Federal Debt Ceiling Standoff Threatens State Programs

July 28, 2011; Source: Stateline | If the federal government fails to avert the debt ceiling economic apocalypse, it won’t be just the federal budget that is affected. Two federal reverberations are likely to hit state budgets. One is that a sizeable piece of state funding is actually federal pass-through money. As the federal government finds itself using its cash to pay debt, some chunk of federal money won’t be reaching state capitals. For example, South Carolina has plans in the works to furlough 7,300 state workers whose paychecks depend on federal moneys. New Mexico only has enough money to pay its bills for 22 days if the federal government shuts down its cash flow. That’s a worse cash position than many nonprofits.

The other threat is the impact of having the federal government’s credit rating downgraded. Stateline reports that five states–New Mexico, Maryland, South Carolina, Tennessee, and Virginia–have been told by Moody’s that their credit ratings could be downgraded if the federal government’s sinks. If their credit ratings go down, their borrowing costs rise, and that sucks money out of state coffers.

NPQ will keep an eye on the potential impacts of the federal standoff, but nonprofits should be prepared not just for losses in federal dollars, but a big time constriction in state funding programs.—Rick Cohen