Although a few states have taken some important steps towards reining in their financial obligations, in most of the country it continues to be business as usual, with shortfalls being met through a combination of one-time measures, borrowing, and clever accounting.

The point at which this inaction becomes unsustainable is rapidly approaching, however, and those governors and lawmakers who need a wake-up call might well use the deadline for raising the Federal debt ceiling as their alarm.

Although main stream and social media have focused on the back-and-forth of the budget negotiations in Washington, it is at the state level that the impact of the eventual agreement will be particularly felt.

Whatever decision is made about how much the federal government can ultimately borrow for its operational needs translates directly into how much money the state governments will have to spend. And given the state of things, whatever the outcome in Washington, there will be a need for serious financial restructure throughout the country.

A few observations, which may be obvious to many, should be made at the outset:

The first is that the federal government is not going to default, and neither, in all likelihood, will any of the states.

The second is that borrowing is a natural activity of the federal government. Rather than representing a failure of planning, it is the standard way that the government gets the cash to pay for its operations.

Finally, when the most recent debt ceiling was enacted ten years ago it was never meant to be taken as sacred. The purpose of the ceiling was to impose a certain amount of fiscal discipline, not to enshrine a specific dollar amount. Changing that amount in line with changes in both the needs of the government, and its ability to repay, is entirely reasonable.

Given all that, we can expect that there will be a decision to raise the debt ceiling as part of a broader program of budget tightening. As of this writing it now appears that the program will not include revenue enhancement, putting even greater pressure to reduce spending reductions. The recent bipartisan vote to end tax subsidies to the ethanol industry is a signal that many formerly “sacred cows” to Republicans and Democrats alike will be subject to review, and no aspect of the discretionary budget will be off limits.

This increased discipline around the federal budget will be paid for primarily at state level.

It will reduce or eliminate programs that provide goods or services that directly benefit citizens and municipalities, and those affected may turn to their state government to make up the loss.

Further, we can expect cuts in programs that give money directly to the states. Medicaid, for example, receives only 40% of its funding from the federal government. A reduction in the federal contribution would have to be met either with a reduction of services or an increase in state spending. And while the unemployment level remains high, the Build America Bonds program has concluded and there is little likelihood of more stimulus funds flowing from Washington.

In sum, there will be increased demand for state- and local-level spending, and less federal money to help pay for it.

To make up for even some of the lost revenue, many states will look to increase their own debt level, turning to the bond market. Here, though, they will encounter the second jaw of the vise. As both federal and state governments look to borrow more money, the competition for bond buyers will increase. This competitive pressure will force up the interest on the loans.

At the very time when states are looking to borrow their way out of a financial squeeze, the cost of borrowing will increase, beginning a vicious cycle that will only end with a concerted effort by states and municipalities to put their houses in order.

Already we have begun to see some states take important steps in restructuring their obligations. In New York, Governor Andrew Cuomo recently negotiated an unprecedented deal with the state’s largest public employee union to control wage and benefit costs, and in New Jersey, which has among the most underfunded pension funds in the country, Governor Chris Christie worked with the legislature to substantially roll back benefits for workers and retirees.

But as the recent shut-down in Minnesota illustrates, the difficult decisions concerning revenue and expenses are by and large being avoided, with the urgency of the fiscal pressures hidden by increased debt and accounting tricks. Those decisions will have to be made at some point: at some point, the cost of borrowing will simply become too great to sustain. The earlier the process begins, the sooner all the stakeholders are brought to the table for negotiations, the better the chance for those decisions to be made wisely and the pain to be minimized.

The negotiations around how to reduce the nation’s debt will continue to dominate Washington, and that is where all the attention is. But governors and state legislators would be well advised to turn their eyes from D.C., and begin the hard work of restructuring at home.

Deryck Palmer is Partner and Co-Chairman of the Financial Restructuring Department Cadwalader, Wickersham & Taft, LLP. He can be reached at deryck.palmer@cwt.com