The debt-ceiling debate in Washington is being watched closely in state capitals, as a U.S. default, or a lowering of the country's bond rating, will have a ripple effect in states and communities across the nation.
In states and localities, the sometimes-abstract debate in Washington over the debt ceiling hits closer to home. Although almost every state must balance their budgets, they also rely on borrowing — selling bonds to investors for everything from meeting day-to-day cash-flow needs to funding major capital improvements.
"They borrow to finance long-term projects like infrastructure, road and bridge construction, as well as an upgrade of the telecommunications systems," said Kil Huh, who is with the Pew Center on the States. "These are activities that create jobs — in the long run have multiplier effects. And, essentially, If states need to postpone these in order to get more favorable terms, that's going to have an impact on those communities as well in terms of jobs and recovery."
Already, Huh says, Portland, Ore., postponed a $43 million bond offering for school construction because of uncertainty in the markets. But there is some good news, too.
The state of Maryland on Wednesday sold some $418 million in bonds. Democratic Gov. Martin O'Malley says there were seven bidders, and the bonds sold at a near-record low interest rate. He said this "shows that the private sector will respond when government acts responsibly and in a balanced way to move forward with fiscal responsibility with adjustments to cuts in your budget and revenues in that budget."
Maryland is one of more than a dozen states with triple-A bond rating, the highest. But the bond ratings service Moody's says it's reviewing the rating of Maryland and four other states in the wake of the possible downgrading of federal bonds. The five states are all closely intertwined with the federal government. Maryland is home to the National Institutes of Health, the National Security Agency, numerous military bases and countless government contractors. Most would be affected by the proposed trillions of dollars in spending cuts lawmakers hope to enact. O'Malley, chairman of the Democratic Governors Association, says the effect could be debilitating.
"We have been fiscally responsible, but if the federal government wrecks our economy with either this needless head dive into default or with massive irresponsible and immediate public sector cuts that wipe out jobs, then it's going to have repercussions for every state," he said.
Another state on Moody's review list is New Mexico. It also has a big federal presence, with two national laboratories and several military bases. But state Finance and Revenue Secretary Rick May calls Moody's concern premature.
"They got our attention, but no one is panicking," he said. "This is not a crisis mode in any way, shape or form. We believe we've got some flexibility in dealing with some of these current Washington events and we're trying to maximize that flexibility."
Moody's review of New Mexico's bond rating isn't just based on the presence of federal facilities. May says there are also a lot of individual recipients of federal aid.
"We do have a fairly extensive dependence on Medicaid in New Mexico — one out of every four New Mexicans are on Medicaid, thus our state budget is pretty dependent on some of those matching federal dollars for the Medicaid program," he said.
May, a former congressional staffer, says states will have to be on their toes to respond to whatever Washington eventually does.
States have been improvising: California took out a $5.4 billion bridge loan this week to meet its cash-flow needs, instead of selling bonds.
The state treasurer cited the fear capital markets would be thrown into if there's no debt ceiling agreement in Washington. It's a fear shared in localities and state capitals across the nation.