States have no place to hide from U.S. debt crisis

Mon Jul 25, 2011 5:28pm EDT

 By Michael Connor
 MIAMI, July 25 (Reuters) - 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.
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 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)


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