Federal Debt Limit Dilemma: What’s At Stake for States and County Governments?

This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. A new article is added each week – read all of MACo’s Policy Deep Dives.

New analyses by the Congressional Budget Office and the US Department of the Treasury indicate the United States is rapidly approaching the date the government can no longer pay its bills, also known as the “X-date.”

Since the debt ceiling reached $31.381 trillion, the US government has not been able to issue any new debt. As a result, the government has been forced to meet its obligations in the short term by combining cash on hand with “extraordinary measures” to prevent the United States from defaulting on its obligations as Congress deliberates on increasing or suspending the debt limit.

While federal lawmakers remain at loggerheads over addressing the debt limit, the once-unthinkable scenario of the United States defaulting on its debt now feels like a genuine possibility.

Here, Conduit Street breaks down what’s at stake for states and local governments… with a particular focus on Maryland.

What Is the Federal Debt Limit?

The debt limit is the total amount of money the United States government is authorized to borrow to meet its existing legal obligations for social programs like Social Security, Medicare, and unemployment benefits and critical government functions like infrastructure and national defense.

The federal government needs to borrow money to pay its bills when its ongoing operations cannot be funded by revenues alone. When this happens, the US Treasury Department produces and sells securities like bills, notes, and bonds. These securities are the debt owed by the federal government.

According to US Treasury Secretary Janet Yelin, the United States will reach its borrowing limit as soon as June 1. Unless Congress raises or suspends the debt limit, the United States could default on its debt for the first time in the nation’s history.

What’s the Holdup In Congress?

Raising the debt limit does not authorize new spending commitments. Instead, it simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Raising the government’s spending limits has often been a routine procedure. According to the US Treasury, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.

But what was once a relatively uncontroversial process has become increasingly politicized. With a slim majority in the House of Representatives, Republicans are tying debt limit negotiations to federal spending cuts, insisting that federal spending be reduced to 2022 levels and future growth capped for the next ten years. Meanwhile, Senate Democrats and President Biden have refused to tie the debt limit negotiations to federal spending cuts, preferring to address the issues separately.

High-Stakes Showdown Has Big Implications for State and County Governments

According to an analysis from the Center on Budget and Policy Priorities, the Republican debt-ceiling-and-cuts bill would cost state and local governments $1.3 trillion in critical funding for healthcare, education, transportation, climate, and other essential services upon which residents depend. For example, under one set of assumptions, Maryland would lose $1.6 billion in fiscal 2024 and $25.5 billion over the next ten years.

Moody’s Analytics estimates the proposed cuts would cause the loss of 780,000 jobs next year alone compared to a clean debt limit increase or suspension. Moreover, states with a significant federal government presence, like Maryland, could be hit particularly hard.

The National Association of Counties is sounding the alarm over the proposed clawback of the American Rescue Plan Act’s State and Local Fiscal Recovery Funds.

“The US Department of Treasury has obligated almost 100 percent of the State and Local Fiscal Recovery Funds and the Local Assistance and Tribal Consistency Funds to counties. Allowing local governments to continue to invest in our communities in the way that is outlined in current law as intergovernmental partners is critical to our long-term vitality. Therefore, counties strongly oppose legislation undermining the careful balance of federalism these investment tools represent.”

Furthermore, there are proposals to rescind federal funds intended for local governments that want to leverage private capital for specified energy projects and improve their local infrastructure, including those already appropriated for the Greenhouse Gas Reduction Fund, assistance for the latest and zero building energy code adoption, the Climate Pollution Reduction Grant Program, and the Neighborhood Access and Equity Grant Program.

In addition, Republicans propose repealing or rolling back nearly all the clean energy tax incentives currently available to county governments under the newly established direct pay mechanism. The Inflation Reduction Act shows that this direct-pay option allows local governments, public utilities, and entities like rural electric cooperatives to pursue economically promising renewable energy projects, putting them on a level playing field with the private sector.

Eliminating these incentives would remove county governments’ ability to finance much-needed and beneficial clean energy projects, including installing solar, wind, and microgrid facilities, replacing aging county fleets, including police cars, school and transit buses, and garbage trucks, with zero- or low-emission vehicles, and installing electric vehicle charging stations.

What Happens if the United States Defaults on Its Debt?

While the United States has hit the debt limit before, it has never run out of resources and failed to meet its financial obligations.

Because the United States has never defaulted on its obligations, the scope of the negative repercussions of not satisfying all federal commitments due to the debt limit is unknown. But most economists agree that failing to increase or suspend the debt limit would likely have disastrous economic consequences in the United States and global financial markets.

According to Moody’s Analytics, a protracted default would result in a “cataclysmic” blow to the economy. “The economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline during the second half of this year and into 2024, falling 4.6 percent from peak to trough, costing the economy more than 7.8 million jobs, and pushing the unemployment rate to 8 percent. In addition, stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth.”

Furthermore, the ability of households and businesses to borrow through the private sector to offset this economic pain would also be compromised. As a result, interest rates would likely soar, including those on the financial instruments households and businesses use most — Treasury bonds, mortgages, and credit card interest rates.

In 2020, Maryland was fourth in the nation for employment within the federal government, though it ranked first for federal jobs per capita, at 242 jobs per 10,000 residents. In addition, Maryland is home to many federal contractors who rely on federal contracts to stay in business. Because a default would force the US Treasury to slash government spending, many of those jobs could be in jeopardy, resulting in disastrous consequences for Maryland’s economy.


In addition to ensuring that our country does not default on our financial obligations for the first time in history, counties urge bipartisan support for fiscal policies that strengthen the federal-state-local partnership and help us achieve our shared goals of keeping communities healthy, safe, and vibrant.

Stay tuned to Conduit Street for more information.