US debt default could mean Ill. cuts in services

[August 01, 2011]  SPRINGFIELD (AP) -- Darlene Edwards was a teenager during World War II when she went to work in a factory -- and started paying Social Security taxes. Now an 82-year-old retired nurse, she fears a U.S. debt default would cut off the retirement income she worked decades for and depends on.

"I can understand what a tight situation that our government has, but they cannot take away livelihood from the most vulnerable population in America," said Edwards, who wouldn't divulge her Social Security benefit but said her only other source of income is a $320-a-month pension. "One-third of our elderly population are living on their Social Security."

Edwards, speaking at a protest Friday in Springfield, was not alone in worrying about the impact of the excruciating debate in Washington over raising the limit on federal government debt.

President Barack Obama and congressional leaders announced an agreement Sunday night. The deal would slice at least $2.4 trillion from federal spending over a decade. No votes were scheduled in either house of Congress before Monday. Lawmakers were being given time to review the package.

The Treasury would not be able to pay all its bills without legislation in place by Tuesday, raising the threat of a default.

No one is certain what would happen in Illinois. But activists fear cuts in federal entitlement programs that help seniors and the disabled. Cities are worried that even basic police protection could be interrupted. The state treasurer is preparing to move state investments into fail-safe accounts, and analysts say borrowing could become more difficult and expensive.

The Obama administration needs usually routine congressional authorization to borrow more than the current $14.3 trillion debt. Congressional Republicans have held up that approval for weeks, trying to wring spending cuts out of the Democratic president.

If there's no pact by Tuesday, the U.S. could default on its debt, triggering deep cuts in spending. Those cuts could manifest as direct decreases such as the one Edwards decried, uncertainty in financial markets, which could spell trouble for the economy, and more.

Interest rates could increase, meaning consumers would be more reluctant to buy big-ticket items that need to be financed, said Jim Muschinske, revenue manager for the Illinois Commission on Government Forecasting and Accountability, the Legislature's bipartisan financial specialist.

"That usually translates into corporations getting cold feet and not hiring and even laying off," Muschinski said. "We've already experienced what some call 'a jobless recovery.'"

Democratic Gov. Pat Quinn said he is concerned about the state's nuclear reactors, which require regular federal inspections, and that military personnel are paid on time.

"This is a time for America to come together," Quinn said. "National security and our economy is at stake. We have to put politics aside and put people and the economy first."

Jobs are also on the minds of the state's mayors, three dozen of whom wrote a stern letter Friday to Obama and Illinois' congressional delegation, warning that uncertainty about government debt will stifle job creation, let alone putting into question federal programs that help pay for public transportation and even police and fire protection.

"It will cause grave damage to our cities -- we simply cannot handle another recession," read the letter, signed by Chicago Mayor Rahm Emanuel and 40 other city executives.

Pete Roberts, executive director for the Springfield Center for Independent Living, which provides services to keep people in their homes instead of nursing homes, said he understands the need to scale back federal spending, but to him, the answer is simple: higher taxes on the rich.

"There are too many wars and too many fat cats," Roberts said at a recent protest in downtown Springfield outside GOP Sen. Mark Kirk's office.

State government operations might be affected if Medicaid health care payments are cut back, Quinn said. There might be construction projects that are paid for with ongoing sales of state bonds, Muschinske said, meaning a higher interest rate. A Department of Transportation spokesman said it's unlikely ongoing projects reliant on federal funding would be affected, but he couldn't comment on bond sales.

Interest on current state debt would not be affected, although debt holders, if they want to sell or use the debt as collateral for another loan, might find it worth less than if they held it to maturity, said Stephen Schnorf, former Illinois budget director.

"It's the lack of predictability. The uncertainty is a big part. And it not only affects the cost of borrowing, but it also affects the ability to borrow," Schnorf said. "The availability of credit and the cost of credit both could be affected by a default."

But, Schnorf warns, maybe not. There's no precedent by which to judge the current situation, and much of what would occur would be based on peoples' expectations -- a bump in the fiscal road, or a cataclysmic meltdown?

State Treasurer Dan Rutherford is taking no chances. He said Friday he is prepared to move billions of dollars of the state's investment portfolio in case of default. If necessary, he would transfer up to $7 billion of the state's invested funds into insured accounts, making sure they're safe, even if the accounts don't offer interest.

That would mean sacrificing millions of dollars a month in interest, but Rutherford said safeguarding the money is more important than getting a return.

[Associated Press; By JOHN O'CONNOR]

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