Delaware's State Treasury is preparing for the worst as debt ceiling negotiations remain deadlocked and the federal government faces imminent risk of default.
US Treasury bonds make up roughly one fifth of Delaware’s $11 billion investment portfolio: the portion of the portfolio that will be most directly impacted if President Joe Biden and House Majority Leader Kevin McCarthy cannot reach an agreement to raise the federal borrowing limit before the end of May.
But State Treasurer Colleen Davis notes the ripple effects of a federal default would have broader impact on state investments.
“We expect a direct effect on that $2.3 billion in US treasuries, but we’ll also expect to see turmoil across the entire municipal market, and I would include the stock market as well," she said.
To ensure Delaware can pay its bills, Davis says her office needs to prioritize securing liquid assets. In the short term, that means protecting cash reserves.
“Making sure that our current returns are secure and we have the liquidity to cover those obligations means children will continue to receive free school lunches, means we can continue to support families who would otherwise be homeless through HUD programs," she said.
But Davis notes at some point the state may need to sell assets, which would be essential in the short term but could be costly during recovery efforts. She adds that depending on the scale of Delaware's financial losses, the state may need shift resources from some programs to preserve others — particularly when federal block grants require the state to put forward matching funds.
US Treasury Secretary Janet Yellen has warned the federal government may be unable to pay some of its bills unless lawmakers agree to lift the debt ceiling before June 5th.
