McNally on Debt Ceiling: ‘States Need Stability’

Press Release from Sen. Randy McNally, R-Oak Ridge; July 29, 2011:

Senate Finance Chairman McNally talks about the impact of a federal impasse on Tennessee’s finances

(NASHVILLE, TN), July 29, 2011 — State Senate Finance Chairman Randy McNally (R-Oak Ridge) said on Friday that it is crucial for the White House to work with Congress to settle their dispute over the federal debt ceiling. McNally made his comments after being briefed by financial experts this week regarding the impact of an impasse on Tennessee.

Congress and the White House have only four days to reach a deal that would prevent the country from defaulting on its debts for the first time in history. McNally said the state’s financial leaders are being consulted due to the broader financial implications to Tennessee if a federal solution is not reached.

“States need stability through development of a long-term budget plan that addresses the federal structural deficit,” said Chairman McNally. “We also need urgent action as there are many programs that would be impacted in Tennessee by an impasse. If a solution is not found, states will need to act quickly and decisively to keep services running; prioritizing help for our most vulnerable citizens whose services are dependent upon receipt of federal funds.”

McNally said state leaders are developing contingency plans in the case of a potential shut-down, depending upon what transpires at the federal level. While McNally applauds the efforts to cut spending, he hopes that Washington will not cut funding to entitlement programs and pass the costs to states without the flexibility to reduce services or enrollees.

Forty-four percent of the state’s budget is federal funding, which amounts to $14 billion of Tennessee’s $30.8 billion budget. Approximately 92 percent of federal funding is contained in only seven departments, with the majority going to TennCare at 44 percent, Human Services at 19.6 percent and Education at 14 percent. A shut-down could jeopardize state-administered federal programs that would be hard to discontinue immediately like individuals being served in Intellectual Disability group homes, children in state custody served by Department of Children Services, persons being served in state Mental Health Institutions, those being served by TennCare, and citizens receiving unemployment insurance payments.

“If the state elects to continue any of the above services, then concerns shift to the state’s ability to fund them with existing cash flow and reserves,” added McNally. “Our reserves will be critical to help us through such a crisis should it occur.”

McNally said that if a solution is not reached, there could also be a significant contraction of consumer spending leading to a decline in sales tax revenue. Tennessee was one of five states put on notice by Moody’s last week that the state’s credit ratings may be downgraded if a solution is not reached. If a long-term plan is not adopted, financial experts anticipate a subsequent federal credit downgrading will occur and trigger a downgrading in several states, including Tennessee.

“A federal shutdown would be harmful to Tennessee’s fiscal strength and make commercial paper more expensive,” McNally continued. “That could impact our cash flow. In addition, an impasse could have an effect on our Tennessee Consolidated Retirement System with the potential to lose value. The next several days of negotiations in Washington will be very important to Tennessee’s financial future.”