Tags: states | us | debt crisis

States Bracing for the Worst in Debt Crisis

Monday, 25 Jul 2011 06:06 PM


MIAMI - State governments across America know the stakes for them are high in Washington's gathering debt-ceiling crisis but are finding few ways to hedge against the big losses they know are coming.

The weeks-old negotiations in Washington over enlarging the federal government's borrowing authorization are so scattered and twisted that state officials reliant on federal monies for large portions of their budgets can't handicap the outcomes.

"A complete unknown at this point ...," said H.D. Palmer, spokesman for California's finance department of the standoff. "We just don't know where things are going to end up."

Officials in Maine, and in Virginia, which was one of five AAA-rated states called out for possible ratings cuts last week by Moody's Investors Service because of the debt face-off, said they can't plan adjustments because outcomes were so clouded.

"We have been examining areas where we think there could be impacts, but cannot make any firm contingency plans because of the uncertainty of what impacts we may see ...," said Jeff Caldwell, spokesman for Virginia Gov. Bob McDonnell.

Some state and local governments, which together got $478 billion from the federal government in 2010, said they will tap reserves or borrowings and use other funds to make up for any short-run losses of federal monies.

Some state finance officials have shifted bond sales because of the federal standoff and others are bracing for possible downturns in sales tax revenues if Social Security and other payments to individuals are interrupted.

In Wisconsin, where federal revenue is about 29 percent, or $9.3 billion, of the annual budget, the state has enough money to fund federal programs for at least three months due to proceeds from a recent $800 million note sale and the state's ability to borrow from other funds, an official said.

"Right now it appears that Wisconsin will be able in the short term to handle any type of default the federal government would have," Mike Huebsch, secretary of the state's administration department, told reporters on Monday.

Huebsch said the federal debt crisis could affect Medicaid healthcare spending, student loans, state university research grants, low-income heating assistance and child welfare.

But even if a deal is reached by Aug. 2, the day U.S. Treasury officials say the government's current borrowing authorization expires, big questions about federal funds for states and local governments will linger for a long time.

"If there is a deal, there will be a headline number," said Chris Whatley of the Council of State Governments. "But the cuts themselves won't be known for months. You won't know what the numbers will be for your state for a long time."

Even so, governors, legislators and local officials do know that the flows of money from the federal government will be slower in coming years, according to Whatley.

"This is uncharted territory. I don't think we know how it could affect us," said Martha Haynie, comptroller for Florida's Orange County.

According to Richard Ciccarone, managing director at McDonnell Investment Management, Washington's debt-ceiling drama does make clear that any hopes of significant federal aid for state governments in a recession, such as 2009's economic stimulus program, are pointless.

"There is an expectation there would be some help in another downturn for states again. But I think the debate in Washington gives us the indication that money will be harder to come by because (the federal government) is worried about their own survival," Ciccarone said. (Additional reporting by Karen Pierog in Chicago, Jim Christie in San Francisco, Lisa Lambert in Washington, Edith Honan in New York and Barbara Liston in Orlando; Editing by James Dalgleish)

© 2015 Thomson/Reuters. All rights reserved.

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