Borrowing difficulty could trickle down to municipal governments

 

By Darwyyn Deyo | PA Independent

 

HARRISBURG — Pennsylvania’s credit rating is on a slippery slope, as the future of the federal debt ceiling hangs in the balance.

 

For weeks, Congress and President Barack Obama have been debating whether to increase the national debt ceiling by the Aug. 2 deadline. Without a higher debt ceiling, the federal government cannot pay its bills.

 

As the deadline approaches, the credit rating agency Moody’s is evaluating the federal government’s debt, which is rated at AAA+, the highest rating possible. Pennsylvania's current credit rating, according to Moody's, is Aa1, meaning the debt is high quality but susceptible to long-term risks.

 

If the federal debt is downgraded, placing it at a higher risk of default, interest rates would increase for federal borrowing.

Dennis Buterbaugh, spokesman for the Pennsylvania Department of Transportation, or PennDOT, said the department has no idea what will happen if its federal funding is eliminated or delayed. PennDOT received more than $1.6 billion from the federal government during fiscal 2010-2011, about 73 percent of the department's budget. In comparison, PennDOT received $186 million in state funding for fiscal 2011-2012. 

 

“We really don’t know. We sure hope they get it worked out,” he said.

Federal transportation funds pay for highway restoration and rebuilding, public transit and aviation.

 

The state Department of Insurance also is heavily dependent on federal funding. Based on previous funding crises, however, the Children’s Health Insurance Program, or CHIP, should not be suffer, though it is funded with $303 million in federal money.

 

“If there is a full or partial freeze on federal funding, CHIP coverage should not be affected immediately," said Melissa Fox, department spokeswoman.  "CHIP is purchased in whole calendar months, because it is managed care coverage, and state funding delays of several months have not resulted in interruptions of (Pennsylvania) CHIP coverage in the past.”

 

The Department of Insurance also handles several federal grants, including the high-risk health-insurance pool, federally funded at $41 million; the health-insurance premium rate review with $1 million in federal aid; the consumer assistance program with $1.4 million; and the health-insurance exchange planning grant of $1 million.

 

The Department of Insurance was expecting $402.8 million in federal funds, almost four times the $120.6 million in state funding for fiscal year 2011-2012.

 

But despite the departments' vulnerability, the state Budget Office does not appear worried.

Susan Hooper, spokeswoman for the state Budget Office, argued that even if Moody’s downgrades the federal debt, Pennsylvania would not necessarily face a similar fate. Hooper cited Pennsylvania’s "balanced budget" and a “relatively low level of outstanding debt,” almost 4 percent of general fund revenue.

 

“The fiscal situation in Pennsylvania is significantly different than in Washington,” said Hooper. “(Pennsylvania) just enacted a balanced budget that projects to end the fiscal year of 2011-12 with a surplus. That would be a plus for Pennsylvania in the eyes of the rating agencies."

 

Billions of dollars in pension fund obligations and state retiree medical payments are not included as part of the official state government debt, said Rick Dreyfuss, senior fellow for the Commonwealth Foundation, a nonprofit think tank based in Harrisburg.

 

The state government's general obligation debt weighs in at $1.2 billion, plus another $34.2 billion in bond debt through borrowing authorities created by the state. Pension debt for state government employees is estimated at $27 billion officially, but estimates based on general accounting standards puts it at more than $100 billion.

 

“All this debt has to get repaid at some point, which takes a lot of capital out of the private sector, and plows it all into some entitlement plans,” Dreyfuss said “Even with some assumption of reform, when you take capital out of the private sector … stock prices will be impacted."

With a pessimistic outlook on the stock market, Dreyfuss said Pennsylvania government could face higher borrowing rates and earn lower returns on the pension funds in the short term.

 

If the federal debt limit is not increased, local governments in Pennsylvania could see trickle-down effects, Hooper said.

“If a municipal issuer were attempting to issue bonds during the period in which the U.S. government was in default, it is very likely that such market access would be unavailable,” said Hooper. “It is assumed that the global financial markets and credit markets would likely freeze as they did in September 2008 following the bankruptcy of the investment bank Lehman Brothers.”

 

The state Treasury Department, however, took a much darker view, though it avoided the question of whether Pennsylvania investments would meet the 8 percent return the state government must exceed to keep from cutting services and raising taxes.

"There will be impacts to markets should the U.S. default on its debt," said Michael Smith, department spokesman. "To suggest specifics would be difficult, pure speculation, but the consensus is there would be consequences."