Debt ceiling failure would have huge impact on Minn. budget

Minnesota would lose hundreds of millions of federal dollars to pay for wide spectrum of services -- overnight -- if Congress and the president can't agree to raise the nation's debt ceiling by the Aug. 2 deadline.

We know the federal government won't have enough money in the bank to pay its bills the following day. But states will also see an immediate impact if that happens.

"States actually receive a ton of money from the federal government," said Michael Linden, director of tax and budget policy at the liberal Center for American Progress. "And if the government is not able to borrow, then all that money is going to be first on the chopping block."

In 2009 -- the last year for which data was available -- Minnesota got more than $9 billion in payments of various kinds from the federal government. Think Medicaid, highway money, food safety, aid to school districts and much more.

Gov. Dayton's office and Minnesota Management and Budget didn't respond to interview requests, but Linden says states would have to grapple with losing more than 40 percent of their federal funds -- overnight.

"Either they're just going to have to shut down those services for awhile, or they're going to have to find cuts someplace else to make up for the money," he said. "Theoretically, they could raise taxes to cover it, but that seems unlikely."

Linden estimates Minnesota could lose almost $900 million in federal money in August and September alone, if the debt ceiling isn't increased.

If the debt ceiling is not raised, states could lose more than 40 percent of their federal funds -- overnight.

The possibility of cuts that large has plenty of governors worried about the stalemate in Washington.

"Whether we're Democrats or we're Republicans, all of us strive to protect our own bond ratings in our states to balance our budgets, to have a balanced approach that moves our people forward that creates jobs," said Maryland Gov. Martin O'Malley, who spoke Thursday on behalf of the Democratic Governors Association.

O'Malley's specific reference to states' bond ratings points out another potential problem if the debt ceiling doesn't go up -- the federal government would lose its triple-A bond rating.

That could trigger a domino effect, where thousands of state and municipal agencies would also see their bond ratings downgraded as a result. Minnesota just approved a plan to help balance its budget by selling bonds to borrow money against its tobacco settelement.

"If the safest government asset in the world is being downgraded, then that can have a downhill effect on states like Minnesota," said Kil Huh, research director for the Pew Project on the States.

That would mean higher interest payments or possibly greater limits on how much the state could borrow. Huh says the timing of the debt ceiling brawl couldn't be worse for state governments.

"They're just starting to have their revenues bounce back overall," said Huh. "This is a very tenuous time for them, and basically a federal default can set them back considerably."

In the event that Washington's Democrats and Republicans do reach a deal to lift the debt ceiling, states still won't be able to rest easy. It's highly likely that any long-term budget deal the two parties reach will shift some costs for programs like Medicaid from the federal government to the states.

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