October 3, 2013 6:51 pm

US shutdown: all for one and one for all

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Shutdown is not good for US states, but failure to raise debt ceiling would be worse

Sometimes the same thing holds true for the sum as for the parts. The general consensus on the US government shutdown is that, while it certainly is not good for the country, a failure to raise the debt ceiling later in October would be far worse. Ditto for the 50 states.

Well Fed

Well Fed
Yields (%); US federal funds, as a % of state total government funds

From California to Maine, states rely on federal funds for programmes ranging from education and housing to healthcare and transport. At $535bn in fiscal 2012, federal revenues accounted for more than a third of the $1.45tn in overall state revenues, according to Moody’s. The largest number of states – 24 – got between 31 and 40 per cent of their funds from the Feds; these include California, New York, Pennsylvania and Texas. Alaska and Wyoming were the most self-reliant at 19 and 18 per cent, respectively. Louisiana received the most from Uncle Sam: 52 per cent.

A shutdown affects discretionary spending to states, but most federal transfers are mandatory spending. The latter can proceed during a shutdown, although some programmes require appropriation, and that depends on the availability of funds. Medicaid, the health plan for the poor, for example, is funded three months in advance to create a cushion. If the government is risking default, however, and must prioritise payments, mandatory programmes are more at risk.

States are left to decide whether they should (or can) front the government in the hope of reimbursements. That depends on how much cash they have on hand. Finances have improved since the recession, but money is still tight. States also could pass on cuts to localities and healthcare providers.

Investors are taking the shutdown in their stride – they seem confident that it will not last long enough to hurt economic growth. But if it does, municipal bond prices may rise: they mostly take their cue from US Treasuries, which rally in times of fear. Yields on top-rated 10-year general obligation munis are flat at around 2.5 per cent this week. A US default, on the other hand, would bring havoc.

Email the Lex team in confidence at lex@ft.com

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