Failure to Raise Debt Ceiling May Result in Stopped Funding for Federally Funded Projects

Deltek State and Local Industry Analysis Manager Chris Dixon reports.

As the federal government nears the brink of missing its self-imposed deadline for raising the debt ceiling, it’s a good time to assess the potential impact on state and local governments and their contractors. (You can find a great assessment on the potential impact on federal contractors here.) Given that the federal government has never failed to raise the debt limit before, we have very little concrete information at hand.

• Moody’s Investors Service has warned that it would downgrade the Aaa credit ratings for Maryland, Virginia, South Carolina, Tennessee and New Mexico within 10 days of a missed deadline. Maryland, New Mexico, and Virginia are the most reliant on federal spending and employment. All of the states have particular issues with Medicaid and other credit issues. However, despite some gubernatorial grandstanding, none of them faces a major fiscal impact from slightly higher interest rates.
• The Tax Policy Center has pointed out that state and local debt that is refinanced using regular U.S. treasuries (as opposed to special state and local government treasuries, or “SLUGs”), represents “only $130 billion out of a $2.95 trillion market” (4.4%). So, no big impact on refinancing.

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