WASHINGTON – Economists and politicians are unclear on what will happen if Congress and the White House fails to increase the debt limit sometime during the next week and the country defaults on its financial obligations for the first time in history.
But one thing is certain: When the federal government no longer has money, Louisiana will be hurt financially, even though the state is flush with cash for the third year in row.
The state can cover its portion of debts shared with the federal government but can’t afford to float money until a deal is secured to raise the $31.4 trillion debt limit and allow the federal government to borrow enough funds to avoid default.
The federal government is paying the lion’s share for the state’s highway and bridge construction, airport and seaport improvements. About 40% of the state depends on health care mostly subsidized by the federal government. Food stamps, officially the Supplemental Nutrition Assistance Program, or SNAP, provide sustenance for more than 20% of Louisiana residents; that program is almost completely funded by the federal government.
The state also is crisscrossed with levees, pipelines, energy production facilities, and navigable waterways, the operations over which the federal government has some say-so.
State government has no contingency plan, other than to muddle through until House Republicans and the Biden administration can cut a deal that the various factions in Congress can accept over the next week.
“The answer is we don’t know,” said Louisiana Commissioner of Administration Jay Dardenne.
Much of the federal money that flows to the state comes in the form of block grants, some of which are already accounted for. In the past, Congress has included language to continue federal payments to Medicaid and to food stamps, Dardenne said. That hasn’t happened yet.
“We can pay the state portion. We don’t have the financial wherewithal to float the federal portion. It’s too significant,” Dardenne said.
State Treasurer John Schroder, who signs the checks for Louisiana, agrees the state has enough money in the bank to pay its portion of the bills.
“It could impact our liquidity, but we’ll continue to pay what we can,” Schroder said, adding that contractors and service providers are just going to have to wait.
The state is operating under a $42.7 billion spending plan for the fiscal year that ends June 30. About $11 billion comes from state taxes and royalties. Another $11 billion is self-generated fees that go into dedicated funds. The remaining $20.9 billion, or 49% of the total, comes from the federal government for use on highways, education, healthcare, social services, and disaster recovery.
Nationwide, states receive about a third of their revenues from the federal government, according to Rebecca Thiess, a manager with The Pew Charitable Trusts’ fiscal federalism project.
“State and federal budgets are inseparably linked, so virtually any federal funding disruption or budget reform stemming from the impasse will affect states’ finances,” Thiess said.
Moody’s Analytics, a subsidiary of Moody’s Investor Service that provides economic research, reports that what federal officials are calling the “X-date” is more likely to be June 8 instead of June 1, given when tax payments are due. “However, odds are increasing that lawmakers will not act before the debt limit is breached,” Moody’s reported last week.
Most state economies will be hit hard even if the default lasts a short time. Agencies backstopped by the federal government that provide home mortgages, such as Fannie Mae and Freddie Mac, would suffer changes to their ratings that would increase interest payments for homebuyers, according to Moody’s.
States that depend on federal aid or have high number of employees in hospitality industries, such as Louisiana, could get hit hard.
Louisiana could lose up to 32,000 jobs and see the unemployment rates almost double to 5.3% if the federal government doesn’t pay its bills in the short term, Moody’s reports. A longer lasting breach could cost the state up to 69,400 jobs with the unemployment rate rising to 7.5%.
Depending on how long the nation is in default, Medicaid, Social Security and unemployment insurance could be disrupted, the analytics firm said.
A disruption in health care payments could prove problematic in Louisiana, where nearly 40% of the state’s 4.6 million residents rely on federal input, said Jan Moller, director of the Louisiana Budget Project, a Baton Rouge-based think tank. The federal government pitches in about 70% of the costs for Medicaid.
“If the federal government can’t fund Medicaid, then that affects every doctor and hospital and most nursing homes in Louisiana,” Moller said. “You can’t pass the costs on to people who don’t have any money because you can’t squeeze blood from a stone. I mean, the reason you’re on Medicaid is because you can’t afford to pay for your health care.”
“They (Republicans) are putting thousands of Louisianans on edge needlessly,” said U.S. Rep. Troy Carter. The Democrat’s district, which stretches along the Mississippi River from New Orleans to Baton Rouge, has 388,000 residents relying on Medicaid, Medicare or Veterans Affairs for healthcare. The Biden administration estimates job losses at about 6,700 jobs in the 2nd Congressional district if the federal government defaults.
Carter says he’s hearing a lot of worry from his constituents.
“Frankly, this is a very selfish battle,” Carter said.
Not so, say House Republicans.
“Families in Louisiana and across the nation are tired of reckless Washington spending that has caused record high inflation, resulting in higher prices on everything from utilities and groceries to higher interest rates on home mortgages,” said House Majority Leader Steve Scalise, R-Jefferson.
Congressman Mike Johnson, R-Benton and one of the GOP House leaders, told KALB-TV in Alexandria on Thursday that he believes a deal will be cut in the middle of the week.
“We believe very strongly that we cannot continue on this spending binge that Congress has been on for the last couple of decades, frankly,” Johnson told the TV station. “And so, we have to be able to limit that if we want to save the economy.”
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