Stateline Story

States Fret Over 'Game of Chicken' on Federal Debt Ceiling

Alarm bells are ringing in state capitols over the potential damage that could be done to states by the first-ever default of the federal government on its debt.

Tennessee Governor Bill Haslam, a Republican, expressed worries Monday about the "incredibly serious game of chicken that we're playing in Washington," reports The (Memphis) Commercial Appeal . Tennessee is one of five states — along with Maryland, New Mexico, South Carolina and Virginia — that Moody's Investor Service has flagged for a potential downgrade in the event of a federal default.

But Haslam warned the fallout could reach well beyond state government. "You have a country that's literally waiting to see what will happen," he said. "Until Washington shows that, A, we can live within our means and B, come to a political agreement about how to solve that, you're not going to see banks willing to loan money, you're not going to see people willing to invest their own capital and so we won't have any job growth until that happens."

Wisconsin officials, meanwhile, determined that they can continue programs that depend on federal funds for three months using state money, the Milwaukee Journal Sentinel writes. Federal funds make up 29 percent of the state's revenues, paying for a wide range of services including Medicaid, heating assistance, homeless shelters and police work.

States are already taking action to protect themselves in case of a default, notes The Wall Street Journal . California is going to banks for short-term loans to avoid volatility in the bond markets. New Mexico officials are exploring the idea of borrowing up to $500 million in revenue anticipation notes to make up a shortfall if federal money does not come through.