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One Thing Certain in Debt Debate: More Cuts for States

Gov. Haley Barbour of Mississippi. (Photo: Gage Skidmore / Flickr)

Salt Lake City — The rancorous debate in Washington over whether to raise the federal debt ceiling is alarming many of the nation’s governors from both parties, who fear that whatever the outcome, much-needed money will almost certainly be drained from their states.

If the federal debt limit is not raised, several governors said as they gathered here on Friday for the semiannual meeting of the National Governors Association, the ensuing default will harm the economy, make it difficult for states to borrow money and delay some of the vital federal payments that states count on for everything from Medicaid to unemployment benefits.

But even if the debt ceiling is raised, as many governors expect it ultimately will be, states could still pay a high price. Both Democrats and Republicans in Washington want to pair any increase in the debt limit with deep new spending cuts — cuts that many governors fear will hurt their states as they are still recovering slowly from the Great Recession.

“If I can use a whitewater analogy here, the two rocks we need to shoot between is, on the one side, being needlessly driven into default, which will kill the jobs recovery,” said Gov. Martin O’Malley of Maryland, the chairman of the Democratic Governors Commission. “The other rock is massive public sector cuts, by whatever name, that would also kill the jobs recovery.”

Gov. Haley Barbour of Mississippi, a Republican, said that a default stemming from a failure to increase the borrowing limit would be “terrible” for states. But he said that states must also brace themselves for managing a new set of cuts even if the limit is raised. “No matter what happens, states are going to get less money from the federal government,” he said.

The uncertainty for states, coming just two weeks after most put new budgets into effect, was a new black cloud on the horizon for governors just when many thought they would have a moment’s respite. State tax collections are improving, but are still below their pre-recession levels, and this month the federal stimulus aid that has helped states balance their budgets in recent years dried up. Now states, already struggling to pay for Medicaid for the many people who lost their jobs and health care in the downturn, face the prospect of less federal money for it.

The impact of the standoff in Washington is already being felt in states.

Moody’s Investors Service warned more than a dozen states this week that their credit ratings would be re-evaluated in light of the uncertainty in Washington, which could saddle them with higher borrowing costs. Governor O’Malley learned that Maryland was one of them when he stepped off the plane here. “This happens at a time when we’re about to go out for a bond sale,” he said.

Governors from around the country — including Christine O. Gregoire of Washington, a Democrat, and Scott Walker of Wisconsin, a Republican — said that employers in their states had been reluctant to hire new workers because of the uncertainty. And Gov. Lincoln Chafee of Rhode Island, an Independent, said that the threat of dwindling federal aid gave him pause last week before he signed a bill in which his state agreed to pay for heating assistance for the poor that the federal government was expected to cut.

“My argument — and I did sign it — was that this was the first of many,” he said. “I don’t know how much Rhode Island taxpayers can do that.”

Behind the scenes, governors have been trying to avert the worst cuts by twisting the arms of their Congressional delegations and working nervously with their budget directors. Some even held a conference call with Vice President Joseph R. Biden Jr. Governors in both parties said they were most worried by talk that both President Obama and Congressional Republicans wanted to cut Medicaid payments to the states by $100 billion over the next decade.

The leaders of the governors association — its chairwoman, Governor Gregoire of Washington, and its vice chairman, Gov. Dave Heineman of Nebraska, a Republican — wrote to Mr. Obama and Congressional leaders in both parties last week urging them to reconsider, warning that such a cut would “result in reduced Medicaid expenditures, in increased state taxes or reductions in K-12 education, transportation and public safety funding.”

But deep partisan divisions remain among the governors. The Democratic Governors Association held a news conference calling for the debt ceiling to be raised, and saying that any accompanying plan to reduce the federal deficit should include tax increases as well as service cuts. And they complained that moderate Republicans were failing to speak up to avert catastrophe.

“We want this deficit solved, and we want it solved in a bipartisan way, but we don’t want it solved on the backs of states,” said Gov. Beverly Perdue of North Carolina, a Democrat. “Because at the end, it’s just another pass down to us, which results in state unemployment, state layoffs.”

Some Republican governors, though — including Rick Perry of Texas and Nikki Haley of South Carolina, neither of whom are members of the association — have said that the debt limit should not be lifted without also moving toward a constitutional amendment requiring a balanced federal budget. Such an amendment is unlikely to pass in Washington.

Other Republicans — including Mr. Barbour and Mr. Walker — said that they hoped that a default could be averted but opposed raising taxes and said that Washington should seize the moment to cut spending significantly.

The normally outspoken Gov. Chris Christie of New Jersey, a Republican, declined to take a position on the debt ceiling. “I’m not doing any press today,” he said, when asked about it here.

Some states are already weighing contingency plans. Governor Walker said that he had asked his administration this week to study what would happen if the federal government did not raise its borrowing limit, and also what to expect in the way of likely cuts if it did.

Massachusetts could face a “serious cash flow issue” if the federal debt limit is not raised and the state stops receiving the $200 million in federal reimbursements it counts on each week for programs like Medicaid and food assistance, Gov. Deval Patrick, a Democrat, wrote Friday in a letter to Congress. He wrote that “state governments are still reeling from the recession and can ill afford to bear the brunt of such a preventable crisis.”

Most governors here said that while the talk of not raising the debt ceiling was alarming and irresponsible, ultimately not raising the ceiling was unlikely. Gov. Brian Schweitzer of Montana, who wore his trademark bolo to a news conference held by the Democratic Governors Association, used a Western analogy to explain why he thought a federal default would be averted.

“Aw, hell, they’re not going to do it,” he said. “Listen: remember ‘Blazing Saddles’? Remember the scene where the sheriff holds the pistol to his own head?” Ultimately, he said, “They’ve got to come together and put together a deal.”

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