U.S. debt default could trigger control board for D.C., CFO warns
By: Freeman Klopott | Examiner Staff Writer Follow Him @FKlopott | 07/27/11 5:07 PM
If the U.S. government defaults on its debts, the District could once again find itself under the thumb of the control board, D.C. Chief Financial Officer Natwar Gandhi warned on Wednesday.
In September, city officials will head to Wall Street and ask for $900 million in short-term bonds that will supply the District with cash-on-hand it needs to meet payroll, and other bills. But if the U.S. government defaults, there's serious risk that government's across the country will see their bonds downgraded. If D.C. is among those, it may not be able to get the cash it needs to meet the $500 million in monthly bills.
"That has the specter of the return of the control board," Gandhi said Wednesday. The primary trigger for the control board's return is the city being unable to pay its bills. The board was put in place in the late 1990s when the city was unable to meet pension payments. It was dismantled when the District balanced it budget and began building a cash reserve.
But as the economy has slumped into recession, the city has dipped into those reserves. Now, only the rainy day fund is left, leaving the city with little cash-on-hand, which is why it needs the short-term bonds, Gandhi said.
If the federal government doesn't agree on a deal to raise the debt ceiling by Tuesday, it will default on its debt, causing the country's bond rating to plummet and havoc in the markets.