Iowa officials bracing for government default

DES MOINES, Iowa (AP) - State government in Iowa wouldn't come to a halt if Congress and the president can't agree on a plan for raising the debt limit, but it wouldn't take long for a variety of problems to crop up.

Officials said they have begun preparing for what they'll face if a deal isn't reached by Tuesday and the federal government is unable to pay all its bills. Although a default by the federal government would hurt Iowa in a variety of ways, most said the state could muddle through for a while.

"We're probably OK for about a 30-day time period," said David Roederer, director of the Iowa Department of Management. "Our first big payment is school aid, which goes out in September, so we've got a little bit of leeway."

But Roederer and others said the consequences for the state of a federal default are enormous because the state gets just over $6 billion in federal money. Roughly half of that money pays for Medicaid, a health care program for the poor and elderly.

House Speaker Kraig Paulsen, R-Hiawatha, said he worries that a default could damage the national and state economy, causing interest rates to rise, job growth to slow and the stock market to drop.

Those developments ultimately would cause Iowa's tax revenues to dry up.

"If we default on our loans that will impact the whole world," said Paulsen. "If all of a sudden the markets are dropping and people are losing money, it will affect our revenue in all sorts of different ways."

Roederer agreed, saying difficulties faced by banks could result in a number of problems.

"If in fact they default, that's going to have a big impact on banks and financial institutions," said Roederer.

Democratic legislative staffer Eric Bakker said a federal default could have an impact on the state's bond rating, a major factor in the state's ongoing operating budget. That's still speculation, though, as officials haven't sorted through the details, he said.

U.S. Sen. Tom Harkin said Iowa would likely feel the impact more than other states because it has such a large population of elderly people, who rely heavily on government programs.

"We have a lot of Social Security recipients in Iowa," said Harkin. "It could happen that those checks might not go out right away."

Paulsen said the state could be forced to step in and keep critical programs running, but he didn't want to speculate on details until faced with the reality of default.

"I think that's a very real possibility that we see where we have to go in and backfill critical programs," said Paulsen. "I'm sure Iowans would feel a significant impact."

No one, however, suggested the state has the capacity to keep giant programs such as Social Security running without federal money.

Paulsen said he remains hopeful Congress and President Barack Obama and reach a compromise because there are no good options for the state if the federal government goes into default.

"Regardless of whether they raise the debt limit or make cuts or whatever, defaulting on our loans, I think, is an unacceptable solution," said Paulsen.