January 14, 2013

The Debt Limit: Different This Time

The day after Christmas, Treasury Secretary Geithner notified Congress the government would hit the debt limit on December 31, 2012. The limit was hit again due to Washington’s inability to deal honestly with its overspending problem. President Obama has added nearly $6 trillion to the national debt in less than four years. Now he wants to eliminate the debt limit entirely.

Treasury can take certain “extraordinary actions” to keep the debt limit from affecting government finances for a few weeks or months. To keep spending beyond then, the President will need to ask Congress once again to raise the nation's debt ceiling. On December 31, Secretary Geithner told Congress that he was beginning extraordinary actions to maintain Treasury’s ability to borrow. He did not request a specific debt limit increase.

The 2011 Debt Limit Increase

In 2011, Congress increased the debt limit by a total of $2.1 trillion in two separate increments:

• $900 billion in August and September 2011;
• $1.2 trillion in January 2012.

The timing of hitting the debt limit in 2011 was pushed back several times. In January 2011, Treasury estimated that the limit would be reached between March 31 and May 16. In March, the estimate was moved to between April 15 and May 31. In April, Treasury settled on a specific day: May 16. On May 16, Secretary Geithner sent a letter to Congress announcing that he was taking extraordinary actions that would push off the final date for congressional action to August 2. President Obama signed the Budget Control Act raising the debt limit into law on August 2.

2013 Drop-Dead Date Is a Moving Target

This time may be different. Secretary Geithner has estimated that the extraordinary actions available to him will create approximately $200 billion of delay in the drop-dead date. This may not be enough to delay the date as long as it was delayed in 2011, since the monthly budget deficit in February is typically very large due to early tax filers receiving their refunds. The combined deficit for January and February 2011 was $259 billion. In 2012, the combined deficit for the first two months was $272 billion.

Even if the $620 billion in additional revenue under the recent fiscal cliff legislation were evenly divided, revenue would only increase by $10 billion in January and February 2013.

The drop-dead date reported by Treasury may not take into consideration actions that the department may not want to take for policy reasons or other concerns. For example, Treasury said that extraordinary action related to the Federal Financing Bank is of little use now, although CBO says that it could provide $8 billion of headroom -- enough for two or more days of delay. The IRS could also delay tax refund processing to slow down cash outflows from the Treasury.

In addition, there are certain dates of large inflows or outflows from the Treasury. If the spending on some day is very large, a small increase in revenue or other factors may not matter enough to change the date. Some of the significant dates coming up include:

Receipts:

• Mid-January: non-withheld individual income tax payments due ($45 billion average)
• Mid-March: corporate tax payments due ($23 billion average)

Spending:

• February 1: Social Security, Medicare Advantage, Medicare Part D, military pay, and other benefits ($67 billion average)
• February 6: additional Social Security payments ($11 billion average)
• February 13: additional Social Security payments ($11 billion average)
• February 15: interest payment (greater than $30 billion average)
• February 20: additional Social Security payments ($11 billion average)
• March 1: Social Security, Medicare Advantage, Medicare Part D, military pay, and other benefits ($67 billion average)
• March 6: additional Social Security payments ($11 billion average)
• March 13: additional Social Security payments ($11 billion average)
• March 20: additional Social Security payments ($11 billion average)
• February and March: large amounts of tax refunds

Treasury Actions to Delay Hitting the Debt Limit 

While it is difficult to determine the exact drop-dead date, Treasury is authorized to take steps, including extraordinary actions, to push it back.

Routine methods to avoid hitting the debt limit

Use cash balances. Treasury maintains cash balances with the Federal Reserve. Treasury can draw on this cash to pay obligations that would otherwise be financed with new borrowing. However, it must maintain an adequate balance in the Federal Reserve account because the Fed is legally prohibited from loaning the Treasury funds in the event of an overdraft.

