LANSING -- To run as a state, Michigan needs money from Washington.

But last week, there were more questions than answers on what might transpire if Congress failed to reach a deal on the nation's debt limit.

A central unknown, as of Crain's deadline for this story Friday, was how the federal government would scale back spending if there were no deal, potentially affecting payments to states.

For example, Michigan every week makes about $400 million in cash draws from the federal government for areas that include Medicaid, education and transportation. As of midday Friday, state officials didn't know how or if those draws might be affected and, if they are affected, how rapidly Michigan would need to cut its spending.

"It would depend on how much they curtail, how big the scale-back is," said Kurt Weiss, public information officer for the state budget office.

Depending on the length and amount of loss of federal funding, employees funded with federal dollars could be laid off and payments in federally supported programs like Medicaid could be affected. But on Friday, the state budget office continued to see those scenarios as unlikely and believed a resolution would be reached in Washington.

About 25 percent of Michigan's workforce, and about 44 percent of its overall budget, is supported with federal funds.

State Budget Director John Nixon said he and Treasurer Andy Dillon had been in discussions and department heads were going through all their perspective operations to see what could be affected if federal support is reduced.

He said "the immediate issue is it's kind of a cash flow problem," because in several areas, like Medicaid, the state makes expenditures and then is reimbursed by the federal government in the cash draws. "Part of it is we're looking and assessing how much liability we have out there," Nixon said.

The Michigan Department of Transportation believes it has enough cash on hand to meet its obligations for at least a month. But road builders were watching the debt ceiling debate closely.

"The concern is that you end up in a situation where a contractor has done work, has paid for product, has paid for labor, and can't get paid in a timely manner from the public agency," said Mike Nystrom, executive vice president of the Michigan Infrastructure & Transportation Association.

Besides operational areas, federal money also supports debt service on state building projects, said budget director Nixon. And "if that federal money evaporates, it makes it harder for us to service the debt," he said.

If the U.S. credit rating were to be downgraded from AAA, there's also a concern that could have a ripple effect to states and make it more expensive for Michigan to borrow money.

http://www.crainsdetroit.com/article/20110731/SUB01/307319978