First impact of U.S. default would be on state’s health care authority, federal employees

Government officials in Oklahoma are preparing for the possibility the United States government will default on bonded indebtedness within the next few weeks. They still hope for an agreement to keep federal operations in place and funds flowing, but were responsive to questions about the impact a default could have here.

Ron Jenkins, public information officer at the Office of State Finance, said Wednesday (July 20), “decisions in Washington will determine immediate and long-range impact on Oklahoma programs that depend on federal funding.”

In response to questions from CapitolBeatOK, Jenkins’ boss, Finance Director Preston Doerflinger, said:

“At this point we just don’t know the immediate impact this would have on our programs in terms of which funds would be curtailed first or the duration of the cuts. We do know that a prolonged holdup or reduction in federal funding could hurt a wide array of state programs. After all, the state got almost $8.7 billion in federal funds across all agencies and programs during fiscal year 2010.”

The $8.7 billion in federal funds includes spending for Higher Education and public schools, state finance officials said. The data is drawn from the Fiscal Year 2010 Comprehensive Annual Financial Report (CAFR).

Doerflinger continued, “We’ve heard dire warnings from Washington about possible cuts affecting some of our most vulnerable citizens. Oklahoma Health Care Authority officials are concerned about paying health care providers as regularly as they do now, and that would have a chilling effect to access to medical care for some Oklahomans.”

Doerflinger concluded, “One of my main concerns is the impact such a national calamity would have on the country’s economy, including the effect on the stock market and interest rates. It would be a shame if another financial crisis and recession put a damper on our ongoing strong recovery from the effects of the recent deep national recession.“

The financial supervisor on Doerflinger’s staff says the state’s credit or bond ratings would not be directly affected.

However, if a protracted shutdown or cash collapse occurred at the federal level, borrowing rates could explode.

Jenkins summarized the picture presented by his colleagues, saying such scenarios “would raise market interest rates, which would increase the rate of any variable rate debt Oklahoma has outstanding. Our debt is not secured by federal funds, but many services are funded through federal money.”

In the end, the view of state finance analysts is that “the greatest risk would be a sharp, dramatic rise in interest rates since this could cause a significant breakdown in other economic cycles -- the price of food, costs to borrow and buy a house, a car, and so forth.”

The Oklahoma Health Care Authority receives some $57.5 million every month for SoonerCare and other programs. Providers are paid weekly.

In comments Doerflinger provided today, Nico Gomez, communications director at the authority, said that if federal funds do not come on a monthly basis, “We would not be able to pay providers weekly as we do now.” That “would put access to health care services in jeopardy.”

State Finance officials, anticipating the effect of a federal default, expressed concern about negative effects on military families. Military publications are warning the affect on the pay of active duty service members is unpredictable. Civilians working at Tinker Air Force Base and other military facilities in the state could also be among the earliest effected.

Treasurer Ken Miller commented this week on the default/debt conundrum in his monthly commentary. He wrote:

“While recent reports show state economic prospects heating up, no recovery is guaranteed. Oklahoma is not immune from macroeconomic conditions or bad decisions made in our nation’s capitol. Unfortunately, the current Washington stalemate threatens our economic recovery just as it’s catching fire.

“With the federal government borrowing 40-cents of every dollar spent, much focus is on the US debt crisis. In the last 10 years alone, the gross federal debt has ballooned about 150 percent from $5.8 trillion to $14.3 trillion. This is an increase from 56 percent of GDP in 2001 to more than 100 percent today. The cause is simple – it’s the spending, stupid! …

“Some of our recent deficits are attributable to prolonged war and deep recession. But much of the debt is the consequence of politicians who can’t refuse special interests that demand more government than we can afford, and it’s a bipartisan affair.

“The debt ceiling was raised seven times under the most recent Republican president and debt grew under the last four. The current Democratic president accelerated the debt by more than $1 trillion each year. Congress under both parties has spent freely.

“The consequences of continued irresponsibility would be devastating. The global economy is built on the full faith and credit of the United States. If that faith were damaged by default or austerity, Oklahoma would suffer from negative effects on the dollar, interest rates, investment, consumption and jobs. Billions of federal tax dollars returned to Oklahoma for core functions would be in doubt and $4 billion of state investment in federal securities could be at risk.”

Miller made clear his preferences on the course national leaders should take in the near future:

“The President and Congress have left the country the choice between bad and worse: going further in debt or default. Now, they must finally take action with a credible long-term deficit reduction plan that takes into account fragile aggregate demand and the peril of defaulting on U.S. debt.

“Once our national leaders avert the immediate crisis, they must commit to strict constitutional spending constraints that include a cap and balanced budget requirement. If policymakers would just return to our post-depression debt average near 60 percent of GDP, our $14 trillion economy would have to grow $10 trillion to reach the debt ceiling.”

The Reuters news service today reported that top staff at the Federal Reserve facilities in Philadelphia and Washington, D.C. have been in contingency planning for weeks, in the event an agreement on the debt limit is not reached.

Charles Plosser, president of the Philadelphia Fed, told Reuters, "We are developing processes and procedures by which the Treasury communicates to us what we are going to do." Plosser said the task was manageable. "How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good?"
 
The reported comments from Fed officials in some respects echoed those given to CapitolBeatOK by Oklahoma City’s Finance Director late yesterday.

Laura Johnson reflected that in the event the U.S. government debt ceiling is not raised, the impact on a community like Oklahoma City would depend “on what the federal government would pay.”

She gave some specifics, saying “It has been indicated to us that the airport bonds, the payments on leases for the FAA (Federal Aviation Administration), are the kind of spending that Moody's is already anticipating the federal government would not pay in the early stages of a default.”