What happens in Alaska if the United States defaults on its debt next month?

As early as June 1, Alaskans could be without Social Security checks, food stamp payments and even their basic paychecks unless members of Congress agree to increase the nation’s debt limit.

The consequences of the first modern US debt default are not fully known, but the details are slowly becoming apparent, and Alaska is likely to be hit particularly hard if Congress fails to act.

Few states are as dependent on the federal government as Alaska. Thirty-seven percent of the state $14.4 billion budget paid with federal dollars. About 15,500 people work federal jobs here, almost 5% of all non-farm jobs in the state. That proportion is higher than any other state in the country.

In 2019, when the federal government shut down for 35 days, Alaska was hit harder than any other state.

Our state has a large number of federal employees and many Alaskans are enrolled in Medicare, Medicaid and VA health coverage,” said Sam Erickson, Assistant US Rep. Mary Peltola, D-Alaska. “Those salaries and benefits could be at immediate risk in the event of a default, depending on how the government decides to prioritize its bills.”


What is different this time?

The United States has had government shutdowns before—for example, the 35-day partial shutdown from December 2018 to January 2019 was the longest on record—but they were prompted by Congress’s failure to appropriate money. This timeit’s about not having money to allocate.

The United States may soon be unable to borrow money due to a cap imposed by Congress called the debt ceiling. If the federal government can’t borrow money, it can’t pay back previous loans, which means it’s in default, which It hasn’t happened since the war of 1812.

The United States is a much bigger part of the global economy now, and US bonds are a key part of that global system. Analysts have said that a breach could damage, or destroy, the central position of the United States in that system. causing a worldwide recession or depression.

What is the debt ceiling?

It’s a politically dictated limit on how much money the federal government can borrow to pay for operations, including federal employee salaries, Social Security, the US military, and interest on bonds it sold previously to cover previous loans.

The modern roof has been in place since the 1930s (an earlier version was created during WWI) and right now it stands at $31.4 trillion. Officially, the federal government approved the ceiling in January, but “extraordinary measures,” to use the Treasury Department’s term, have kept the federal government running ever since.

Why is it a problem now?

These extraordinary measures are about to reach their limit.

Congress regularly (albeit grudgingly) votes to raise the ceiling, but Republicans in the US House of Representatives now demand harsh cuts in services in exchange for their votes. Because Republicans control a majority of the seats in the House, the ceiling cannot be increased without their approval.

Democrats, who control the Senate, are unwilling to accept those cuts, and President Joe Biden has been negotiating with the House Majority Leader and other key members of Congress to try to find a solution.

Under Congressional policy, there is a limit to the amount of money the federal government can borrow. The government has been above that limit, known as the debt ceiling, since January, and only “extraordinary measures,” as the Treasury Department calls them, have kept services running.

Those measures will end on June 1, a date dubbed “X-Day” by federal officials and experts who monitor the issue. The exact date is not yet known: it depends on how much tax revenue the federal government receives and how much it needs to spend.

About $98 billion in federal benefits, including Social Security, Medicare, Medicaid and pension payments, are scheduled to be paid in the first two days of June, according to an analysis released Tuesday by the Bipartisan Policy Center, a centrist think tank in Washington, DC.

If no money is available, those checks and automatic deposits will not go through. Federal employees may be required to report to work without pay.

That could have a significant impact on Alaska’s summer tourist season. The US Forest Service maintains access to the state’s most popular tourist attraction, Mendenhall Glacier in Juneau.

Wade Muehlhof, national press officer for the Forest Service, said it’s “a complicated issue and we can’t predict the consequences for the Forest Service. At this time, it would be inappropriate to speculate on the possible impacts.”

Federal fisheries, which operate with paid observers under federal contracts, could be affected: they were in 2019when the federal government shut down for 35 days amid a dispute over the national budget.

Major development projects, including Ambler Road in northwest Alaska, and oil and gas work on the North Slope, could be affected as federal workers and contracts are put on hold, affecting the permits needed to build them.

The scope of the problem is unclear because this situation is different from previous government shutdowns.

In those cases, the problem was caused by Congress’s failure to allocate money. This time, it’s because there won’t be any money to allocate: the federal government couldn’t borrow more money to spend.

That means switching to what is effectively a cash and carry system. The federal government could only spend what it has available. That means an instant cut of up to a quarter of the federal budget, at least temporarily.

“It’s hard to say what the full impact would be on the states, since a default related to not raising the debt limit would be unprecedented,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officials in Washington, DC.

“State governments have dealt with disruptions from a federal government shutdown in the past, but this type of situation would be more unpredictable. During a shutdown, the effects on federal funds for states vary by grant program depending on whether the program’s spending authority is mandatory or discretionary, the timing of program allocations, and other variables in the federal budget process. “, said.

The state treasury department is evaluating the situation, said Aimee Bushnell, special assistant to Department of Revenue Commissioner Adam Crum. The focus has been on the immediate effects, even within the next few months, and “it has been determined that the state of Alaska has sufficient cash on hand to fund state government functions in the near term, in the event of a federal default.” “, she said. .

The most dire results could be the ripple effects of a national default. US bonds, sold to finance the national debt, are the cornerstone of the world economy, and if they fail, a run on the market can ensue.

in October 2015a Treasury Department official told Congress that “failing to increase the debt limit would have catastrophic economic consequences.”

This month in Maryland, State Comptroller Brooke Lierman warned this month that “even a short-term breach of the debt ceiling could trigger a recession, while a long-term default would imply a Great Recession-like scenario, with unemployment rates potentially doubling and long-term damage to our economy.”

Moody’s analysis My dear that in Alaska, the state unemployment rate, which is currently 3.9%, could hit 7% if the default is prolonged.

At Alaska Permanent Fund Corp., managers are watching the situation closely, said Paulyn Swanson, the corporation’s director of communications.

An annual transfer from the Permanent Fund represents more than half of the general purpose revenue used to pay for state services. Problems in the financial markets could affect the corporation’s ability to pay for services beyond 2024.

“The impacts of not extending the debt ceiling are likely to be significant in most financial markets (and consequently the APFC portfolio),” Swanson said by email.

“The worst case scenario for APFC assets is a massive fiscal tightening (less government spending that pushes the economy close to or into recession),” said Marcus Frampton, chief investment officer at Permanent Fund Corp., per email. “If there is literally no debt deal, the federal government will be forced to run a balanced budget right away; this would almost certainly push into recession. If significant budget concessions/cuts are extracted, it will have a similar but smaller effect. Given these risks, we are positioned conservatively (underweight stocks) and managing liquidity in the form of cash and gold.”

As of Wednesday afternoon, negotiations to resolve the impending crisis were underway in Washington, D.C.

If all goes well and Congress reaches a deal before X-Day, the immediate problem would be resolved, but analysts at Fitch Ratings warned last month that the reprieve will be temporary.

Nothing short of a change in US policy would prevent the same kind of confrontation from happening again.