Politics & Government

NJ League of Municipalities: Default on Federal Debt Could Have Dire Local Impact

Federal allocations for local programs could be negatively impacted, regulatory reviews could be stalled, and it could become much harder and more costly for towns to access credit — according to the NJ League of Municipalities' executive director.

As the deadline for raising the federal , some state leaders are starting to send out cautionary messages about how a default on the national debt could impact local towns in New Jersey. According to the non-partisan NJ League of Municipalities, federal funds could be curtailed, regulatory reviews halted, and credit could become more difficult to obtain and more expensive. League Executive Director William G. Dressel, Jr. sent this memorandum to municipal clerks statewide on Friday, July 29:

RE: Federal Debt Ceiling and Possible Default 

Dear Mayor:

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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.  

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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.

Very truly yours,  

William G. Dressel, Jr.

Executive Director    


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