debt limit analysis

7/30/2019 Debt Limit Analysis

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Debt Limit Analysis

JANUARY 2013


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THREE QUESTIONS 2

1. What is the first date on which Treasury will nothave sufficient cash to pay all of its bills in full andon time (the X Date)?

If we reach the X Date, and Treasury is forced to"prioritize its payments to avoid a debt default:

2. What would be the effects on governmentoperations?

3. What would be the market risks?


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Methodology &

Assumptions


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BPC METHODOLOGY 4

Reviewed financial data from the Treasury Department Daily + Monthly Treasury Statements

Monthly Statement of the Public Debt

Projected monthly operating cash flow using: Historical financial data

CBO estimates of revenue/spending growth

Adjustments for anticipated issues (e.g., expiration of payroll taxholiday, increased FEMA and flood insurance spending due to Sandy)

Closely analyzed cash flows during February and March to

generate daily projections


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FISCAL CLIFF DEAL 5

Fiscal Cliff deal has little impact on debt limit timing

BPC made a series of assumptions in developing itsNovember estimate

Most assumptions turned out to be accurate

Those that were superseded by events are not ofsufficient magnitude to significantly affect the

estimates


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INITIAL BPC ASSUMPTIONS / FISCAL CLIFF DEAL OUTCOME 6

Congress will patch the Alternative Minimum Tax as it has in the past

Income tax withholding tables will not change (small changes)

Sequestration will not go into effect

Medicare payments to physicians will not be cut 27%

Extended unemployment insurance benefits will be allowed to expire(Benefits were extended, but very small impact on debt limit timing)

The payroll tax holiday will be allowed to expire

Miscellaneous tax provisions (e.g., R&D credit) will be extended


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Extraordinary Measures


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EXTRAORDINARY MEASURES 8

The U.S. hit its debt limit on December 31.

The Treasury Secretary then began tapping into ~$200 b ofemergency borrowing authorityreferred to as extraordinarymeasures to allow for an additional period of fully-funded

government operations.

Extraordinary Measures are legal financial maneuvers thatallow the Treasury Department to raise additional cash to meetgovernment obligations.


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Example: Federal Employees Retirement System

G-Fund

Federal employees invest some retirement assets ingovernment bonds.

Treasury may temporarily reduce the amount of debt held bythis fund, thereby freeing up room under the debt limit.

This allows Treasury to issue additional securities to the publicand raise cash to pay federal obligations.

After the debt limit is increased, Treasury must fully reimbursethe retirement fund for the principal and interest.


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EXTRAORDINARY MEASURES AVAILABLE

BPC

ESTIMATE

Do not reinvest the Federal Employees Retirement System G-

Fund $159 billion

Do not reinvest the Exchange Stabilization Fund

$23 billionDo not reinvest interest payments and cash receipts to Civil

Service Fund and Postal Fund $20 billion

Do not reinvest maturing securities in the Civil Service Fund

and Postal Fund

Not Available

During This Period

Total $201 billionNote: The totals indicate availablemeasures. Treasury may not employ all available measures. Treasury also has measures available

(not listed) that assist with cash flow and debt management, but do not extend the date on which Treasury would begin to default on

federal obligations absent an increase in the debt limit (the X Date). Column does not add due to rounding.

Sources: Government Accountability Office; Congressional Research Service; December 26, 2012 letter from

Treasury Secretary Geithner to Congress; Treasury Direct Government Account Statements


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EXTRAORDINARY MEASURES WONT LAST AS LONG 11

In 2011, Extraordinary Measures extended the

federal governments ability to pay its obligationsfrom May 15 until August 2.

They wont buy as much time as they did last

summer

February is a bad month for the federalgovernments finances

Fewer measures available


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Once Treasury has utilized all of its emergencyborrowing authority, only two sources will remainfrom which to continue funding governmentoperations:

Remaining cash on hand (including any leftover fundsfrom the emergency $201 b)

Daily cash inflows (federal revenues received each day)


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REACHING THE DEBT LIMITWHAT IT MEANS 13

Layers of Defense Against DefaultThe Treasury Department has multiple means that can be used to pay the

nations bills. If the debt limit is reached and Congress does not act intime, however, all of these layers of defense will be breached and thenation will default on its obligations.

ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER

EXTRAORDINARY MEASURES

DAILY REVENUE AND CASH ON HAND

DEFAULT ON FINANCIAL OBLIGATIONS

Debt Limit Reached

EM Exhausted

The X Date


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WHAT IS THE X DATE? 15

X Date: The first day on which Treasury has exhausted itsborrowing authority and no longer has sufficient funds to pay

all of its bills in full and on time

In other words, if the debt limit has not been raised by the XDate, the federal government will begin defaulting on some ofits obligations.

After the X Date, bills must be paid solely out of incoming cashflows, which will not be able to cover all government spending.

BPC estimates that the X Date will occurbetween February 15 and March 1.

BPC will update its projection as additional information becomesavailable.


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WHEN IS THE X DATE? 16

Cashonhand+available

extraordinarymea

sures

(inbil

lions)

BPCs Projected Range February 15 to March 1

Note: The projections above are subject to substantial uncertainty and volatility resulting from economic

performance, cash flow fluctuations, and other factors.

Source: Bipartisan Policy Center Projections based off of Treasurys Daily, Monthly, and Direct Government Account Statements

$-

$50

$100

$150

$200

$250

$300

Actual Projected


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REMAINING WILD CARDS 17

Tax Filing Season

Particularly given the last-minute fiscal cliff deal,there is potential for delayed processing of refunds.

Strengthening/weakening economy

Revenues have been coming in stronger than CBOprojections. The BPC model accounts for this, but itsimpossible to know if such trends will strengthen orweaken.

Monthly fluctuations in spending and revenues


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TAX REFUND PAYMENT VOLATILITY

Total Tax Refund Payments Made by Date

(from start of filing season)

2011 2012

Through January 31 $13 billion $7 billion

Through February 14 $57 billion $66 billion



Through March 15 $146 billion $157 billion

Source: Daily Treasury Statements

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Prioritization


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President Obama has stated that the 14thAmendment

does not provide a reasonable basis for challengingthe constitutionality of the debt ceiling: My lawyersare not persuaded that [the 14thAmendment] is a

winning argument.

Press Secretary Jay Carney: The 14thAmendment [does not

give] the president the power to ignore the debt ceiling period.

Treasury has stated that it has no secret bag of tricksto finance government operations past the X Date Treasury will not attempt to firesale assets during a crisis Other ideas are deemed impractical, illegal, and/or inappropriate

(platinum coins, IOUs)

NO SILVER BULLETS TO EXTEND DATE 20


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21

There is no precedent; all other debt limit impasses

have been resolved without reaching the X Date. Treasury has never failed during a debt limit impasse to meet

a payment obligation.

Chairman Bernanke:

"[Going past the X Date] would no doubt have a very adverseeffect very quickly on the recovery. I'm quite certain of that.

BEYOND THE X DATE


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HOW MIGHT TREASURY MAKE PAYMENTS AFTER THE X DATE? 22

If we reach the X Date, Treasury might either prioritizepayments or make full days worth of payments once theyreceive sufficient revenues to cover all of a days obligations.

Interest on the federal debt would likely be prioritized in eitherscenario.

Scenario # 1: Pay some bills, but not others

Treasury might attempt to prioritize some types of payments overothers. Prioritized payments would be made on time, others wouldnot.


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PRIORITIZATION 23

Under Scenario # 1:

Treasury would find itself attempting to sort and choose fromwell over 100 million monthly payments.

Roughly 40% of the funds owed for the month would go

unpaid. Inflows and outflows do not match up well and are quite lumpy,

as BPCs daily analysis shows.

The reality would be chaotic:

Unfair results, unanswered questions

Treasury picking winners and losers

Public uproar

Intense global media focus


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PRIORITIZATION: MONTHLY TOTALS 24

February 15March 15

* BPC Projections (in millions of dollars)

Year Inflows Outflows Deficit Business Days

2011 238,150 439,241 201,091 20

2012 273,296 452,595 179,299 21

2013* 277,107 451,883 174,776 20


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ILLUSTRATIVE SCENARIO #1: PROTECT SELECTED BIG TICKET PROGRAMS 25

If you choose to pay

For a total of $277 billion

Program Cost

Interest on Treasury Securities $38.1 b

IRS Tax Refunds for Individuals $85.5 b

Medicare / Medicaid $72.5 b

Social Security Benefits $61.1 b

Military Pay and Retirement $13.2 b

Unemployment Insurance Benefits $6.2 b


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ILLUSTRATIVE SCENARIO #1: PROTECT SELECTED BIG TICKET PROGRAMS 26

Then you cant fund these programs, worth $175 billion

Program CostDefense Vendor Payments $28.8 b

Veterans Benefits $4.2 b

Federal Salaries + Benefits $19.9 b

Dep. of Education (e.g., Pell grants, special ed. programs) $16.8 b

Food / Nutrition Services + TANF $10.1 b

Civil Service Retirement $5.0 b

Health and Human Services Grants $8.0 b

Supplemental Security Income $3.4 b

Other Spending, including:

