What would a federal default hold for Wisconsin?

Monday, July 25, 2011 at 11:47 PM by

With recent reports indicating that policymakers are still disappointingly far away from striking a deal to extend the federal debt ceiling, the possibility of default is looming larger. At the Governor’s request, Wisconsin has already taken some initial steps to identify the potential impacts of the situation on state operations, if federal lawmakers cannot come to agreement.

If the debt ceiling is not extended, the federal government will be nearly powerless to borrow money. Here’s how a recent blog post by the Center for Budget and Policy Priorities described the situation:

“Congress’ failure to raise the debt limit in a timely manner would leave the Treasury powerless to borrow money except to refinance maturing securities. With the power to spend only what it collects in revenues, the government would have to cut spending abruptly by over one-third, putting an enormous drag on economic growth at a time when the economy is struggling to recover from the Great Recession. It also would harm millions of businesses, employees, and beneficiaries who rely on timely federal contract, reimbursement, benefit, or other payments.”

Keep in mind that raising the debt ceiling is a separate issue than the federal debt, or it should be. To rein in federal debt, Congress can increase revenues and limit spending, but by the time the debt limit comes up for debate, the decisions that prompt the need to borrow have already been made elsewhere.

At the state level, a failure to extend the debt ceiling, and the ensuing default, could have several effects, the most visible of which be the loss of federal funds to the state’s coffers. It’s not known which, or how much, of its obligations the federal government would be able to pay if the debt ceiling was not lifted, and there seem to be conflicting reports about whether the federal government would be able to prioritize certain payments over others. Many questions remain about which programs the federal government would be able to continue to sustain once in default.

Twenty-nine cents out of every dollar in the Wisconsin state budget comes from the federal government, according to the Department of Administration report describing the potential implications of default on WIsconsin. Top programs with federal support include Medicaid, UW research and financial aid, transportation, Temporary Aid to Needy Families (TANF), child care and child welfare services funding, energy assistance, workforce training, and community development block grants.

If the federal government stopped supporting these programs come August, DOA notes that Wisconsin has “sufficient cash in the short term (at least three months) to continue to fund federal obligations if desired.” Some programs receiving federal support also require General Program Revenue (GPR) commitments from the state, which would allow some flexibility in continuing services for the short term.

If the state does not or cannot provide temporary cash flow assistance to a program, DOA notes it may have to implement a payment prioritization plan. This could have a devastating effect on individuals and businesses that count on the state to meet its obligations. For example, in the Medicaid program – for which the federal government provides $350 million in support each month – stopping payments to providers could force the closure of health care facilities, particularly in rural areas. 

There could be less visible effects of the default as well. The questionable status of federally-subsidized bonds could have an effect on the state’s capital improvement, clean water, and transportation funds. Depending on the scenario that plays out, we could see a general rise in interest rates, making it more costly for the state to borrow. And state revenue collections would be impacted if the federal default further slowed the economic recovery.

There’s still time for the two sides to reach an agreement in Washington on lifting the debt ceiling. While the Wisconsin has identified some options that could help ease the loss of federal revenues in the short term, the picture DOA paints of what might come to pass is fairly bleak. Hopefully this exercise in identifying what might come to pass will remain just that – an exercise – as federal policymakers turn back from the cliff.

Tamarine Cornelius

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