July 29, 2011

RE: Federal Debt Ceiling and Possible Default

Dear Mayor:

With the deadline to resolve the Federal Debt Ceiling and possible default less than one week away, President Obama and Speaker Boehner and the House and the Senate continue to have significant disagreements over deficit reduction proposals that are tied to efforts to raise the debt ceiling.  For months now, the President has warned that if the nation's debt ceiling is not raised by August 2, the country will, for the first time ever, default on its financial obligations.

We cannot provide the details of the competing House and Senate proposals, since the issues are so complex and the specifics subject to change. But we did want to begin communicating with you about the potential impacts a default may have on local governments.  

As you might imagine, because a default is unprecedented, no one is completely certain about the impacts.  However, if reports are accurate that the U.S. would be unable to meet about 40 percent of its debt obligations if we default, then municipalities could be impacted in ways similar to the possibilities we were facing under the near government shutdown a few months ago. 

For example, if the federal government had shut down in April, cities seeking permission from HUD grant administrators (non-essential employees) to draw down on CDBG funds would have been unable to do so because the HUD staff would have been furloughed.  Similarly, if the U.S. defaults and Treasury chooses to pay U.S. creditors, social security benefits, and military families first, there probably won’t be enough cash remaining to reimburse municipalities for spending under programs like CDBG, HOME and other direct federal grants, both formula and competitive.  And, even if there was sufficient cash, the federal grant administrators might be furloughed and therefore unreachable during the default period.  In addition, projects awaiting regulatory review by EPA or other federal agencies could be stalled if EPA workers are furloughed.

In addition to impacts on federal government payments to local governments, we also have to be concerned about the impact of a U.S. default on municipal finance and access to credit generally.  It’s difficult to know with certainty, but the prevailing view is that a federal default will make it more difficult and expensive for municipalities to access credit in any form whether it’s bonds, loans, letters of credit, or other products.

Our Federal Relations partners at the National League of Cities (NLC) have asked the Administration to prepare guidance for state and local governments on the consequences of a default. NLC has also begun participating in regular conference calls with the Administration on the status of the negotiations and the consequences of a default.  We’ll keep you updated as we learn more. 
In addition, here’s a link to a report from the Pew Center on the States that outlines the impact a default could have on cities: The Debt Ceiling Debate: How a Federal Default Could Impact States and Cities.  Finally, here is a link to NLC’s official statement on the debt negotiations.

If you have any questions, contact Jon Moran at 609-695-3481, ext. 121 or jmoran@njslom.com

Very truly yours,

 

William G. Dressel, Jr.
Executive Director