- Department of Justice (FBI, federal courts)- Department of Energy

- Federal Highway Administration (road construction)

- Federal Aviation Administration (air traffic control)

- Environmental Protection Agency

- FEMA and National Flood Insurance Program

$79.0 b


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ILLUSTRATIVE SCENARIO #2: NO TAX REFUNDS FOR YOU 27

If you choose to pay

For a total of $276 billion

Program Cost

Interest on Treasury Securities $38.1 b

Medicare / Medicaid $72.5 b

Social Security Benefits $61.1 b

Military Pay and Retirement $13.2 b

Veterans Benefits $4.2 b

Defense Vendor Payments $28.8 b

Federal Salaries and Benefits $19.9 b

Unemployment Insurance Benefits $6.2 b

Civil Service Retirement $5.0 b

Food and Nutrition / TANF $10.1 b

Dept. of Education (Pell Grants, Special Education) $16.8 b


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ILLUSTRATIVE SCENARIO #2: NO TAX REFUNDS FOR YOU 28

Then you cant fund these programs, worth $176 b

Program Cost

IRS Tax Refunds to Individuals $85.5 b

Health and Human Services Grants $8.0 b

Supplemental Security Income $3.4 b

Other Spending, including:

- Department of Justice (FBI, federal courts)

- Department of Energy

- Federal Highway Administration (road construction)

- Federal Aviation Administration (air traffic control)

- Environmental Protection Agency

- FEMA and National Flood Insurance Program

$79.0 b


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PRIORITIZATIONCOULD IT BE DONE?

The Treasury Departments Office of Inspector General (OIG) releaseda report in 2012 on post-X Date strategies that Treasury was

considering in the summer of 2011

Some senior Treasury officials were skeptical of the prioritizationscenario for two reasons:

1) Choosing to pay certain obligations before others would be of questionablelegality

2) Given the sheer number of daily payments and Treasurys computerizedpayment system, prioritization would require a massive overhaul andreprogramming of these operations that may be impossible

One other mechanical possibility for the prioritization scenario is that

Treasury (via the Office of Management and Budget) would instructagencies to withhold processing of certain groups or types of bills soas to prevent them from entering Treasurys system

BPC does not know the feasibility of this approach

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HOW MIGHT TREASURY MAKE PAYMENTS AFTER THE X DATE? 30

Scenario # 2: Make all of each days payments together onceenough cash is available

Treasury might wait until enough revenue is deposited to cover anentire days payments, and then make all of those payments atonce.

(For example, upon reaching the X date, it might take two days of revenue

collections to raise enough cash to make all of the payments due on dayone. Thus, the first days payments would be made one day late. This, ofcourse, would delay the second days payments to a later day.)

In the 2012 OIG report, some senior Treasury officials stated thatthey believed this to be the most plausible and least harmful

course of action.

Since debt operations are handled by a separate computersystem, these payments could likely still be prioritized under thisscenario.


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FEDERAL PAYMENTS AFTER THE X DATE

Illustrative Potential Payment Delays

(assuming a Feb 15thX Date)

Payment Due Date Delayed Until

Military Active Duty Pay February 15 February 20

Unemployment Insurance February 15 February 20

Social Security February 20 February 25

Defense Vendor Payments February 22 March 1Food Stamps February 25 March 5

Tax Refunds March 1 March 15

Social Security March 1 March 15

Veterans Benefits March 1 March 15

Medicare and Medicaid Payments toProviders and Plans

March 1 March 15

Note: These projections incorporate a set of assumptions, including (for illustrative purposes) that the X Date occurs

at the beginning of the BPC estimated window (February 15); that Treasury enters the X Date with precisely enough

cash on hand to make that days $30 billion interest payment on the debt; that all interest payments are prioritized

and paid on time; and that federal trust fund operations continue as normal.

