Locals eye federal debt problems, stock market dive

Even without a window, Tom Dankert’s office in the basement of Austin's Municipal Building provides him with a clearer view of the financial situation than most people get.

His main concern about Standard & Poor’s downgrading of the U.S. debt rating is that it could trickle down.

"It has the potential to impact the state of Minnesota, the larger cities and counties," he said.

Whether governments at the local level are able to pay their debts or not, "the downgrading creates a ‘fear factor’ that they may not be able to make those payments. The state’s rating may be affected by the country’s rating."

Local governments, which depend on federal government grants for operating funds, could feel a direct effect if those grants are cut off as part of a national austerity posture, but most lenders will still see cities and counties as good risks.

Why?

Because cities and counties borrow money at the same rate as the state, not the nation, and because cities and counties borrow on a general obligation status that says "if we don’t have enough money to pay what we owe, we will raise taxes."

That makes loans to local governments more attractive to lenders. Their risk is less.

Raise taxes?

"That could still happen," he said, but he doesn’t think it will, not in Austin anyway.

"We have no plan to issue any debt that we can see. And if you don’t borrow, there’s no impact."

"I’ve been here at the city since 1996," he said. "I’ve tried to pay off any debt we’ve issued as soon as possible."

The new Justice Center is an example: "The city bought the land."

The money was paid out of the building fund without need to borrow and the Justice Center stayed in the city.

School's view

Mark Stotts, director of finance and operations for Austin Public Schools, is not quite so cool about the downgrade. The school system is planning a referendum to seek funds to build a school.

Again, like other government entities, school districts share the rating of the state. He is more worried about federal government payments for special education and the National Student Lunch Program.

"We were hoping to get more money for special education because the government has never met their commitment to fund 40 percent of the program," he said.

Investors

Greg Bird of Edward Jones on Main Street had a pile of advisories from the company headquarters for investors on his counter Monday, and, in the face of a free-falling stock market, Bird has his own experience to draw on.

"We feel that investors need to take the long look," he said. "Selling is a knee-jerk reaction."

It may also be a time, he said, "To add good quality when you can."