Loss of federal money could affect education, transportation and health-care costs
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President Obama in this July 22 file photo. Federal debt talks continue in Washington as the Aug. 2 debt ceiling deadline looms.TRENTON — No matter what the outcome of Washington’s negotiations on raising the debt ceiling is, one thing is certain: New Jerseyans, as most Americans, will suffer.
State officials and economic analysts said that of the two possible scenarios — neither is good.
The tense and bitter discussions are virtually certain to result in a U.S. government default or a compromise that slashes at least $1 trillion in federal spending — and both would have dire consequences for New Jersey at a time when it is trying to cope with Gov. Chris Christie’s steep budget cuts, a 9.5 percent unemployment rate and a sluggish recovery from the deep recession.
"This is unprecedented territory — there is no playbook," said State Treasurer Andrew Sidamon-Eristoff. "Most of us continue to believe that a deal will get done, but we must prepare prudently."
Christie, when asked at a news conference yesterday about the possible consequences to the state, declined to speculate. "We’re all just guessing," he said. "I don’t want to add to the hysteria."
If Congress doesn’t raise the debt ceiling by the deadline next Tuesday, the federal government won’t be able to make good on its debts. In that case, experts said, the damage would come swiftly through a series of cascading side effects.
In legal terms, the debt ceiling is the amount of money the United States is allowed to borrow. The limit has been raised more than 100 times in the last decades, usually without the partisan rancor now dominating Washington. The main reason Congress needs to raise the ceiling is so that it can borrow money to pay for the expenses it already approved in its budget this year.
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U.S. Speaker of the House John Boehner in this July 22 file photo. Debt talks continue as the Aug. 2 deadline looms. But New Jersey officials and analysts say no matter what the outcome, Garden State residents will suffer.Most economists agree the stock market would falter, home values would decline, retirement savings would take a hit, pension funds could see their investments dwindle, and the cost of borrowing would surge for people applying for mortgages or credit cards as well as governments seeking to finance transportation projects or school construction.
"These are job-creation projects," said Kil Huh, research director at the Pew Center on the States. "If states can’t access the credit markets, or they’re paying more to borrow, they’ll postpone these projects and essentially postpone the kind of activities that might help the economic recovery."
The other, less severe possibility is that Congress will raise the debt ceiling in combination with steep budget cuts at the federal level. Republicans and Democrats have competing proposals, but both would chop close to $1 trillion from domestic spending over 10 years. That could force New Jersey to revisit the approximately $30 billion budget that was passed last month, Huh said.
"They were counting on the federal money, which accounts generally speaking for about a third of states’ revenues," he said. "If that money doesn’t appear it will mean going back to the drawing board and figuring out what to do. But nobody really knows what those cuts might look like yet."
Sidamon-Eristoff said the state, which is expecting about $12 billion in federal revenue this year, is in a good position to absorb that shock, however. New Jersey does not rely on federal funds as much as other states, he said, and his staff has been reaching out to all the state agencies to figure out a contingency plan.
Still, many of the cutbacks being proposed by both sides would target education, transportation and health-care costs. The state, for example, might be forced to pay even more for Medicaid — already its biggest expense.
The New Jersey Hospital Association warned that the federal spending cuts being discussed could force hospitals to lay off staff, drastically cut services or simply close.
"We can't continue to chip away at at the very foundation of our health-care system by continually cutting Medicare and Medicaid," said Betsy Ryan, president of the hospital association. "The impact will be felt ... by anyone who counts on access to quality health care in their community."
Social Security payments could also shrink, putting a strain on the 1.5 million elderly residents in New Jersey who rely on that money.
Brian McGuire, spokesman for AARP-NJ, said Social Security is the primary source of income for more than half of the recipients, and about one-fifth of them count on the checks for 90 percent of their income.
The AARP is in favor of revising Social Security and Medicare laws, McGuire said, but not during a politically charged showdown.
"We understand the political situation," he said. "We don’t think those programs ought to be singled out."
Christie’s budget for the year includes a $640 million surplus, but he has already set aside most of that money for debt service, emergency aid to troubled cities, property tax relief and health benefits payments, leaving the state with a cushion of only $225 million.
Huh, of the Pew Center on the States, said it is likely that 7,000 cities — including some in New Jersey — could also have their credit ratings downgraded, further complicating their ability to borrow money.
Jarrett Renshaw and Ginger Gibson contributed to this report from the Statehouse Bureau.