Source: Bipartisan Policy Center projections off of Daily Treasury Statements

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REAL WORLD CHAIN REACTION OF DELAYED PAYMENTS

Examples of First- and Second-Order Consequences

from Delaying Government Payments by Weeks: A senior who depends on Social Security benefits might be unable

to pay rent when due

A physician who treats many Medicare and Medicaid patients may

be unable to meet payroll

A small government contractor may be unable to pay asubcontractor on time, thus incurring penalties

A family depending on their tax refund to make a credit card

payment might incur substantial interest expenses

A member of the military whose paycheck is delayed might miss amortgage payment, incurring penalties

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Daily Analysis:

February 15

March 1, 2013


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DAILY CASH FLOW ANALYSIS 34

The following slides project daily revenue and expenditures,by category, for the BPC projected X-date window (February

15March 1).

Projections are estimates and subject to change. Revenueflows and tax refunds are particularly volatile.

For purely illustrative purposes, the Running Cash Deficit totalis calculated by assuming that the X date is February 15.

Significant disruption to the tax filing and refund processes orsubstantial strengthening or weakening of the nationaleconomy would need to occur for the X Date to fall outside ofthe BPC projected range.


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Daily Inflow Daily Outflow

Treasury Cash Flow: Friday February 15, 2013

$9 Billion in revenues

$52 Billion in committed spending:30.0 b Interest on the Debt

6.8 b IRS Refunds to Individuals

3.5 b Federal Salaries/Benefits

2.8 b Military Active Pay

2.3 b Medicare/Medicaid

1.5 b Defense Vendors

1.1 b Food/HUD/Welfare/Unemp.

4.4 b Other Spending

Scale ($)

0 b

45 b

90 b

Running Cash Deficit:

$43 b

Note: All daily figures assume zero cash balance on Feb 15; numbers may be off slightly due to rounding

Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements


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Treasury Cash Flow: Tuesday February 19, 2013

$15 Billion in revenues $16 Billion in committed spending:


3.4 b Medicaid/Medicare

2.0 b Federal Salaries/Benefits



$44 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Wednesday February 20, 2013


$30 Billion in committed spending:11.4 b Social Security Payments8.0 b IRS Refunds to Individuals3.3 b Medicaid/Medicare


900 m Dep. of Education



$58 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Thursday February 21, 2013


$19 Billion in committed spending:7.1 b IRS Refunds to Individuals2.8 b Medicaid/Medicare





$68 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Friday February 22, 2013


$17 Billion in committed spending:4.7 b IRS Refunds to Individuals





$75 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Monday February 25, 2013


$24 Billion in committed spending:11.9 b IRS Refunds to Individuals



1.0 b Dep. of Education



$84 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Tuesday February 26, 2013

$5Billion in revenues

$15Billion in committed spending:4.2 b IRS Refunds to Individuals





$94 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Wednesday February 27, 2013


$29 Billion in committed spending:11.6 b Social Security Payments

6.9 b IRS Refunds to Individuals2.2 b Medicaid/Medicare


1.2 b Dep. of Education



$113 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Thursday February 28, 2013


$18 Billion in committed spending:6.6 b Interest Payment on Debt2.7 b Medicaid/Medicare




$122 bScale ($)



0 b

45 b

90 b


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Treasury Cash Flow: Friday March 1, 2013


$84 Billion in committed spending:25.6 b Social Security Payments

20.5 b Medicare/Medicaid

5.0 b Civil Service Retirement

4.2 b Veterans Benefits

4.1 b Federal Emp. Salaries/Benefits

3.8 b Military Active Pay

3.8 b Military Retirement

3.4 b Supplemental Sec. Income



1.6 b Defense Vendors1.4 b Interest Payment on Debt


0


$185 bScale ($)



0 b

45 b

90 b


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CONSEQUENCES 45

Handling allpayments for important and popular programs

(e.g., Social Security, Medicare, Medicaid, Defense, militaryactive duty pay) will quickly become impossible.

Economic disruption:

Immediate 39% cut in federal spending would affect broader

economy Many service providers unpaid

Medicare and Medicaid providers

Defense vendors

Individuals not receiving government checks

Widespread uncertainty as decisions are made day by day


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Market Risk


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ONE-YEAR COST OF 2011 DEBT LIMIT EVENT 47

The Government Accountability Office (GAO) issued a reportdetailing additional costs to taxpayers as a result of the

delayed 2011 debt limit increase.

