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May 19, 2023

What a federal debt default could mean for Maryland: recession, unpaid workers, loss of benefits

Credit: Maryland Matters

Thousands of Marylanders could be out of a paycheck or other benefits if federal leaders fail to reach an agreement to increase the nation’s debt ceiling.

With roughly two weeks left before the so-called X Date, lawmakers from both parties are negotiating to avoid defaulting on debt payments. Economists and state leaders warn of unpleasant short-term effects that could become painful long-term if negotiations stall.

“A congressional failure to reach an agreement on the debt ceiling would at the very least send negative ripples throughout Maryland’s economy — and possibly far worse,” said Comptroller Brooke Lierman.

Comptroller Brooke Lierman (D). File photo by Bryan P. Sears

“Even a short-term breach of the debt ceiling could trigger a recession, while a long-term breach would entail a Great Recession-type scenario, with unemployment rates potentially doubling and long-term damage to our economy,” she said.

Senate Budget and Taxation Chair Guy Guzzone (D-Howard) expressed optimism that a deal will be reached before hitting the edge of the financial cliff.

“I mean, my gosh, common sense has got to prevail at some point, and I believe that it would,” said Guzzone.

“I think the whole discussion is, quite frankly, ridiculous,” he said. “I can’t believe that they can’t come to not just the conclusion of this point in time, but develop a policy and a procedure that is different than it is right now. To make this not come up on such a regular basis — it’s disruptive. It’s embarrassing for the entire country. It puts people on pins and needles when in all likelihood, they will resolve it. It’s entirely unnecessary. I think if we ran things like that in Maryland, I would be embarrassed.”

The comptroller’s office, through its Board of Revenue Estimates, is developing models trying to estimate short- and long-term effects.

Senate Budget and Taxation Chair Sen. Guy Guzzone (D-Howard). File photo by Bryan P. Sears.

“There’s so many pieces that you couldn’t even predict,” said Guzzone. “Obviously, the impact of federal government in jobs and contracts and things throughout all the Mid Atlantic and in particular Maryland is dramatic. And so, quite frankly, we would probably feel the pain of actual action and inaction and the confusion more than many other states. It would be probably substantial.”

A final agreement that avoids a default may still have an effect on the state’s finances though Maryland is sitting on a historic level of reserves including $2.5 billion in the Rainy Day Fund and another $351 million in cash in the state’s general fund.

Guzzone said a resolution could look more like 2011 when the debt ceiling debate led to a retrenchment of federal spending. Under what was called sequestration, federal spending did not return to fiscal 2012 levels until 2018.

The exact timing of a default — if it occurs at all — is tricky to nail down.

The country hit the borrowing limit in January. Since then, the government has used accounting gimmicks. Soon, even those won’t be enough.

Treasury Secretary Janet Yellen said without a deal to increase the nation’s borrowing capacity, the federal government will run out of cash sometime between June 1 and August.

The debate over raising the debt ceiling is different from Congress’ failure to pass spending authorization bills that resulted in a 35-day government shutdown between December 2018 and January 2019.

Under a shutdown scenario, most federal employees are told not to report for work as all but essential services are suspended. Employees who are required to work don’t get paid until regular government services resume.

A failure to raise the debt ceiling would not require departments to determine which services are essential. Employees would still come to work but would not be paid until an agreement is reached.

Rep. David Trone (D-6th) said a default would result in an initial 60,000 people losing their paychecks in the initial weeks of a default.

“Maryland is home to more than 150,000 federal workers and tens of thousands more federal contractors, along with many Maryland businesses that are tied directly to providing services to those workers,” said Lierman.

Maryland, with more than 6 million residents, has a disproportionate number of federal employees and contractors because of its proximity to Washington D.C.

The Maryland Association of Counties, citing 2020 estimates, said the state was fourth in federal employment. The state, however, ranks first on a per capita basis with 242 federal employees per 10,000 residents.

