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On Beacon Hill

State scrambles to stave off a ruinous shortfall

By Noah Bierman
Globe Staff / July 30, 2011

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Top state financial officials have spent the past several days in war-room mode, contemplating worst-case scenarios should the debt crisis in Washington prevent the federal government from giving Massachusetts more than $200 million a week in reimbursements, mostly for programs affecting the poor.

In an ominous sign of the potential trickle-down effects from the deadlock Washington, Moody’s Investors Service said it is reviewing credit ratings of 162 local governments in 31 states - including Dover, Concord, Newton, and Brookline - that could be affected if the federal credit rating is downgraded.

Moody is focused only on cities and towns with the highest credit ratings, as part of an initial analysis of how a federal default could affect the most financially robust communities across the country. A lower credit rating could raise the cost of borrowing for some of the state’s wealthiest towns.

But yesterday also brought good news for the state when Massachusetts officials learned federal officials had sent them a $100 million advance in health care reimbursement that was not expected until next month. Though state officials said the early payment was not tied to the debt crisis in Washington, they acknowledged it gives them a measure of breathing room as they consider what to do if the other $750 million due for the month does not come.

Federal money makes up a fourth of the state budget, paying for more than 500 grants, the vast majority of highway construction projects, health care subsidies for 1.25 million residents, and food stamps for 1 in 8 residents. It also provides salaries for 4,500 state employees.

Federal officials have not detailed which payments could be frozen, or partially frozen, and which ones might be covered in the event of a default. Yesterday, budget chiefs around the nation were expecting a briefing from the US Treasury, only to learn later in the day that it would not be coming by day’s end.

One report estimated that the federal government would be unable to pay 40 percent to 45 percent of its bills without a higher debt limit, according to Massachusetts’ budget chief, Jay Gonzalez. But Gonzalez cautioned that even that estimate is hard to translate into the state budget, because it is not known which of the federal government’s numerous bills would be given priority in the case of a cash shortage.

Governor Deval Patrick said on his monthly “Ask the Governor’’ radio appearance Thursday that veterans’ services and Medicaid are among those programs that could be affected.

“It’s a serious, serious threat, the scope of which I can’t tell you,’’ Patrick said.

Massachusetts is in better shape than many other states. The state budget was passed this month without a California-like crunch or a Minnesota-style shutdown. And tax collections in recent months have been far higher than expected, giving state officials some comfort that they could weather a federal crisis of one or more months, using state money to fill the federal void temporarily. But in September, when the state traditionally doles out more than $1 billion in annual state aid payments to cities and towns, the situation could grow more troublesome, said Treasurer Steven Grossman.

“September, I think, would put every state in the country . . . in a position of significant difficulty, no matter how healthy your cash position on Aug. 1,’’ Grossman said yesterday.

The exact date when the state could potentially run short of cash would depend on various factors, including what portion of its reimbursements the federal government continues to pay. The day of reckoning moves further down the road if the federal government pay half its obligations, for example, than it would if it pays none of them, he said.

Gonzalez said he has not made any decisions about what to do in the event of a federal default, but is gathering information about a number of scenarios so that Patrick would be able to make a decision quickly should the need arise.

His staff, for example, is researching whether it would need legislative authority in order to cover federal payments temporarily using state money.

“The reason we would even consider doing that is that we wouldn’t expect to actually have to pay that cost at the end of the day,’’ once the federal crisis is resolved, Gonzalez said.

Speaker Robert A. DeLeo and Senate President Therese Murray said through spokesmen that they have been in touch with state budget officials and are prepared to act if needed. Murray’s spokesman, David Falcone, said in an e-mail that using state cash on a temporary basis would probably not require a vote of the Legislature.

But “this is new territory for all of us,’’ he added.

Grossman said he and Gonzalez are trying to reassure the public that quality of life will not be harmed, while also looking down the road to make sure they are prepared for even the most unlikely outcome.

If the impasse lasts into September, past when the state can temporarily cover its obligations, it might then be able to issue short-term debt to cover bills, Grossman said.

Grossman also listed a number of “last resort’’ scenarios in the event that the credit markets freeze up, preventing the state from issuing bonds. They include using the state’s rainy day fund, now at about $700 million. Grossman said treasury officials have also contacted some banks that have long-term relationships with the state and might be willing to offer short-term loans in the unlikely event that the state cannot issue bonds. And as a final resort, Grossman said the state could begin talking to its vendors about accepting delayed payments.

“I’m giving you all of the options that we’ve talked about,’’ Grossman said. “Not because we necessarily expect’’ to use them.

The more direct threat to city and town credit ratings caused great concern in Washington, where the state’s congressional delegation sent a letter to Moody’s yesterday demanding that it allow local governments to prove their credit-worthiness and revoke the threat of downgrade.

“It is highly unwarranted for you to continue to subject these communities to the wholly unwarranted uncertainty that you have created,’’ the letter stated.

A dozen Massachusetts towns and two school districts, all with AAA ratings, are receiving the reviews from Moody’s, including: Acton, Bedford, Belmont, Brookline, Concord, Dover, Hingham, Lexington, Newton, Wayland, Wellesley, and Weston. The Concord-Carlisle Regional School District and the Lincoln-Sudbury Regional School District are also receiving reviews.

Theo Emery and Michael Levenson of the Globe staff contributed to this report. Bierman can be reached at nbierman@globe.com. Follow him on Twitter @noahbierman.