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How Would a U.S. Debt Default Affect You?

State officials weigh in on the potential effects if politicians in D.C. don't reach an agreement on raising the federal debt ceiling by next week.

As lawmakers huddled in conference rooms in Washington in an effort to devise an agreement to raise the federal government’s debt ceiling before Aug. 2, when the Treasury projects it will run out of money to cover all the nation’s bills, many at the local level are left to ponder the ramifications of what such a default could mean to them.

If the U.S. government were unable to meet all its obligations as of next week, officials at the state and local level who spoke to Patch for this article said the fallout could be severe and long lasting, encompassing everything from a downgrading of the nation’s credit rating, which could affect global interest rates and roil worldwide financial markets, to missed Social Security payments for millions of Americans who depend on those checks as a source of income, although most noted that many of the “worst case” scenarios predicted might not occur for several weeks after the Aug. 2 deadline.

Others said they also had concerns with many of the deals proposed by lawmakers on Capitol Hill to raise the debt ceiling in exchange for spending cuts to existing federal programs, which would have a trickle down effect on states and local municipalities who have already had to par back budgets in recent years due to a stagnant economy.

“It certainly will cause upheavals in the market,” Benjamin Barnes, secretary of the Connecticut Office of Policy and Management, the governor’s staff agency that is responsible for the planning and management of the state’s $40.1 billion biennium budget, told Patch Tuesday.  “We regularly borrow money in the municipal bond market, and it may impact interest rates, which could have a most likely negative affect on the state of Connecticut. There may be some difficultly in accessing the capital markets for a period of time.”

Gov. Dannel P. Malloy sent a letter to congressional leaders and President Obama July 22 urging both parties to put politics aside and agree to raise the debt ceiling before Aug. 2 to avoid potential catastrophic financial consequences, while working with the president on a long-term solution to trim federal spending and reduce the deficit.

“Failure to increase the debt ceiling and fulfill the financial obligations already authorized by Congress would do great harm to this nation,” Malloy wrote. “For Connecticut, such a failure would result in a serious disruption to our cash flow, negatively affect our access to the capital markets, and harm our local economy.”

Malloy continued that some of the funding cuts already publically discussed as part of the negotiations could cost Connecticut about $500 million in federal aid over the next 10 years, particularly if reductions in the federal government’s Medicaid reimbursement rate and Children’s Health Insurance Program were to be implemented.

An additional federal reduction in aid to graduate level medical programs could jeopardize the state’s plan, according to Malloy, a proposal to pump $864 million into the University of Connecticut’s Farmington-based Health Center to renovate and expand the medical campus in an effort to transform it into one of the state’s primary economic drivers.

Barnes told Patch that although Connecticut had enough cash reserves to weather several weeks of missed federal payments or reimbursements, he was more concerned with the effects of reductions to pre-established programs the federal government may make as part of an agreement. Such a deal, Barnes said, would mean that Connecticut would have to make further reductions to its current budget to plug the gap, as Malloy has stated he has no intention to raises taxes beyond the increases called for in the current budget.

“If the federal government were to change the reimbursement rates for Medicaid, that would result in a very large hole in our budget,” Barnes said. “The governor’s committed not to raise revenue, so if we were to receive a lack of federal aid for something…grants that are supporting critical governmental activities, we would be forced to find other ways to pay for those or curtail those activities, neither one of which is a desirable end.”

Locally, officials said that a federal default could result in higher interest rates on bonds and municipal debt, a slowdown or cessation of certain programs or projects funded through federal dollars, and a reduction in services or an increase in the local tax rate to make up for any federal shortfalls in local budgets that have already been enacted.

Patricia Flack July 29, 2011 at 08:34 PM
I depend largely on my monthly social security payment for my living expenses as my part time job would not cover most of them, therefore I certainly would like to see that debt ceiling raised. I have read however some of the ways social security has been manipulated, so can see, too, why there is a threat to it.

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