Texas waiting, watching national debt showdown

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by CHRIS TOMLINSON

Associated Press

Posted on July 31, 2011 at 9:09 AM

Updated Sunday, Jul 31 at 9:44 AM

AUSTIN (AP) — Texas officials are watching the showdown in Washington carefully and waiting for some hint of how it may affect the state if a deal isn't reached by Tuesday.

Obama administration officials say that without legislation in place, the federal Treasury will no longer be able to pay all its bills. The result could inflict significant damage on the economy, they add, causing interest rates to rise and financial markets to sink. But Gov. Rick Perry has questioned the severity of crisis, calling the administration's claims "a bit of a stretch."

Unlike most states, federal funds to Texas flow directly to state agencies. The largest recipient is the Health and Human Services Commission, which also said it was too early to know how to react.

"We're like everyone else, watching what's going on there in Washington, hoping that there is some development," said Geoff Wool, spokesman for the agency. "We need to get direction from the federal government as to how they would handle a situation where there is no agreement. So far we haven't gotten any clear direction on that."

Any cuts in federal funding for Medicaid, which provides health care for the poor and disabled, would likely not be immediate, Wool said, giving the agency time to make adjustments to its budget.

But the governor sees no need to start planning for a possible federal default, said Perry spokeswoman Catherine Frazier.

"It's too early to be talking about contingency plans because there is still time for Congress to take action, and the governor expects them to do their jobs and to reach an agreement, even if that agreement is short term," Frazier said Friday.

Texas ranks near the bottom in government spending per citizen, and it relies on federal money much less than many other states, making it less reliant on the federal government. That was reflected in a recent report by Moody's Investor Services, a credit rating agency.

Texas has a AAA bond rating, making it one of the safest bets for investors and giving the state the low interest rates on the bonds it issues to raise money. Moody's placed the federal government and five other states on notice that if the debt ceiling is not raised, and the government defaults, they could lose their AAA rating and pay more in interest.

Moody's excluded Texas from the list of states facing a possible downgrade in its credit rating, but nine governments within Texas, including Dallas, Bexar, Tarrant and Travis counties, could lose their AAA rating in the event of a federal default.

Higher interest rates mean higher costs to taxpayers. No one can predict how the bond market will react if the federal government defaults and credit ratings drop.

Texas is set to make a $9.7 billion short-term bond offering on Aug. 23, said R.J. DeSilva, spokesman for the state comptroller. The state sells a bond at the beginning of every fiscal year to cover the state's expenses, such as school funding, and then pays it off after it has collected a year's worth of taxes and fees by Aug. 31.

"We're certainly monitoring the markets on a daily basis in terms of interest rates and other types of activity," DeSilva said. "There's always been demand for these short term notes from Texas and we expect that demand to continue."

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