How U.S. Debt Default Would Impact California

The U.S. is just eight days away from defaulting on its debt, Treasury Secretary Janet Yellen said Monday. Unless Congress raises the $31.4 trillion debt ceiling by June 1, it is "highly likely" that the Treasury will be unable to pay its bills, triggering the first default in American history.

Debt ceiling fights have occurred before, but always with an eventual resolution. This time is different, thanks to the harsh political realities in Washington.

So, how would a default affect the Golden State?

Yellen has warned that that the country could be headed for "economic calamity" without a plan to raise the debt cieling. Default could trigger an economic recession and the loss of 8 million U.S. jobs.

If the government stops paying its bills, California could lose up to 841,000 jobs, according to a recent analysis from Moody's Analytics. That would bring the state's unemployment rate up from 4.5% to 6.2% this summer and 8.7% by next spring. Those losses would disproportionately impact cities and counties with a large number of federal workers and those that rely heavily on federal contracts. At the top of the list are regions with large military bases like San Diego.

“The local economy would be impacted primarily through any effects of late wages and salary payments on the consumption of restaurants, entertainment, purchases of electronics and other consumer goods by those households,” University of California, San Diego economist Jeffrey Clemens told CNN. “If the federal government goes into default and there’s to some extent a seizing up of economic activity everywhere, I would certainly expect people’s summer vacation plans to be impacted and places like San Diego that have an important tourism sector will be adversely affected by that.”  

A default could also increase borrowing costs for municipalities and discourage investors. The impact of that would be felt by local governments across the board.

The threat to local governments was recently outlined by Michael Gleeson, Legislative Director of Finance, Administration and Intergovernmental Relations at the National League of Cities.

“If the U.S. defaults, it would raise borrowing costs for municipalities, leaving less money to go towards cities’ projects and forcing more money to be directed to cover debt service,” Gleeson wrote

“For smaller cities, a default could have a profound effect. It would have impacts on city operations, as municipalities vie to make their debt offerings more attractive in the marketplace.” 

Local government organizations have been urging Republicans and Democrats in Congress to come up with a bipartisan solution to prevent default.

"Failure on the part of the Treasury Department to meet its federal obligations would create significant uncertainty and risk to American citizens, government services, and global financial markets. We call on Congress to increase or suspend the debt limit as soon as possible,” said a group of local government associations in March.  

House Speaker Kevin McCarthy (R-CA) said Wednesday that Republicans and Democrats are not close to making a deal. Stocks were down, as investors' pessimism about a forthcoming agreement grew. McCarthy is headed back to the White House today for negotiations. 

Stay tuned.