The debt ceiling, default, and education
We're looking at a long weekend for politicians, journalists, and finance professionals as the debt ceiling fight goes into extra innings. The House leadership has delayed a vote on the Boehner plan due to dissension in the Republican rank and file, and odds for a major deal don't look great. What are the implications for education if a deal doesn't happen?
The most immediate impact will be that the wall of money flowing on a regular basis from the feds to state and local governments may stop, since bondholders will get priority if the debt ceiling is not raised. States will have to contend with a loss of Medicare and Medicaid support, typically the largest portions of state budgets along with education. It's hard to imagine this not impacting states' education spending. Even short delays may force districts that are living "check to check" with no reserves to borrow cash. Minnesota schools have already been forced to do this by the government shutdown there.
The longer-term impact, even if a deal is reached, would come from a ratings downgrade on America's debt. Districts routinely sell bonds to finance the construction or renovation of school buildings, and these bonds, like US Treasury bills, are rated by credit rating agencies. Moody's has warned that if US sovereign debt is downgraded, these so-called "muni" bonds would also be downgraded. This would cause interest rates to rise on many of these bonds, meaning districts would pay their lenders tens or hundreds of thousands of dollars more per year.
Nothing is certain at this point. A deal could come early next week, or even later today. If a meaningful deal is not reached, however, either a full default or a ratings downgrade would pull resources away from schools. No doubt state budget analysts and district financial officers are watching the drama unfold. Let's hope kids don't suffer from the rancor in Washington.
? Chris Tessone
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About the Editor
Bernard Lee Schwartz Policy Fellow
Chris Tessone was a Bernard Lee Schwartz Policy Fellow and the Director of Finance of the Thomas B. Fordham Institute. He has strong interests in governance and education finance, especially teacher compensation and school facilities finance.
June 13, 2013