Wednesday, October 2, 2013

The Federal Debt Ceiling and What Reaching It Really Means

U.S. Department of the Treasury
On September 25, Treasury Secretary Jack Lew sent a letter to Congress with updated forecasts of the U.S. Treasury’s fiscal situation. According to his forecast, the Treasury will exhaust its borrowing capacity no later than October 17, at which time the Treasury Department will have exhausted its use of extraordinary measures (see below) to maintain a positive cash flow balance.

Lew requested that Congress immediately increase the debt limit in order to avoid reaching that borrowing capacity limit. On or about October 17, Lew reported, the Treasury would have only about $30 billion in cash balances on hand to meet existing federal obligations.  Government bills can total as much as $60 billion on any given day, so if the debt ceiling is not raised by the time the Treasury Department's extraordinary measures are exhausted, the government will be unable to pay its existing financial obligations (although, ironically, it would still be able to take on new obligations). This has never happened (i.e., the U.S. has never reached the point of defaulting on its financial obligations).

In the face of this upcoming deadline, this article provides an overview of and background on the debt ceiling issue.  Where applicable, respective U.S. Government Accountability Office (GAO), Congressional Research Service (CRS), and Congressional Budget Office (CBO) sources for the information provided.

The debt limit is the amount of money that the federal government is authorized to borrow to meet its existing financial obligations, such as Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments. The debt limit simply allows the government to finance existing legal obligations made in the past [Source: U.S. Treasury Department].

The U.S. Congress has always restricted the amount of federal debt that the government can incur. The Second Liberty Bond Act of 1917 included a limit on federal debt as well as limits on specific debt categories.  During the 1920s and 1930s, Congress altered those restrictions to give the U.S. Treasury more debt management flexibility, and in 1939, a general limit was placed on the size of the federal debt.  When the federal debt approaches or is at that debt limit, Congress needs to increase the limit before it can be exceeded.  

Increasing that debt limit frequently involves lengthy debate by Congress. And when such delays occur, the Treasury Department has to depart from normal cash and debt management operations to avoid exceeding the debt limit; employing what are called "extraordinary measures" [Source: GAO].  

Extraordinary Measures
When needed to maintain a positive cash flow, the Treasury can employ alternative strategies for managing its cash and borrowing in order to continue funding government activities. Treasury has a well-established toolbox of so-called "extraordinary measures" that will make continued borrowing possible for a limited time if the current debt limit is reached. Specifically, the Treasury can take the following steps:
  • Suspend the investments of the Thrift Savings Plan G Fund (otherwise rolled over [or reinvested] daily)
  • Suspend the investments of the Exchange Stabilization Fund (otherwise rolled over daily)
  • Suspend the issuance of new securities to the Civil Service Retirement and Disability Fund and Postal Service Retiree Health Benefits Fund
  • Redeem a limited amount of Civil Service Retirement and Disability Fund securities and Postal Service Retiree Health Benefits Fund securities early
  • Suspend the issuance of new State and Local Government Series (SLGS) securities and savings bonds (typically between $3 billion and $12 billion in SLGS securities and less than $1 billion in savings bonds are issued each month); and
  • Replace Treasury securities subject to the debt limit with debt issued by the Federal Financing Bank, which is not subject to the limit (up to $8 billion).
Those measures provide the Treasury with additional room to borrow by limiting the amount of debt held by the public or debt held by government accounts that would otherwise be outstanding [Source: CBO]. For example, in 2011, Treasury Secretary Geithner invoked authority to use extraordinary measures on May 16, 2011, which helped fund payments until the debt ceiling was raised on August 2, 2011. [Source: CRS].

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