Possibility of federal debt default generates concern in E.V. cities - East Valley Tribune: Politics

Possibility of federal debt default generates concern in E.V. cities

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Posted: Wednesday, July 27, 2011 11:30 am | Updated: 11:59 am, Thu Jul 28, 2011.

East Valley officials expect no immediate impact on their municipalities' day-to-day operations should the federal government default on its debt next week.

However, the fact that this is mostly uncharted territory - the U.S. has defaulted twice, the last time in 1933 - is generating concern.

"It's really hard to know exactly what it would mean because we've never gone through this before," Gilbert Mayor John Lewis said. "The short answer is that we don't see anything changing right away, but over time, it's something that could cause chaos."

The Obama administration and many economists fear that if the debt ceiling - the legal limit the country can borrow to pay for expenses already incurred - is not raised from its current figure of $14.3 trillion by Tuesday, the U.S. will default and set off a global economic slowdown.

Debt-ceiling raises have been routine for decades; Congress has done so 72 times since 1962, 10 times in the last decade. However, Republicans, who control the House of Representatives, want a ceiling increase accompanied by major spending reductions; Democrats have countered with spending cuts and additional revenue via tax increases.

Washington is at an apparent impasse, but Dennis Hoffman, professor at Arizona State University's W. P. Carey School of Business, is not fearing the worst yet, because, at this point, the markets do not seem to be.

"If there's a default, checks - to defense contractors or Social Security recipients or Medicare providers - going out with cuts would be on the horizon," Hoffman said. "Would it happen immediately? I don't think so. There might be a week or two of cash flow while all this is sorted through. I hope there would be resolution from the president and Congress before (the worst) takes place."

A default's impact has sparked fears among local officials across the U.S., triggering them to plead with Congress for quick action. Mesa Mayor Scott Smith was in the national spotlight last week, appearing on several news programs while huddled with 50 mayors at a summer gathering of the U.S. Conference of Mayors in Los Angeles.

Smith said the uncertainty is dragging the economy down because consumers have money to spend but are fearful to let go of it. He contends businesses are hesitant to hire or expand, too.

A default would cause more pain by hurting the U.S. government's credit rating - and likely drive up interest rates for any local government, business or individual who borrows money, Smith said.

He and the other mayors pushed for Congress to cut a deal that avoids spooking lenders who have the power to boost interest rates.

"The impact of that, I think, is a risk that you just can't toy with. It's like deciding I'll cheat on my wife and I think she'll be OK with it but I just don't know," Smith said. "They're playing political fire with something that is not guaranteed but could possibly have a huge impact."

Chandler management services director Dennis Strachota said the most immediate impact on his city would be $1.1 million in federal-grant reimbursements - mostly Community Development Block Grants - likely delayed. However, the missing money would not severely impact Chandler because federal funds are a small part of the city's budget.

"No vital services would be affected," Strachota said. "We have a cash flow great enough that we wouldn't face a potential danger."

About 80 percent of the city's investment portfolio is in federal treasuries and agencies. Those investments are guaranteed, but Strachota said that Chandler would have to avoid selling them prematurely.

"We would probably lose something on the sale," Strachota said. "If we hold them, we won't lose, but it limits our investment options."

Tempe's main concern would be getting reimbursed $740,000 a month to provide housing to 1,047 low-income families, said Ken Jones, the city's finance and technology director. Tempe has asked the U.S. Department of Housing and Urban Development what would happen in a default but hasn't gotten a clear answer, Jones said. Tempe has enough cash on hand to cover the expense if HUD doesn't make its payments.

"We'll have to deal with it as it comes," he said.

Federal reimbursements for transportation and homeland security should continue under a default.

"We haven't heard anything from the federal government indicating they won't make good," Jones said.

Lewis said that Gilbert is using federal funds to help construct a fire station at Guadalupe and McQueen Roads that is scheduled to open within a year.

"There could be some projects that are affected," Lewis said.

Perhaps the biggest concern among local officials is economic uncertainty, which the drawn-out debt-ceiling battle has only exacerbated. If businesses are hesitant to invest and consumers less willing to spend, a municipality's revenue takes a hit.

"When there's uncertainty, usually you press the pause button," Lewis said.

Smith is a vice president of the U.S. Congress of Mayors. The group's message to Congress is that it is possible to survive after making painful cuts.

Smith said local elected officials have spoken with Arizona's congressional delegation. Most of the focus has been on congressional leadership and the White House, he said.

They've argued cities have already made the kind of painful decisions Congress is now facing. Cities have led the way on balancing budgets, Smith said, in part because many around the nation are required to balance their budgets without the kinds of gimmicks common at the state and federal level.

"We've settled into a normalcy and we've worked to get through this crisis," Smith said of his message to lawmakers. "And we're really a little bit tired that you guys at Washington and the state capitols can't get over the politics, and that the decisions or non-decisions that you make have a direct impact on our citizens.

"That's not good. It's bad."

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