unemployment to highway construction if a deal is not reached to raise the debt ceiling by the Aug. 2 deadline.

States whose economies rely on the federal government – including Maryland and Virginia, home to many federal employees and contractors – are at the greatest risk if there is no agreement and Washington has to decide which payments to make and which to skip. They were among the states warned by Moody’s Investors Service this week that their credit ratings were being jeopardized by Washington – which would make it more expensive for them to borrow for costs like construction, through no fault of their own.

“For nearly 75 years we have worked hard to earn the highest credit ratings from all three rating agencies,” Gov. Bob McDonnell of Virginia, a Republican, wrote this week to President Obama and members of Congress, urging them to raise the debt limit. “Now your failure to get the job done is hurting the businesses and citizens of our commonwealth.”

Many state and local officials are still hoping that a deal will be reached, averting a situation in which federal payments to the states could start to be cut in August. But a number of states have begun preparing for the worst.

Ric Brown, Virginia’s secretary of finance, said that it was a difficult task, made much more difficult by the lack of concrete information coming from Washington. “What you’ve got at the federal level, let’s face it, is outright chaos,” he said in an interview. “It’s hard to make sense out of that.”

In Maryland, the uncertainty over what will happen in Washington is complicating the state’s plans to sell bonds for school construction and to refinance some existing debt. The sale was pushed back to Monday after the state was warned that the debt ceiling debate could harm its credit rating.

Of course, if the debt limit is not raised and the federal government cannot meet all its costs, states and localities will face a new set of more serious problems. The National Conference of State Legislatures told members this week that there was little experience to guide their many “what if” questions, citing instead “a potpourri of ‘coulds,’ ” including the possibility that the federal government could pay its debts in the order in which they were received, or could prioritize which payments to make.

If the federal government were to stop paying some employees or contractors next month, or were to hold back Social Security checks, it could have a “profound effect on state and local tax revenues,” according to a report issued this week by the Pew Center on the States. On top of that, a delay in the payments that states and local governments rely on would pose cash-flow problems for many states. The Pew report noted that the federal government owed $10.4 billion in tuition assistance next month, when the academic year begins.

August is also the peak of the road construction season. In June, the states got $4 billion worth of reimbursements for transportation projects from the federal government, said Jack Basso, the director of program finance and management for the American Association of State Highway and Transportation Officials. Now the association is trying to figure out whether money in the highway trust fund – which comes mostly from the federal gas tax – would be protected if the debt limit were not raised.

An interruption in payments would put states in a bind, Mr. Basso said, since they use the money to pay private contractors. “They would have to face ‘How are we going to pay our bills?’ ” Mr. Basso said.

California had been preparing to issue $5 billion worth of short-term bonds next month, but now its treasurer, Bill Lockyer, is seeking to put together a bridge loan with banks instead.

“Given the situation in Washington, the treasurer decided it would be prudent to develop a contingency plan, a Plan B,” said Tom Dresslar, a spokesman.

Mayors are also watching the debate in Washington nervously. Several said in interviews that they were not worried in the short term. But some, including Mayor Ralph Becker of Salt Lake City, said they were worried about the general economic harm that a federal default would cause. “We all fear and see the specter, the dark clouds that would hide our beautiful blue skies and mountains,” he said. “It’s hanging over us.”

{NY Times/ Newscenter}