A substantial cost to taxpayers stemmed from elevatedinterest rates on U.S. securities issued in 2011 prior to whenthe debt limit was increased in August.

GAO conducted an economic analysis to estimate the resultingchange in interest rates.

For Fiscal Year 2011, GAO estimated additional interest coststo taxpayers of $1.3 billion.


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TEN-YEAR COST OF 2011 DEBT LIMIT EVENT 48

The cost of the event to the federal government, however,continues to accrue because many of the bonds issued during

that period remain outstanding.

BPC extended GAOs methodology to analyze the long-termcost to taxpayers stemming from the elevated interest rates.

Estimate of the ten-year cost to taxpayers of the 2011 debtlimit standoff = $18.9 billion

To put this in perspective, the Congressional Budget Office(CBO) estimates that the Doc Fix to prevent the scheduled

27% cut to Medicare physician payments for 2012 cost $18billion over ten years.


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PRIORITIZATION: MARKET RISK 49

Treasury must roll over roughly $500 b in debt that maturesthis year during the Feb 15Mar 15 period.

When a Treasury security matures, Treasury must pay back theprincipal plus interest due. Under normal circumstances, Treasurywould simply roll over the security.

As one security matures, the principal and interest for that securitywould be paid for with cash from the issuance of a new security.


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PRIORITIZATION: MARKET RISK 50

In a post-X Date environment, this operation may not run assmoothly.

Two elements of market risk:

Treasury will have to pay higher interest rates to attract newbuyers.

It is possible, if unlikely, that not enough bidders would appear,forcing Treasury to either use cash on hand to pay off securitiesthat came due or, in a worst-case scenario default on the debt.

The 2012 Office of Inspector Generals report found that therewas substantial concern about this issue among Treasuryofficials during the 2011 debt limit event


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DEBT ROLLOVER AND THE X-DATE

Debt Maturing After February 15

Note: Does not include estimates of 4-week maturities that have yet to be auctioned.

Date Debt Maturing

February 15 $20 billion

February 21 $60 billion

February 28 $115 billionMarch 7 $86 billion

March 14 $60 billion

March 15 $40 billion

Source: TreasuryDirect

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THE RISKS ARE REAL


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THE RISKS ARE REAL 52

Additional borrowing costs for the federal government fromdelay in increasing the debt limit

Additional rating agency downgrades are possible

Fitch: Arrears on [various federal government] obligations would notconstitute a default event from a sovereign rating perspective but verylikely prompt a downgrade even as debt obligations continued to be

met.

Translation: If we go past the X Date without a debt limit increase,prepare for another downgrade.

S&P downgraded last summer and reaction was not severe

But there is uncertainty about effects of another downgrade sincemany funds are prohibited from holding non-AAA securities

THE RISKS ARE REAL


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THE RISKS ARE REAL 53

Market risks beyond the X Date:

Treasury market, interest rates

Potential for serious equity market reaction (401(k)s, IRAs,other pensions)

Our economy

The global financial system

No guarantee of the outcome; risks are risks

SIZE OF A DEBT LIMIT INCREASE


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SIZE OF A DEBT LIMIT INCREASE 54

Roughly how much would the debt limit need to beincreased to get through 2013 or 2014*?

*The estimates in the chart above assume that the full sequester is waived, war spending declines as scheduled, Medicare physician

payments are frozen at 2013 levels (the Doc Fix), and the tax extenders in the American Taxpayer Relief Act of 2012 are

extended permanently. Alternatively, if current law continued except that war spending declines as scheduled and a permanent

Doc Fix is enacted, the necessary increases to get through 2013 and 2014, respectively, would be $1 trillion and $1.9 trillion.

$0

$500

$1,000

$1,500

$2,000

$2,500

End of 2013 End of 2014

BillionsofDollars

$1.1 Trillion

$2.1 Trillion

Source: Congressional Budget Office, Bipartisan Policy Center projections


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Authors

STEVE BELL SENIOR DIRECTOR OF THE ECONOMIC POLICY PROJECT

SHAI AKABAS SENIOR POLICY ANALYST

LOREN ADLER SENIOR POLICY ANALYST

BRIAN COLLINS POLICY ANALYST

MEDIA CONTACT:

ASHLEY BERRANGDIRECTOR OF COMMUNICATIONS

(202) 637-1456

debt limit analysis

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