United States: Government Shutdown And Debt Ceiling: A Primer

Last Updated: September 22 2015
Article by Stephanie A. Kennan and Charlyn A. Iovino

Even before Congress returned to work this week, House and Senate Republican leadership warned their caucuses about the political consequences of shutting the government down when this fiscal year ends on September 30. In addition, this week, U.S. Treasury Secretary Jacob Lew said the government was close to exhausting all of its extraordinary means for paying its obligations unless the debt ceiling was raised. He anticipates that the debt ceiling will need to be raised sometime after October. To aid understanding of these discussions, we have prepared this explanation of the basics.

The continuing resolution (defined below) and the debt ceiling are two different concepts designed to address two different situations. A government shutdown occurs because there is no authority to obligate funds. By contrast, in a situation in which the debt limit is reached and Treasury exhausts its financing alternatives, aside from ongoing cash flow, an agency may continue to obligate funds. However, Treasury cannot borrow to meet federal outlays due to a shortage of cash.

When Congress passes appropriations bills and the President signs them, authority to obligate funds is created. This Congress has yet to send an appropriation bill to the President to sign. It is not likely that Congress will be able to pass 12 separate appropriation bills before the end of the month, which means it will have to pass a short-term funding bill to continue to keep the federal government operating. This short-term funding bill is known as a continuing resolution.

Why is a government shutdown a possibility (again) this year?

Two separate disputes have become intertwined. While the White House and many in Congress may agree that government-wide automatic spending cuts, known as sequestration, need to be replaced with actual spending policy, there is disagreement over what that policy should be. The sticking points between the White House and Congressional Republicans are over cutting military spending versus cutting domestic spending. The second issue concerns Planned Parenthood. Republicans want to cut off government spending to Planned Parenthood, in the wake of publicly released hidden camera videos discussing reimbursement for fetal tissue, even though the Senate already failed to cut such spending before it recessed in August. Planned Parenthood receives about $500 million in federal funds annually.

Other issues also can play into the funding debate. For example, Congress let the Export-Import Bank expire in June and a government funding bill could be a vehicle to debate restarting the agency. Congress also has to spend time debating the Iran Nuclear Agreement − time that might otherwise go toward working out a funding deal.

Continuing Resolution (CR)

Congress must provide legislation to authorize budget authority for most federal agencies and programs on an annual basis. This usually is achieved through the passage of appropriations bills. However, should the fiscal year begin without the annual appropriations bills enacted, Congress must resort to a stopgap spending measure known as a continuing resolution (CR) to keep federal agencies operational while longer-term legislation can be considered. A “clean CR” refers to such a stopgap measure that largely maintains current spending levels and does not contain non-budgetary policy provisions. A CR, however, can change the spending levels of the federal programs it funds.

Mandatory vs. Discretionary Funding

Some programs are considered “mandatory” spending. Unlike the national parks and the National Institutes of Health, which are “discretionary” spending, mandatory spending programs continue even if the government has to shut down. Social Security, Medicare and Medicaid are the largest individual mandatory expenditures, accounting for about 73 percent of mandatory spending. Various income security programs such as SNAP, unemployment compensation, and earned income and child tax credits account for an additional 18 percent of mandatory spending.

Medicare

In the short term, the Medicare program, because the benefits that it pays beneficiaries constitute mandatory spending, will continue largely without disruption, despite the lapse in appropriations. Additionally, other nondiscretionary activities including Health Care Fraud and Abuse Control (HCFAC) and some activities by the Center for Medicare & Medicaid Innovation (CMMI) are likely to continue. However, the Centers for Medicare and Medicaid Services (CMS) would be unable to continue discretionary funding for healthcare fraud and abuse strike force teams, resulting in the cessation of their operations. Because a potential consequence of a government shutdown includes fewer recertification and initial surveys for Medicare and Medicaid providers being completed, beneficiaries would be at risk for a lower quality of care. In addition, the longer the government is shut down, the greater the likelihood of a longer lag time in claims being processed for payment.

Medicaid

Because Medicaid allotments are paid to states on a quarterly basis, it is likely states will not see an immediate impact from a temporary government shutdown. Thus, providers who service Medicaid and SCHIP patients should not see a disruption in payment initially. However, like Medicare, the longer the shutdown, the more likely a lag in processing claims could be experienced

Will Congress Act?