And it wouldn’t be just federal employees and contractors in Maryland who feel the pinch. Trone warned of a downward push on other industries.

“Most of these workers will be retail workers, food service workers,” Trone said. “Those types of jobs will be hammered hard.”

An economist with Moody’s Analytics warned Congress of ripple effects that could result in more than 7 million people without work nationally and perhaps even a recession.

This is the closest the nation has come to a default since 2011.

“A default would be catastrophic for Maryland and our country — causing a job-killing recession; hurting our veterans, seniors and small businesses; and undermining the historic progress made by the Biden Administration to invest in America, boost manufacturing and tackle the climate crisis,” said Carter Elliott, a spokesperson for Gov. Wes Moore (D).

Rep. Andy Harris (R-1st), a member of the House Appropriations Committee, did not respond to a request for comment.

In a statement in late April, Harris praised passage of a Republican debt ceiling plan that limits spending to pre-pandemic levels with 1% annual growth for 10 years.

“They’re risking the whole credibility of the United States,” said Trone, speaking of the Republican proposal. “It’s outrageous that 20 Republican Tea Party members would have that kind of power, and (House Speaker Kevin) McCarthy couldn’t explain it to them and tell them to get with the program and work with Democrats, as we should do in a bipartisan way.”

Sen. Chris Van Hollen (D) said “no Marylander would be shielded from the economic catastrophe that would follow if the House Republicans press the default detonator.”

“Failing to honor our financial obligations would cause large-scale harm by disrupting social security checks for millions of seniors, sending housing costs skyward, hitting hard earned retirement savings, and destroying up to 120,000 jobs in Maryland alone — just to name a few examples. With limited time left to avert disaster, the best course of action is for Speaker McCarthy to take the threat of default off the table so we can discuss the budget and responsible deficit reduction through the appropriate process — not by taking our entire economy hostage,” he concluded in a written statement.

Moore joined nine other Democratic governors in signing a letter opposing the Republican plan.

“While Congressional leaders have clarified that Medicare and Social Security will not face any cuts, the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, Medicaid, and discretionary spending — literal lifelines for millions of Americans nationwide — are on the chopping block,” Moore and his colleagues wrote in an April 26 letter. “As Governors, we speak with one voice: any federal funding cuts or fundamental changes to the spirit and intent of these programs will have dangerous repercussions for Americans across the nation, regardless of what political party is in power at the state level.”

The result would be increasingly draconian efforts to end spending and prioritize payments.

In 2011, President Barack Obama planned to deal with the possibility of a debt ceiling crisis by covering interest and principal payments on federal debts while foregoing payments of other bills and federal benefits.

Rep. Glenn Ivey (D-4th) warned of potential dire effects on his district, which contains most of Prince George’s County and a portion of Montgomery County.

Ivey estimates that a Republican proposal that would limit spending to fiscal 2022 levels would put health care insurance, food assistance, some preschool and child care at risk along with other essential services.

“And if Republicans don’t get their way, they’re threatening to default on our nation’s bills, unleashing economic catastrophe and putting vital government services at risk,” Ivey said in a statement.

A default “would kill” an estimated 7,700 jobs in Ivey’s district. It could also jeopardize social security payments to 66,000 people in the district affect 278,000 people in the district who rely on Medicare, Medicaid, or Veterans Affairs for health care, according to Ivey.

Local governments would also feel the pinch.

In March, the U.S. Treasury suspended the sale of bonds that county and municipal governments use to finance projects at lower costs.

The 2021 American Rescue Plan Act earmarked $65 billion for state and local recovery efforts. Almost all of that money goes to county governments.

The aid, related to recovery from the economic effects of the COVID-19 pandemic, could be clawed back, according to the National Association of Counties.

Guzzone said he and other legislative fiscal leaders are trying to focus more on “long term issues beyond what I believe is a temporary blip.”

“We’ve tried to just stay focused on what we need to do and at this point,” he said. “We just need to focus on the long-term future, which is a broader issue than just this moment in time.”