By Larry Jones
May 16, 2011

Partisan disagreement, since returning from the Easter recess, has kept members of Congress mired in gridlock as they seek a solution to the nation’s $14.3 trillion debt problem. By May 16, the federal government will reach its borrowing limit, and if Congress does not increase the limit, the government will eventually have to default on its obligations. Should this happen, some believe it will cause another financial crisis at home and possibly worldwide.

While most members agree action must be taken to ensure the government has the resources it needs to meet its obligations, Republican leaders want the White House and Democratic leaders in Congress to agree to deep spending cuts and no tax increases before any action is taken on raising the debt limit. On the other hand, Democratic leaders, who are worried about how deep'spending cuts will affect our fragile economy, support a more balanced approach of spending cuts and tax increases.

While the debate continues, Treasury Secretary Tim Geithner in a recent letter to Congress announced that the Treasury Department will stop issuing special securities that help state and local governments pay for their bond debt effective May 13. The Secretary told members that this was one of a series of "extraordinary measures" that the Department is taking to avoid a federal default if the debt limit is not increased soon.

Local governments regularly invest the borrowed funds they receive from bonds into U.S. Treasury securities called State and Local Government Series Securities (SLGS). These securities allow state and local governments to earn interest from the federal government and use the yield to pay their own bondholders. According to recent data, state and local governments have invested $23 billion in SLGS this year and they have issued $62 billion in debt.

At a time when most state and local governments are facing increased demands for services and dwindling revenues, this loss will add to their financial burdens. Geithner, in his letter to Congress, warned: "It will deprive state and local governments of an important tool to manage their outstanding debt expenses."