As soon as June 1, Alaskans may go without Social Security checks, food-stamp payments and even their basic paychecks unless members of Congress agree to raise the nation’s debt ceiling.
The consequences of America’s first modern debt default aren’t fully known, but the details are slowly becoming apparent, and Alaska is likely to be particularly hard hit if Congress fails to act.
Few states rely on the federal government as much as Alaska. Thirty-seven percent of the state’s $14.4 billion budget is paid for with federal dollars. About 15,500 people work in federal jobs here, almost 5% of all non-farm jobs in the state. That proportion is higher than any other state in the country.
In 2019, when the federal government shut down for 35 days, Alaska was affected more than any other state.
“Our state has a very high number of federal employees and many Alaskans are enrolled in Medicare, Medicaid and VA health coverage,” said Sam Erickson, an aide to U.S. Rep. Mary Peltola, D-Alaska. “Those salaries and benefits could be at immediate risk in a default, depending on how the government decides to prioritize its bills.”
DEBT CEILING 101
What’s different this time?
The United States has had government shutdowns before — for example, the 35-day partial shutdown from December 2018 through January 2019 was the longest on record — but those were driven by Congress’ failure to allocate money. This time, it’s about having no money to allocate.
The United States may soon be unable to borrow money because of a congressionally mandated limit called the debt ceiling. If the federal government can’t borrow money, it can’t pay back older loans, meaning it would be in default — something that hasn’t happened since the War of 1812.
The United States is a far bigger part of the global economy now, and American bonds are a key part of that global system. Analysts have said default could harm — or destroy — America’s central position in that system, causing a global recession or depression.
What is the debt ceiling?
It’s a politically dictated limit on how much money the federal government can borrow to pay for operations, including things like the salaries of federal employees, Social Security, the U.S. military — and the interest on bonds it sold previously to cover prior borrowing.
The modern ceiling has been in place since the 1930s (a prior version was created during World War I) and right now stands at $31.4 trillion. Officially, the federal government passed the ceiling in January, but “extraordinary measures” — to use the Treasury Department’s term — have kept the federal government running since then.
Why is it an issue now?
Those extraordinary measures are about to hit their limit.
Congress regularly (if begrudgingly) votes to raise the ceiling, but Republicans in the U.S. House are now demanding strict cuts to services in exchange for their votes. Because Republicans control a majority of seats in the House, the ceiling can’t be raised without their approval.
Democrats, who control the Senate, are unwilling to agree to those cuts, and President Joe Biden has been negotiating with the House’s majority leader and other key members of Congress to try to find a solution.
Under congressional policy, there is a limit on the amount of money the federal government can borrow. The government has been above that limit, known as the debt ceiling, since January, and only “extraordinary measures” — as the Treasury Department calls them — have kept services running.
Those measures will run out as soon as June 1, a date referred to as “X-Day” by federal officials and experts monitoring the subject. The exact date still isn’t known: It depends on how much tax revenue the federal government takes in and how much it needs to spend.
About $98 billion in federal benefits, including Social Security, Medicare, Medicaid and pension payments, are scheduled to be paid in the first two days of June, according to an analysis published Tuesday by the Bipartisan Policy Center, a centrist Washington, D.C., think tank.
If there’s no money available, those checks and automatic deposits won’t take place. Federal employees may be required to show up to work without pay.
That could have a significant impact on Alaska’s summer tourist season. Access to the state’s most popular tourist attraction — the Mendenhall Glacier in Juneau — is maintained by the U.S. Forest Service.
Wade Muehlhof, a national press officer for the Forest Service, said it’s “a complicated issue, and we are unable to predict the consequences to the Forest Service. At this time, it would be inappropriate to speculate on potential impacts.”
Federal fisheries, which operate using observers paid under federal contracts, could be affected: They were in 2019, when the federal government shut down for 35 days amid a dispute over the national budget.
Major development projects, including the Ambler Road in Northwest Alaska and oil and gas work on the North Slope, could be affected as federal workers and contracts go on hold, affecting the permitting needed to build them.
The extent of the problem isn’t clear because this situation is different from prior government shutdowns.
In those cases, the problem was caused by Congress’ failure to allocate money. This time around, it’s because there won’t be money to allocate: The federal government wouldn’t be able to borrow any more money to spend.
That means switching to what’s effectively a cash-and-carry system. The federal government would only be able to spend what it has on hand. That means an instant cut to as much as a quarter of the federal budget, at least temporarily.
“It is hard to say what the full impact would be on states since a default related to not raising the debt limit would be unprecedented,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers in Washington, D.C.
“State governments have dealt with disruptions from a federal government shutdown in the past, but this type of situation would be more unpredictable. During a shutdown, the effects on federal funding to states vary by grant program depending on whether the program’s spending authority is mandatory or discretionary, the timing of the appropriations for the program, and other variables in the federal budget process,” he said.
The state treasury department is assessing the situation, said Aimee Bushnell, a special assistant to Department of Revenue Commissioner Adam Crum. The focus has been on immediate effects, including within the next few months, and “it’s been determined that the state of Alaska has enough cash on hand to fund state government functions in the near term, should there be a federal default,” she said.
The most dire outcomes could be the ripple effects of a national default. American bonds, sold to finance the national debt, are a cornerstone of the global economy, and if they fail, a run on the market may ensue.
In October 2015, a Treasury Department official told Congress that “failing to increase the debt limit would have catastrophic economic consequences.”
In Maryland this month, state comptroller Brooke Lierman warned that “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.”
Moody’s Analytics estimated that in Alaska, the state unemployment rate, which is currently 3.9%, could reach 7% if the default is protracted.
At the Alaska Permanent Fund Corp., managers are watching the situation closely, said Paulyn Swanson, the corporation’s communications director.
An annual transfer from the Permanent Fund accounts for more than half of the general-purpose revenue used to pay for state services. Trouble in financial markets could affect the corporation’s ability to pay for services beyond 2024.
“The impacts of a failure to extend the debt ceiling are likely to be material across most financial markets (and consequently to APFC’s portfolio),” Swanson said by email.
“The worst-case scenario for APFC assets is a massive fiscal tightening (less government spending moving the economy closer to or into a recession),” said Marcus Frampton, the Permanent Fund Corp.’s chief investment officer, by email. “If there is literally no debt deal, the federal government will be forced to run a balanced budget immediately; this would almost certainly push into recession. If significant budget concessions/ cuts are extracted, it will have a similar but smaller effect. Given these risks, we are conservatively positioned (underweight stocks) and husbanding liquidity in the form of cash and gold.”
As of Wednesday afternoon, negotiations to resolve the impending crisis were underway in Washington, D.C.
If all goes well, and Congress reaches an agreement before X-Day, it would solve the immediate problem, but analysts at Fitch Ratings warned last month that the reprieve will be temporary.
Nothing, barring a change in American politics, would prevent the same kind of standoff from happening again.
Originally published by the Alaska Beacon, an independent, nonpartisan news organization that covers Alaska state government.