Cities Nervously Watch Washington’s Debt Limit Talks

In Clearfield City, Utah, Mayor Mark Shepherd is nervously following the negotiations between the White House and House Republicans to raise the nation’s debt ceiling so the country can pay its bills.

“Every day that goes on and every meeting that goes on, I get a little more and more worried,” he said.

In the small town of Edgewater, Kentucky, the city administrative officer, Brian Dehner, is also worried. “Catastrophic is what comes to mind,” he said when asked how a default could affect his city of 8,398 people.

It’s hard to know for sure what will happen if the federal government reaches a point as early as next Thursday when it cannot afford to pay the money it owes its creditors and to state and local governments and to Social Security recipients, to name a few obligations. Congress has never allowed that to happen.

But Dehner, in an interview, said he could see the city having to delay some road projects, the local hospital having to figure out how to pay for adding a new wing, and the city’s budget taking a big loss of revenue. It will also have to absorb costs the federal government has promised to cover, like an apprenticeship program for firefighters.

“That’s a big need because there’s a shortage of firefighters in our region,” he said.

And all this would be happening just months after city leaders expressed relief amongst themselves that the worst of the pandemic appeared to be over.

“Then slam. They’re slamming us with this,” Dehner said.

Many cities around the country are also worried. “We are coming down to the wire on preventing a default on the national debt, which would be devastating for local governments and their residents,” the National League of Cities’ CEO and Executive Director Clarence Anthony said in a statement on Monday, urging the White House and Congress to reach a deal. “There is no time to lose,” he said.

Negotiators for the White House and House Republicans did make progress, said House Speaker Kevin McCarthy. But he stopped short of saying that they were close to an agreement as members of the House left town for their Memorial Day holiday, unsure if they will be called back over the weekend with the deadline looming.

The nation actually hit its $31.4 trillion limit for borrowing money to pay its bills on Jan. 19. Since then, the Treasury Department has been taking “extraordinary measures” to keep making payments, including covering benefits to people on Social Security and grants to states and cities. Treasury Secretary Janet Yellen, though, has said that the federal government might not be able to pay all of its bills as early as June 1 unless it can borrow more money.

Fitch Ratings said Wednesday that it expects there to be a deal before then. But the credit ratings agency said it is still considering lowering the nation’s credit score because of the “increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date.” The “‘x date’ is when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt.”

In a memo outlining what could happen if there is a default, the Treasury Department warned that it “would likely cause severe damage to the U.S. economy.”

Interest rates would skyrocket on everything from credit cards to mortgages. The government may have to delay making payments many people rely on, including Social Security. 

“Unlike the Great Recession and the COVID recession, the government is unable to help consumers and businesses,” the Treasury report said, noting that Moody’s estimated that even a short-term default would cause 2 million people to lose their jobs. People needing cash wouldn’t be able to take out loans.

Should the default last through September, things would get worse. The stock market is expected to plunge by 45%, said the report, which noted that according to a Moody's estimate, job loss would rise to 8 million people.

All this would fall on cities. “Any breach of the debt ceiling could substantially drive up the cost of short-term debt. Many municipalities use short-term debt for immediate bills including those around infrastructure and capital improvements,” the National League of Cities said in a report Monday on the potential risks of a default to local governments. “This would likely lead a municipality to have to either delay or cancel many capital projects until the issue got resolved and interest rates return to more normal levels,” the report said. 

Shepherd and Dehner said that their cities would have to delay doing some work.

Dehner worried that could mean that the contractors who are counting on those projects might have to lay people off.

In addition, he said the city had allowed St. Elizabeth Edgewater Hospital to use its bond capacity to finance the construction of a new wing. The city and the hospital are worried enough about what a default would mean for the hospital’s ability to go ahead with the project that they plan to meet to discuss what to do.

The Treasury Department hasn’t said what it would pay and what it would not pay should they run out of money next week and that is leaving states and cities in a tense limbo. 

“At this point the direct impacts are unknown. Treasury has not specifically stated what actions they would take if the debt ceiling is not raised,” said Brian Sigritz, director of State Fiscal Studies National Association of State Budget Officers.

As a result, states are closely watching the drama in Washington. “In the event that the impasse is not resolved, it’s unclear as to which federal payments would be determined as priority payments by the Treasury Department, as well as the sequence in which payments would either be paid or delayed,” HD Palmer, a spokesman for California’s finance department said. 

It was a similar story in Washington state. “We have so little clarity on what’s being considered, it’s hard to figure it out,” David Schumacher, director of Washington state’s Office of Financial Management said in an interview.

Still, the state does have enough cash on hand that “if it lasts a week or two, we’ll sort it out,” he said. “Right now we’re more worried about the impact on the economy and our citizens. We’re counting on people on Social Security and in the military getting paid.”

The impacts are different for a small city like Edgewater, though. The city puts up the cost of doing projects, like fixing streets, expecting to get the money back through already approved federal grants. But Dehmer said that not knowing when money will come could mean they will have to hold off on doing the projects until things become more clear.

The League of Cities urged local governments to prepare. “If the Federal government is not able to pay its obligations, there is no clear mechanism for who or what will be paid and when. Municipalities should have a cash reserve on hand just in case.”  

But while promised grants will eventually come, Dehmer said what would be lost from the city’s coffers for good would be occupational taxes its budget relies on if the massive layoffs expected by the Treasury Department happen. 

Cities will also lose sales taxes if the economy takes a hit, the National League of Cities report said. “Moody’s Analytics predicts that $10 trillion in household wealth could be lost,” the report said. “This would in turn hurt sales tax receipts, as city residents pull back spending and remittances to local governments shrink. This could hurt local budgets.”

Shepherd said that as he follows the news, he’s become increasingly worried about what budget cuts Democrats will agree to in order get a deal. Indeed, advocates for housing, transit and public health worry that even a deal freezing spending at current levels will mean less funding when rising costs are factored in.

“I worry about what we lose,” he said. “But I think they'll come to an agreement.”

Dehmer, though, wasn’t so sure.