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Debt fears, interest costs for states, cities

Debt concerns are across the board, weighing on individuals, companies and governments. A major problem with debt, as the recent debt ceiling debate underscored, is the massive interest payments that accompany it.

Uncle Sam is not alone. The Tax Foundation has compiled a U.S. map illustrating how much debt interest each state pays as a percentage of its direct spending.

State interest payments Tax Foundation mapClick on the image for a larger view.

City downgrades on the way? As with the federal government, debt is a major component in the credit rating of each state and its cities.

Following the U.S. credit downgrade, there were reports that Standard & Poor's also was considering downgrading "thousands" of municipalities.

Before that other shoe dropped, however, the ratings agency backed off.

Perhaps the outcry about S&P's political considerations or its $2 trillion mistake or the rehashing of some of the ratings agency's previous questionable AAAs findings played a part.

Maybe S&P just wasn't in the mood to catch more heat from other government officials.

Whatever the reason, the official line from S&P was that it wants to see what the final pieces of the debt ceiling deal will bring. Well, we all have a pretty good idea, but if S&P wants to cool its heels for a while, fine.

But if a city is at risk of losing a good credit rating, a couple of weeks or months probably won't make much or a difference. "Clearly, in order to keep the system logical and coherent," Christopher Mier, a managing director at Loop Capital Markets, told reporters, "there’s going to be a lot of downgrades."

Congressional cuts to states might not be so bad: And speaking of Congress or more specifically, the Super Congress panel in charge of putting together a $1.2 trillion deficit reduction deal before they break for Thanksgiving, states are worried about what impending spending cuts might mean to them.

One analysis says that it might not be as bad as feared.

Marcia Howard, editor of Federal Funds Information for States, says that given the inevitability of some sort of federal deficit reduction, notes that the most immediate portion of the spending cuts in the debt deal are for discretionary programs, not mandatory entitlement programs such as Medicare, Social Security and, most important to states, Medicaid.

While the debt deal limits discretionary spending over the next ten years to $917 billion, Howard told Stateline that in actual dollar terms the impact will be reduced because the baseline assumes inflation-based spending growth.

Of course, that's just the first part of the deficit reduction plan. If the Super Congress can't reach a deal, automatic cuts will be triggered. But, notes Howard, many expensive programs are exempt from the trigger cuts, including some of the largest joint state-federal programs: Medicaid, the Children's Health Insurance Program, Temporary Assistance for Needy Families (welfare) and the Supplemental Nutritional Assistance Program (food stamps).

According to Howard's analysis, roughly three-quarters of the money that the federal government currently sends to states would be excluded from the trigger's cuts.


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