At this writing, 28 House Republicans have pledged to shut the government down unless Planned Parenthood is defunded. The political concern is that few in the public remember the issues for which Congress failed to fund the government. Yet, those frustrated by certain policies see the funding fight − because it is a must-pass legislative vehicle – as an opportunity to raise their issues. Expert budget watchers give the odds as well over 50 percent to 75 percent that a shutdown will occur, in part because of the weight of the issues that will consume Congress’ attention in September, and because the actual time Congress is in session in September is short.

Debt Ceiling

Under normal circumstances, partly due to its ability to borrow funds, the Treasury has sufficient financial resources to pay all obligations arising from discretionary and mandatory spending, including interest payments on the debt. However, Treasury estimates that it will exhaust its borrowing capacity shortly after the end of October. On July 29, Secretary Lew wrote:

On March 16, 2015, the outstanding debt of the United States reached the statutory limit. As a result, Treasury had to begin employing extraordinary measures to continue to finance the government on a temporary basis. These measures, which we have used in previous debt limit impasses, include a debt issuance suspension period with respect to investments of the Civil Service Retirement and Disability Fund and a suspension of the daily reinvestment of Treasury securities held by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan. The debt issuance suspension period currently lasts until July 30. Tomorrow, I expect to extend the debt issuance suspension period through October 30.

In his letter of September 10, Secretary Lew said:

On July 29, I wrote to inform you that the extraordinary measures we have been employing to preserve borrowing capacity would not be exhausted before late October, and that they likely would last for at least a brief additional period of time. That continues to be our view, based upon our best and most recent information.

Since my previous letter, I have taken additional action to implement the extraordinary measures that allow us, on a temporary basis, to continue paying the nation’s bills. Specifically, on August 31, I suspended, as necessary, the daily reinvestment of the portion of the Exchange Stabilization Fund that is invested in Treasury securities. Each of the measures employed to date is authorized by law, and each has been used during past debt limit impasses. The effective duration of these measures depends on factors that are inherently variable and irregular, including the unpredictability of tax receipts and changes in expenditure flows. If Treasury exhausts these measures, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash on hand on any given day.

Earlier this year, Treasury implemented a new policy of maintaining a cash balance generally sufficient to cover one week of outflows, subject to a minimum of roughly $150 billion. In a public release, we explained that the policy will help protect against a potential interruption in market access resulting from events such as Hurricane Sandy, September 11, or a potential cyber-attack. Maintaining this higher cash balance does not increase the debt limit, nor does it alter in any way the length of time Treasury can continue to pay the nation’s bills. On August 19, our cash balance fell below this minimum level. We anticipate that it will rise temporarily after the September 15 deadline for corporate and individual tax receipts − possibly above $150 billion − and then will decline again.

Extraordinary Measures and Background :

Beginning in 1789 and for approximately 130 years thereafter, Congress generally had to act each and every time Treasury needed to borrow money. Since World War I, however, Congress has provided Treasury with increasing flexibility to manage the federal debt. In more recent times, Congress has set a debt limit − an amount that Treasury can borrow up to but not over without congressional action. That is the debt ceiling. Treasury cannot borrow more unless Congress votes to raise the ceiling.

In the past, Treasury Secretaries, when facing a nearly binding debt ceiling, have used special strategies to handle cash and debt management responsibilities. Since 1985 these “extraordinary measures” have included:

  • suspending sales of nonmarketable debt (savings bonds, state and local series, and other nonmarketable debt);
  • trimming or delaying auctions of marketable securities;
  • underinvesting or disinvesting certain government funds (Social Security, Government Securities Investment Fund of the Federal Thrift Savings Plan, the Civil Service Retirement and Disability Trust Fund, Postal Service Retiree Health Benefits Fund and Exchange Stabilization Fund); and
  • exchanging Treasury securities for non-Treasury securities held by the Federal Financing Bank (FFB).

So what will happen once the debt ceiling is hit? One scenario is that the government’s computers would keep printing checks and some would bounce, unless a debt ceiling increase limit had been passed. At the very least, the government would not be able to pay all debts on time.

