Moore administration prepares for federal shutdown as potential default looms

Amid uncertainty about whether congressional leaders and the White House will reach a deal to save the U.S. from defaulting on its debt, Gov. Wes Moore’s administration is preparing for a federal government shutdown, a senior aide to the governor said.

But, state officials would be in uncharted territory trying to cushion the blow of a calamity lasting more than a few days. Maryland has the cash reserves to weather “a couple of days” of the country being in default, the governor’s aide said.

Maryland has “perfected the playbook” for navigating government shutdowns, turning to unemployment, housing and food assistance programs to help the state’s residents, the governor’s aide said. These programs, though, can include federal funding.

The Moore administration has been encouraging hospitals, the medical community, federal employee unions, nonprofit organizations and county governments to prepare for a default as early as Thursday of next week, said the aide, who spoke on the condition of confidentiality.

RELATED: Debt ceiling talks teeter on the brink, as lawmakers leave town for weekend without a deal

Maryland had more federal jobs per capita than any other state in 2020, according to the Maryland State Archives.

In a letter to President Joe Biden, the American Federation of Government Employees urged the president to reject House Republicans’ proposed deal that includes budget cuts and take unilateral action to ensure the government continues to pay its bills.

The government would otherwise be unable to pay its workers’ salaries and federal retirees would miss out on pension payments, according to the union.

House Republicans have balked at raising the debt ceiling until the White House agrees to cut domestic discretionary spending dramatically; military and veterans spending plus programs like Social Security and Medicare would be exempted from those cuts. Republicans have said soaring deficits demand action.

In a letter to Congress, the union’s National President Everett Kelley wrote that Republicans were holding the threat of a default over the heads of federal and D.C. workers and their families, who are “now on the front lines of a new crisis, one created not by a virus, but by our broken political system.”

Roughly $60 billion in federal spending for military pay, veterans benefits and Medicare for seniors is supposed to be disbursed nationally on June 1, Moore’s senior aide said. It’s money that’s intended to go directly to people, programs, organizations, doctor’s offices and hospitals.

Social Security benefits are expected to go out June 2 and Supplemental Nutrition Assistance Program (SNAP) benefits are set for June 5, the governor’s aide said.

In Maryland alone, more than one million people on Medicare and another one million Social Security recipients would be at risk of losing their benefits, as would more than 250,000 veterans, Moore said in a speech to Senate Democrats this month. Mortgage payments in the state would increase by an average of $147 per month, he said.

The National Association of Counties has expressed concern about the proposed clawback of federal funding that counties and municipalities have relied on to recover from the financial hardships of the pandemic and used to leverage private capital to improve local infrastructure and energy efficiency.

The state is well-prepared for a short-term crisis, but it’s the potential for a protracted disruption prompting soaring interest rates that keeps the governor’s senior aide up at night. The longer the crisis prolongs, the less the state can do to assist its residents.

Moore has said he is “deeply concerned” about House Republicans’ debt plan. He wrote in a tweet that it would put health care coverage for millions at risk and cut tens of thousands of jobs from teachers and their support staff.

“A default would be catastrophic for Maryland and our country, causing a job-killing recession, hurting our veterans, seniors and small businesses,” Moore spokesman Carter Elliott said in a statement. “It is imperative that our leaders in Washington come to a bipartisan agreement to prevent a default and Governor Moore is committed to supporting these efforts in any way possible.”

U.S. Treasury Secretary Janet Yellen this week wrote in a letter to House Speaker Kevin McCarthy that it’s “highly likely” the U.S. won’t have the money to pay its bills by early June, as early as June 1, if Congress doesn’t raise or suspend the debt limit before then.

As federal lawmakers prepare to leave Washington, D.C., for the Memorial Day weekend, McCarthy said the debt ceiling standoff with Biden was “not my fault,” according to a Thursday report from The Associated Press.

Raising the debt limit has previously been routine. Since 1960, Congress has either raised, temporarily extended or revised the definition of the debt limit nearly 80 times, according to the U.S. Department of the Treasury.

The U.S. has never before defaulted on its legal obligations, according to the Treasury.

The second the government defaults, the cost of borrowing will increase for everyone involved in the financial system, and it would have “disastrous effects” for Maryland, Moore’s senior aide said.

State Comptroller Brooke Lierman said that a failure to compromise on the debt ceiling would place Maryland’s more than 150,000 federal workers and tens of thousands of federal contractors in “direct financial peril.”

“A congressional failure to reach an agreement on the debt ceiling would at the very least send negative ripples throughout Maryland’s economy – and possibly far worse,” Lierman said in a statement. “Our agency leadership understands and shares Marylanders’ apprehension about the situation, and we are closely monitoring all related developments.”

Lierman said that even a short-term breach of the debt ceiling could trigger a recession. A long-term breach would bring about a recession reminiscent of the 2008 financial crisis, potentially doubling unemployment rates.

The Office of the Comptroller and the Moore administration are preparing for “all potential scenarios,” including a government shutdown, Lierman said.

The state has also examined its own bond ratings in case it has to borrow, but Moore’s senior aide said the state wouldn’t be expected to have to enter the bond market until August or September.

Rebecca Thiess, a manager with The Pew Charitable Trusts, said that federal spending directly contributes to states’ abilities to pay for public services like health care, education and infrastructure.

Federal spending also helps sustain states’ economies and tax revenues with military contracts, federal employee wages and direct payments through programs like food stamps and social security benefits, she said.

“State and federal budgets are inseparably linked, so virtually any federal funding disruption or budget reform stemming from the impasse will affect states’ finances,” Thiess in a statement.

Christopher Carroll, an economics professor at Johns Hopkins University who researches macroeconomics and public finance and formerly worked at the Federal Reserve Board in Washington, D.C., wrote in an email that a default would prompt an economic downturn worse than the Great Depression, “quite possibly plunging the entire world into a new ‘dark ages.’”

And, he wrote, there’s nothing Moore or any state government can do to fix it.

“Fundamentally, the economy works on a bedrock of trust, and the most trustworthy asset in human history has been U.S. government debt,” Carroll wrote. “Ben Bernanke [the former chair of the Federal Reserve] became famous for diagnosing that the Great Depression a century ago was brought about mostly by a collapse of trust in the banking system. A collapse of trust in the currency (basically, the same thing as government debt), would be much more catastrophic.

“I think you will find that all economists of any political persuasion agree on this point, if on nothing else,” Carroll wrote.