Debt crisis could have outsized effect on Maryland

Bracing for the loss of a steady paycheck is becoming something of a routine for Frank Silberstein.

A statistician for the U.S. Census Bureau and a union steward for the American Federation of Government Employees, Silberstein said the pitched battle in Washington over whether to raise the nation's $14.3 trillion debt ceiling has — for the second time this year — put federal workers in Maryland on edge about whether they'll still have a job in a few weeks.

"It feels like they're coming at us with an ax," said Silberstein, of Hyattsville. He notes that federal workers were caught in the political crossfire over deficit reduction just four months ago as Congress struggled to pass a budget to avoid a government shutdown.

"People are just hoping for the best," he said.

As Washington attempts to negotiate a deal to raise the debt ceiling by Aug. 2 or risk defaulting on the nation's financial obligations, hundreds of thousands of Maryland-based federal employees, contractors and Social Security beneficiaries are watching the political brinksmanship warily.

If Congress and the White House fail to broker an agreement, they could all be affected.

And the pain would be deeper and more widespread, economists say, than was threatened during the government shutdown.

Without authority to borrow money, President Barack Obama's administration would face immediate choices on which bills to pay: Federal employee salaries or Medicare recipients, out-of-work residents who receive federal unemployment benefits or investors who expect to receive interest payments on the country's current debt, veterans or air traffic controllers.

While there are similarities to the showdown in April that threatened to shut down the federal government, economists say, a default could affect a broad swath of Americans that don't typically interact with the government at all. Interest rates could increase on mortgages and credit cards. And while the administration vowed to send Social Security checks during the shutdown, it has made no such guarantee for the debt crisis.

"Unlike the situation posed by a government shutdown, we have no previous experience to draw on where debt defaults are concerned," said Stan Soloway, president of the Professional Services Council, which represents federal contractors.

Maryland is home to 850,361 Social Security recipients, 794,039 Medicare beneficiaries and 753,100 people on Medicaid.

Between hands of a pinochle game at the Waxter Senior Center on Cathedral Street, Marian Wright said her biggest concern is whether the government would stop sending Social Security. Wright is only 59, but is on disability.

"It's the only income that we have," Wright said. "I don't think that this should be a threat to us to get the debt down. Find something else and don't use the seniors and the disabled to get the debt down."

No one knows precisely how the administration would prioritize the nation's obligations — the White House, citing optimism that a deal will be reached, has refused to say — but Maryland, with its concentration of federal employees and contractors, has more to lose than many states.

Census data show that 286,814 federal workers live in Maryland. There are 131,350 federal employees who work in the state, and local companies were responsible for about $60 billion in federal contracts in 2010.

"Maryland is more vulnerable," said Sen. Benjamin L. Cardin, who has become increasingly vocal in recent days in pushing for a bipartisan agreement to the debt limit.

"If we don't increase the debt ceiling, it would have a catastrophic effect," the Maryland Democrat said. "I'm not overstating that."

Lawmakers have been discussing the looming debt deadline since last year's midterm election. Republicans captured control of the House of Representatives in that election in part by promising to use the debt limit to reduce federal spending and cut the nation's burgeoning budget deficits.

But political leaders have failed so far to find enough spending cuts to make raising the ceiling palatable.

A bipartisan group of congressional leaders — the latest in a series of groups charged with negotiating a deal — met with Obama for five consecutive days last week. In a news conference Friday, Obama said the sides have made progress, but warned that time is running out.

The group includes Rep. Steny Hoyer of Southern Maryland, the second-highest ranking Democrat in the House.

"My hope is, is that after some reflection, after we walked through all the numbers this week and we looked at all the options, that there may be some movement, some possibility, some interest to still get something more than the bare minimum done," Obama said.

The president and some of his fellow Democrats have pushed for a $4 trillion deficit-reduction deal that would cut entitlement programs while also raising some taxes. But that deal appears to be out of reach as Republicans have resisted tax increases of any kind. Instead, GOP leaders have pushed for a smaller agreement, amounting to somewhere around $2 trillion in cuts.