Medicare, Social Security and Debt Ceiling

If Treasury delays investing a federal trust fund’s revenues in government securities, or redeems prematurely a federal trust fund’s holdings of government securities, the result would be a loss of interest to the specific trust fund. This could worsen the financial situation of the affected trust fund(s) and accelerate insolvency dates. Congress passed PL 104-121 to prevent federal officials from using the Social Security and Medicare trust funds for debt management purposes except when necessary to provide the payment of benefits and administrative expenses of the program.

The Social Security and Medicare trust funds were created to account for monies that are dedicated to those programs. The fund accounts maintained by the Department of the Treasury provide a mechanism for keeping track of all program income and disbursements. Accumulated assets of the funds represent automatic authority to pay program benefits (that is, no annual legislation is needed to spend a portion of trust fund assets on these costs). If the trust funds were exhausted, congressional action would be needed to pay benefits not covered by current program revenues.

While the trust funds are treated separately under budget rules, what is important to understand is the flow of funds between general revenue and the respective trust funds. The Medicare program has two trust funds: the Hospital Insurance (HI) and the Supplementary Medical Insurance (SMI) trust funds. The HI trust fund is financed primarily by payroll contributions. Other income includes a small amount of premium revenue from voluntary enrollees, a portion of the federal income taxes beneficiaries pay on Social Security benefits, and interest credited on the U.S. Treasury securities held in the HI trust fund. Parts B and D of SMI are financed by transfers from the general fund of the Treasury. Beneficiaries pay 25 percent of the Part B costs in the form of monthly premiums.

When a trust fund invests in U.S. Treasury securities, it has loaned money to the rest of the government. The value of the securities held is recorded in the budget as “debt held by government accounts” and represents debt owed by one part of the government to another. The securities constitute a liability for the Treasury because the loan must be repaid when the trust fund needs to redeem securities in order to make benefit payments. As with marketable bonds, these Treasury securities are backed by the full faith and credit of the U.S. government.

A rough analogy would be to think of the general fund as a checking account from which purchases of all sorts can be made, while the trust funds represent retirement savings accounts with specific rules for withdrawals. For example, the SMI trust fund receives large transfers from the general fund, with the size of each depending upon how much the program spends, as opposed to how much revenue comes into the Treasury. If non-dedicated revenues become insufficient to cover both the mandated transfer to SMI and expenditures on general government programs, Treasury must borrow to make up the difference. In the long run, if there is insufficient funding to meet obligations, and Treasury cannot borrow to make up the difference, Congress must allow Treasury to borrow, raise taxes, cut other government spending or reduce spending on the benefits.

Could the Treasury Prioritize the Bills It Pays?

Some have argued that prioritization of payments can be used by Treasury to avoid a default on federal obligations by paying interest on outstanding debt before other obligations. Treasury officials, however, have maintained that there is no formal legal authority to establish priorities to pay obligations. In other words Treasury is required to make payments on obligations as they come due. The Congressional Research Service, however, has pointed to two different interpretations. In August 2012, the Treasury Inspector General stated that “Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day.” In 1985, however, the Government Accountability Office (GAO) wrote to then-Chairman Bob Packwood of the Senate Finance Committee that it was aware of no requirement that Treasury must pay outstanding obligations in the order in which they are received.

Some have argued that the federal government would be required to develop and use some sort of decision-making rule to determine whether to pay obligations in the order they are received or, alternatively, to prioritize which obligations to pay while other obligations would go into an unpaid queue. The overarching fact is that the federal government’s inability to borrow or use other means of financing implies that payment of some or all bills or obligations would be delayed.

Congressional Action

On September 10, the House Ways and Means Committee reported the “Default Prevention Act,” H.R 692. This legislation would give the Treasury Department authority to borrow in order to pay interest on the debt, should the government hit the debt ceiling and new borrowing authority has not yet been passed. It is unclear when and if the Senate will consider this legislation.

Conclusion

While several political issues have intertwined to make a government shutdown a possibility, so too have intertwined issues made the debt ceiling issue complicated. Raising the debt ceiling does not in itself increase government spending, but there are policymakers who want to use the debt ceiling debate as a means to extract policies to decrease spending. The federal government has yet to default on its obligations, even though political debate has created uncertainty in the recent past and may do so again this year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.