Cash Management (CM) bills can be issued. CM bills are the Treasury’s method of borrowing cash for very short periods – usually just a few days at a time. When close to the debt limit, Treasury can use CM bills in a two step process that favors short-term borrowing over long-term borrowing. First, Treasury either reduces the overall amount it seeks to borrow via long-term securities auctions, or it actually delays those auctions by a few days or weeks. Second, it replaces the lost borrowing with CM bills. Because this strategy involves altering regularly scheduled securities auctions and borrowing less money over a shorter time, GAO has said that it likely increases the long-term cost of borrowing money.

Extraordinary methods to avoid hitting the debt limit

Suspend issuance of SLGS securities. Established in 1972, State and Local Government Series (SLGS) securities are offered by Treasury to help state and local governments invest their bond proceeds. This Treasury action does not actually lower the debt subject to the limit. Since SLGS securities can be issued any day that a state or local government would like to purchase them, suspending their issuance temporarily halts Treasury borrowing in this particular program until after the debt limit is raised. This action is typically the first extraordinary one used when the government gets close to the debt limit. In his December 26 letter to Congress, Secretary Geithner wrote that this action will not lower the debt, but will prevent between $4 billion and $17 billion from being added to the debt each month.

Exchange FFB debt for debt subject to the limit. The Federal Financing Bank (FFB) essentially acts as the financing agency for many federal departments and agencies that incur debt or issue loan guarantees. Up to $15 billion in FFB debt is not subject to the statutory debt limit. Treasury has the authority to swap some debt subject to the limit in exchange for FFB debt. This action actually lowers overall debt subject to the limit. Treasury said in its December 26 letter to Congress that “FFB has a limited amount of obligations available to exchange.” However, CBO reports that approximately $8 billion held in the FFB that could be used to delay the debt limit being breached.

Suspend G-Fund investments. The Thrift Savings Plan, a federal employee retirement program, invests a certain portion of its employee and employer contributions in Treasury securities. Treasury can suspend this investment when close to the debt limit. This action ensures that no new debt is incurred in this program until after the debt limit is increased. After the limit is raised, Treasury is legally obligated to repay lost interest on these uninvested funds. This method could create up to $156 billion in headroom under the debt limit.

Suspend ESF investments. The Exchange Stabilization Fund (ESF) holds several types of assets, one of which is U.S. dollars. ESF often invests its excess dollars in Treasury securities. By suspending ESF investments, Treasury prevents another program from increasing the debt subject to the limit. This method could create up to $23 billion in headroom under the debt limit.

Extraordinary methods used when the debt limit has been reached

Suspension and disinvestment of CSRDF investments. The Civil Service Retirement and Disability Fund (CSRDF) is a trust fund for federal retirement that invests in Treasury securities. This option is only available to Treasury when the debt limit has been reached. Once this occurs, Treasury can notify Congress that it is declaring a “debt issuance suspension period.” This allows Treasury to take two separate actions: (1) suspend new CSRDF investments in Treasury securities; and (2) actually disinvest some Treasury securities held by the CSRDF. By law, the treatment of investments in the CSRDF must be duplicated for investments to the Postal Service Retiree Health Benefits Fund. Taking all actions available under this authority will allow approximately $29 billion of room under the debt limit. Secretary Geithner issued a debt issuance suspension period on December 31, 2012, and stated his intention to take these actions.

Other methods outside of Treasury’s authority. Congressional action is required to allow any additional borrowing if all Treasury options have been exhausted. For example, Congress once passed a measure that allowed the March 1996 Social Security benefits to be paid with borrowing that was temporarily designated as not subject to the debt limit.

We Cannot Afford the Path We’re On

America’s current fiscal path is unsustainable, with four debt limit increases in the last four years:

• February 17, 2009 (P.L. 111-5): $789 billion
• December 28, 2009 (P.L. 111-123): $290 billion
• February 12, 2010 (P.L. 111-139): $1.9 trillion
• August 2, 2011 (P.L. 112-25): $2.1 trillion in two increments

Our nation’s ballooning debt illustrates the need for strong reform of entitlements and other federal spending. The Treasury Secretary can do many things to delay hitting the debt limit, but the President must lead on the effort to control our spending.