By Larry Jones
July 18, 2011

Conference of Mayors President Los Angeles Mayor Antonio R. Villaraigosa expressed his concerns in a July 13 statement about the partisan division in Washington that is stalling action on increasing the nation’s debt limit. He said, “Our government needs to do what families across America have done since this recession began'solve its financial problems and start living within its means. As a nation, it is imperative that we get our finances under control, reduce our deficit, and work to fix the country’s long-term financial problems.”

President Obama held a conference call with the top three officers of The U.S. Conference of Mayors and many other mayors from around the nation on July 11 to discuss the potential impact to the nation's metro economies if a debt ceiling agreement is not reached.

With only 15 days left before the August 2 deadline when the federal government will no longer be able to borrow the money it needs to pay all of its bills, the President and Congress remain deeply divided over how this should be done. The current limit is $14.3 trillion, which will be used up on August 2 and Administration is requesting a $2.4 trillion increase so the federal government can continue paying its bills over the next two years. Without an increase, there will undoubtedly be dire consequences since the federal government will not have enough money to meet all of its obligations on a monthly basis. If forced to set spending priorities, there is no question many critical areas may be adversely affected including spending on benefits and state and local grants.

Villaraigosa warned that a “default would have a catastrophic impact on Americans across the country. It would mean reduced Social Security and Medicare benefits, withheld military salaries, and a spike in interest rates for mortgages, car loans and credit cards. This is a recipe for disaster.”

Moody’s has also warned that it will downgrade the federal government’s credit rating if the Government defaults on its financial obligations. And in a July 14 article in Bloomberg News, Moody’s said at least 7,000 top-rated municipal bonds would have their ratings cut if the federal government’s credit rating is downgraded. According to Moody’s, there would be an automatic downgrade affecting $130 billion in municipal debt including mortgage-backed bonds secured by U.S. Treasuries or Fannie Mae or Freddie Mac. This is expected to significantly drive up borrowing costs for local governments.

At press time, Senate leaders were discussing a contingency plan offered by Senate Minority leader Mitch McConnell (KY) to allow the federal government to continue borrowing money to pay its bills until a compromise on long-term plan can be reached. Under the proposal, Congress would vote to set up a process by which the Administration would seek a debt limit increase three times over the next year and a half. With each request for an increase in borrowing authority, the Administration would be required to submit a corresponding set of budget cuts. Congress would have an opportunity to block the request for an increase in the limit by a voting for a resolution of disapproval. If such resolution is vetoed by the President, which it most likely would be, it would require a two-third majority vote in both chambers to over ride the President’s veto. While Senate Majority Leader Harry Reid and others are seriously considering McConnell’s proposal, they have not given up on reaching agreement on a long-term proposal.

However, House Speaker John Boehner (OH) and other Republican leaders in the House continue to insist that any increase in the limit must be offset by an equal amount in spending reductions. And they are insisting that no increase in taxes should be considered. They believe a tax increase will hurt small businesses and kill any chances of creating new jobs. On the other hand the President has agreed to reduce the nation’s debt by $4 trillion over the next decade, the level approved earlier this year in the House Republican budget proposal. However, he is insisting that any deal must balance spending cuts with revenue increases, at least on a three to one basis (three trillion in spending cuts and one trillion in revenue increases). So far, House Republican leaders are united in opposition to including a tax increases in the deal.

Commenting on the stalemate, Villaraigosa said, “President Obama has been very clear: all options are on the table. He is willing to make difficult choices on issues like entitlement reform and reforming and strengthening Medicare and Social Security; and he is willing to work day and night with the Republican leadership to reach a long-term deal to reduce the deficit. The clock is ticking and the Republican leadership needs to put aside partisan differences and work with the President to reach a compromise. Playing politics with the full faith and credit of the United States of America is simply not an option.”

Conference of Mayors Vice President Philadelphia Mayor Michael A. Nutter issued a statement saying, “While Congress engages in a destructive game of -chicken- – playing politics with the debt limit and our economic future – too many Americans are still struggling financially and looking for work. The only -debt limit- someone without a job cares about is their own personal debt limit that they reached a long time ago. The only ceiling they care about is the one they-re trying to keep above their family's heads.”

Conference of Mayors Second Vice President Mesa (AZ) Mayor Scott Smith issued a statement saying, “We need to get this issue resolved soon. The uncertainty in Washington is stifling investment on Main Street. Mayors want to get on with the work of fixing the economy and creating jobs, and we are willing to help however we can.”