A third option, proposed by Senate Republican leader Mitch McConnell of Kentucky last week, would authorize the president to raise the limit without the support of Congress — so that he would then bear sole responsibility for the nation's growing debt in next year's election.

The fallback would enable the government to avoid default, but it would also likely end any opportunity for significant deficit reduction before the 2012 vote.

"People are proceeding on multiple tracks in the hope that one of them will arrive at a solution," said Rep. Chris Van Hollen of Montgomery County, the top-ranking Democrat on the House Budget Committee and a leader in the deficit-reduction talks for months. "People are sort of continuing to look at multiple avenues to resolve the problem and have not yet zeroed in on one particular approach."

Rep. Andy Harris, a member of the freshman GOP class that has pushed for deep cuts, suggested another scenario: A short-term extension for a few months coupled with around $700 billion in cuts. That, the Baltimore County lawmaker said, would give Congress more time to draft a constitutional amendment that would require the federal government to balance its annual budget.

Harris is one of several conservative House Republicans who have demanded a balanced-budget amendment in exchange for increasing the debt limit.

Harris agreed that the consequences of not finding a compromise would be harmful for Maryland, but he has also said that the long-term effect of the nation's debt is potentially dangerous, too.

"Advancing a balanced budget amendment would be worth a two- or three-month wait," Harris said. "We should consider doing what Congress was sent here to do: Cut spending."

Obama has opposed a short-term extension of the debt ceiling and has all but ruled out a balanced-budget amendment.

The U.S. technically hit the debt limit May 16. Treasury Secretary Timothy F. Geithner has used what he calls "extraordinary measures," including holding off on payments to federal employee retiree funds, to delay the potential crisis until Aug. 2.

Members of both parties, including Van Hollen and Harris, said they are confident an agreement ultimately will be found. Congress has voted to raise the debt ceiling 10 times since 2001.

So far, Wall Street has not reacted to the uncertainty over the current vote, despite announcements last week that Moody's Investor Service and Standard & Poor's were considering downgrading the nation's gold-plated credit score.

But the markets may grow more antsy as the deadline nears. Even slight changes in interest rates could have a big impact on the cost of current debt.

Maryland is preparing to sell $718 million in bonds for school construction and to refinance earlier debt, State Treasurer Nancy K. Kopp said. Kopp said the borrowing, which is scheduled to begin Friday, 7/22 will continue as planned, but her office is keeping a close eye on interest rates as the debate in Washington unfolds.

She said the state has the option to back out of the sale, if necessary.

"We're beginning to hear a little bit of talk about what could happen" if the negotiations fall apart, Kopp said. "The market is, to some extent, an emotional as well as a rational being. You don't know what will happen if people start getting really worried."

Even absent an agreement, the United States would not necessarily default on Aug. 2 because there would be enough tax revenue to make some payments on its current debt. If it made those payments, the administration would face choices about where else to cut, a recent report by the Bipartisan Policy Center makes clear.

After Aug. 2, those choices would quickly grow more difficult.

For instance, if the administration paid the interest due on treasury securities plus Social Security, Medicare and Medicaid, defense contractors and unemployment — at a total cost of about $172.7 billion for the month of August — it would not have enough money left to cover the salaries of federal employees, including the military, or food stamps, federal courts, highway projects, or tax refunds.

Because many of those cuts would fall on government services, Maryland's economy would suffer disproportionately.

"Marylanders have as much incentive as anyone in the nation to see that a deal … can be reached," said economist Anirban Basu, chief executive officer of Sage Policy Group.

At the Bykota Senior Center in Towson, Adrienne Toland said she is prepared to make a sacrifice if it helps address the nation's larger woes.

"I'm willing to give up a little Social Security to bring the debt down," said Toland, a 77-year-old retired schoolteacher and bookkeeper from Cockeysville. "We have to stop living on other people's money. Social Security was never meant to pay for our whole lives."

If that check didn't come, Toland said, "I'd pull in my horns and live more carefully."