Could this red-white-and-blue weekend augur red ink for Virginia?
Default by the federal government, unless the debt ceiling is raised by Aug. 2, has potentially devastating effects for state government.
The flow of dollars from Washington to Virginia — No. 1 in federal spending per capita — would slow to a trickle. Federal workers wouldn't be paid, driving up unemployment and choking off income-tax revenue. Medicaid, the federally financed, state-managed health-care program for the poor that is Virginia's fastest-growing expense, would go begging.
To keep the budget in balance as required by law, Gov. Bob McDonnell would have to start cutting.
Also, transportation dollars would evaporate, potentially slamming the brakes on a defining feature of McDonnell's just-passed road-building program: debt. He is planning to issue $1 billion in bonds backed by an anticipated federal handout.
With Uncle Sam unable to borrow money, interbank lending would stall; so, too, would a segment of the economy that depends on other people's money: the still-struggling housing market. Another downturn would further imperil important sources of cash for local government, including property taxes and levies on land and building sales.
But perhaps the most embarrassing consequence for Virginia would be the most abstract: the possible loss of the highest credit rating, triple-A. It has been a badge of honor for Virginia since risk ratings were first issued for states in the late 1920s. Lower ratings mean higher costs for taxpayers who back bonds, paying principal and interest.
Virginia saved its triple-A rating in 2004 by increasing taxes but could lose it if Washington fails to increase the debt limit.
That's because, in the view of the three rating agencies, the creditworthiness of government — at all levels — is tied to that of the nation, the so-called sovereign rating. U.S. debt is triple-A. If it falls, so could Virginia's. Local governments, such as triple-A Fairfax County, wouldn't be spared.
Moody's Investor Services, one of the credit agencies, this past Thursday warned of the cascading effects of federal default. A summary of the report said, "Some (triple-A)-rated states and local governments, however, may be more vulnerable to credit pressure under the circumstances that would lead to a sovereign downgrade and, in turn, more vulnerable to rating actions."
Translated: oops.
But you don't have to take Moody's word for it. Just ask Bill Boinest, plain-talking retired head of a Main Street bond house. "The fallout is there," he said. "If the triple-A rating of the country is lost, the states and municipalities will eventually feel the effects of a downgrade."
Contact Jeff E. Schapiro at (804) 649-6814. His column appears Wednesday and Sunday. Watch his video column Thursday on Times-Dispatch.com. Follow him on Twitter.com/RTDSchapiro. Listen to his analysis 8:33 a.m. Friday on WCVE (88.9) FM.
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