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Now, a failure to pay the bills of the U.S. government or even a lowering of the bond rating, would have a ripple effect in some states and communities across the nation. The bond ratings for states could suffer, we're told, and states with a lot of federal facilities and recipients of government assistance are vulnerable, as NPR's Brian Naylor reports.

BRIAN NAYLOR: The political back-and-forth in Washington over the debt ceiling can seem pretty abstract and detached from reality. But in states and localities, the sometimes abstract debate hits closer to home. For while almost every state must balance its budget, so, too, do they rely on borrowing, selling bonds to investors for everything from meeting day-to-day cash flow needs to funding major capital improvements.

Kill Huh is with the Pew Center on the States.

Dr. KILL HUH (Pew Center on the States): They borrow to finance long-term projects like infrastructure, road and bridge construction, as well as an upgrade of the telecommunications systems. So 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.

NAYLOR: Already, Huh says, Portland Oregon 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 yesterday sold some $418 million in bonds. Democratic Governor Martin O'Malley says there were seven bidders, and the bonds sold at a near-record low interest rate.

Governor MARTIN O'MALLEY (Democrat, Maryland): Which 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.

NAYLOR: Maryland is one of more than a dozen states with triple-A bond ratings, 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.

Gov. O'MALLEY: 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.

NAYLOR: 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.

Secretary RICK MAY (New Mexico Finance and Revenue): They got our attention, but no one is panicking. 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.

NAYLOR: 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.

Sec. MAY: We do have a fairly extensive dependence on Medicaid in New Mexico. One out of every four New Mexicans are on Medicaid, thus we, you know, our state budget is pretty dependent upon some of those matching federal dollars for the Medicaid program.

NAYLOR: May, a former Congressional staffer, says states will have to be on their toes to respond to whatever Washington eventually does. And states have been improvising. California took out a $5.4 billion bridge loan this week to meet the states cash flow needs instead of selling bonds. The state treasurer cited the fear capital markets would be thrown into chaos if there's no debt ceiling agreement. It's a fear shared in localities and state capitals across the nation.

Brian Naylor, NPR News, Washington.

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