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Federal Debt Ceiling

FEDERAL DEBT CEILING INCREASE OR INACTION POSSIBILITIES: POTENTIAL IMPACT ON STATES

JULY 19, 2011

 

The statutory federal debt ceiling is presently $14.29 trillion. The nation reached that ceiling in May 2011. Treasury Secretary Timothy Geithner instituted various stopgap policies that extended the drop-dead date for reaching the ceiling to Aug. 2, 2011. A variety of sources report that more than $2 trillion in additional borrowing authority is necessary for the remainder of the 112th Congress (2011-2012).

On Aug. 2, 2011, the federal government will become solely reliant on incoming revenues to pay its obligations. Revenues currently cover approximately 60 percent of obligations, ergo the raging annual federal deficit, which is on course to reach approximately $1.3 trillion for federal FY 2011.

The United States has scant experience regarding defaults on its obligations to guide answering the “what if” questions that arise out of any possibility of not increasing the current debt ceiling by Aug. 2, 2011. Instead, there is a potpourri of “coulds” that will confront the nation and its 50 states, territories and commonwealths next month. For example:

  1. The United States could pay obligations in the order in which they are received.
  2. The United States could pay obligations in the order in which they are received and could make these payments proportionate to anticipated revenue.
  3. The United States could prioritize what obligations would be paid. It could simultaneously create an “unpaid” account(s) for obligations not fully or only partially paid.

A 1985 General Accounting Office (now Government Accountability Office) report concluded that the United States is not compelled to pay obligations in the order in which they are received. The report adds that the Treasury Department can liquidate its obligations in any order that serves U.S. interests.

Where does this leave states?

  1. There appears to be no distinction between meeting obligations for mandatory or entitlement or domestic discretionary programs. States could or could not be paid or reimbursed (in whole or in part) for costs incurred through the Medicaid program, unemployment insurance benefits or clean air grants.
  2. The federal Prompt Payment Act informs states that they would be reimbursed in the future for the penalty interest earned during periods of non-payment. However, states would most likely have to tap their own revenues to maintain all or some committed spending for a wide variety of state-federal programs – or make determinations as to which programs might cease temporarily. There may be state statutory or constitutional questions such actions might generate if authorized programs cease.
  3. Unlike a federal government shutdown, the federal government and its agencies can continue to pay its obligations and incur further obligations when a debt ceiling is breached. It can continue to spend on programs up to a point where revenues will meet spending determinations. This would put states in the precarious position of relying solely on decisions made by the federal government to cover certain costs.
  4. The 1974 federal Impoundment Control Act authorizes the President to submit requests to the Congress to defer spending or rescind budget authority. For example, if the President submitted requests to rescind all budget authority granted state-federal education programs and the Congress accepted these requests, federal funds for education programs would temporarily dry up.
  5. Because of their unique nature regarding investment and redemption of holdings, trust funds, such as the highway trust fund, would lose interest that is likely anticipated. That could, depending upon targeted spending, reduce federal funds available for a given state-federal program.
  6. Moody's has placed five of 15 Aaa states, including Maryland, New Mexico, South Carolina, Tennessee and Virginia, on review for possible downgrade due to U.S. sovereign risk vulnerability.

If the Congress and Administration are unable to resolve their differences regarding an increase in the debt ceiling and deficit reduction strategies as of August 2, 2011, then the following obligation shortfalls could occur next month:

On August 3, 2011:

  • cash on hand to pay obligations - $12 billion
  • obligations due, 2/3rds of which are Social Security - $32 billion
  • about 38% of obligations due on that date could be paid; there are no specific rules or statutes governing order of payments or proportionate payments

Month of August, 2011:

  •  anticipated revenues - $172 billion
  • obligations due - $306 billion
  • about 56% of obligations due could be paid; there are no specific rules or statutes governing order of payments or proportionate payments.

This report is derived from a variety of publications produced by the Congressional Budget Office, House and Senate Appropriations Committee, House and Senate Budget Committees, Government Accountability Office, Congressional Research Service, the Office of Management and Budget and the Committee for a Responsible Federal Budget.

 

Michael Bird
Senior Federal Affairs Counsel
202-624-8686
Michael.Bird@ncsl.org

Jeff Hurley
Policy Specialist
202-624-7753
Jeff.Hurley@ncsl.org

 

 

 

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